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Corporate Control and Multiple Large Shareholders

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Author Info
Dhillon, Amrita (University of Warwick)
Rossetto, Silvia (Toulouse School of Economics and University of Warwick)

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Abstract

Many firms have more than one blockholder, but finance theory suggests that one blockholder should be sufficient to bestow all benefits on a firm that arise from concentrated ownership. This paper identifies a reason why more blockholders may arise endogenously. We consider a setting where multiple shareholders have endogenous conflicts of interest depending on the size of their stake. Such conflicts arise because larger shareholders tend to be less well diversified and would therefore prefer the firm to pursue more conservative investment policies. When the investment policy is determined by a shareholder vote, a single blockholder may be able to choose an investment policy that is far away from the dispersed shareholders' preferred policy. Anticipating this outcome reduces the price at which shares trade. A second blockholder (or more) can mitigate the conflict by shifting the voting outcome more towards the dispersed shareholders' preferred investment policy and this raises the share price. The paper derives conditions under which there are blockholder equilibria.The model shows how different ownership structures affect firm value and the degree of underpricing in an IPO.

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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/papers_2009/twerp_891.pdf
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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 891.

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Length: 57 pages
Date of creation: 2009
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Handle: RePEc:wrk:warwec:891

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  2. Maury, Benjamin & Pajuste, Anete, 2005. "Multiple large shareholders and firm value," Journal of Banking & Finance, Elsevier, vol. 29(7), pages 1813-1834, July. [Downloadable!] (restricted)
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  8. Tirole, Jean, 2001. "Corporate Governance," Econometrica, Econometric Society, vol. 69(1), pages 1-35, January.
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  11. Brennan, M. J. & Franks, J., 1997. "Underpricing, ownership and control in initial public offerings of equity securities in the UK," Journal of Financial Economics, Elsevier, vol. 45(3), pages 391-413, September. [Downloadable!] (restricted)
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  14. Patrick Bolton & Ernst-Ludwig von Thadden, 1998. "Blocks, Liquidity, and Corporate Control," Journal of Finance, American Finance Association, vol. 53(1), pages 1-25, 02. [Downloadable!] (restricted)
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  19. Stoughton, Neal M. & Zechner, Josef, 1998. "IPO-mechanisms, monitoring and ownership structure1," Journal of Financial Economics, Elsevier, vol. 49(1), pages 45-77, July. [Downloadable!] (restricted)
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