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Estimating the Effects of Large Shareholders Using a Geographic Instrument

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  • Becker, Bo

    (Harvard U)

  • Cronqvist, Henrik

    (Claremont McKenna College)

  • Fahlenbrach, Rudiger

    (Ohio State U)

Abstract

Large shareholders may play an important role for firm performance and policies, but identifying an effect empirically presents a challenge due to the endogeneity of ownership structures. We develop and test an empirical framework which allows us to separate selection from treatment effects of large shareholders. Unlike other blockholders, individuals tend to hold blocks in public firms located close to where they reside. Using this empirical observation, we develop an instrument--the density of wealthy individuals near a firm's headquarters--for the presence of a large, non-managerial individual shareholder in a firm. These shareholders have a large impact on firms, controlling for selection effects. Consistent with theories of large shareholders as monitors, we find that they increase firm profitability, increase dividends, reduce corporate cash holdings, and reduce executive compensation. Consistent with the view that there exist conflicts between large and small owners in public firms, we uncover evidence of substitution toward less tax-efficient forms of distribution in firms with blocks. In addition, large shareholders reduce the liquidity of the firm's stock.

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Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2008-9.

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Date of creation: Aug 2008
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Handle: RePEc:ecl:ohidic:2008-9

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  11. Kasbi, Salma, 2009. "Ownership Concentration and Capital Structure Adjustments," Economics Papers from University Paris Dauphine 123456789/3862, Paris Dauphine University.
  12. Jesse Edgerton, 2011. "Agency problems in public firms: evidence from corporate jets in leveraged buyouts," Finance and Economics Discussion Series 2011-15, Board of Governors of the Federal Reserve System (U.S.).
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