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Blockholders and Corporate Governance

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  • Alex Edmans

    () (Finance Subject Area, London Business School, London NW1 4SA, United Kingdom
    Finance Department, Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104
    National Bureau of Economic Research, Cambridge, Massachusetts 02138
    Centre for Economic Policy Research, London, EC1V 3PZ, United Kingdom)

Abstract

This paper reviews the theoretical and empirical literature on the channels through which blockholders (large shareholders) engage in corporate governance. In classical models, blockholders exert governance through direct intervention in a firm’s operations, otherwise known as “voice.” These theories have motivated empirical research on the determinants and consequences of activism. More recent models show that blockholders can govern through an alternative mechanism known as “exit”—selling their shares if the manager underperforms. These theories give rise to new empirical studies on the two-way relationship between blockholders and financial markets, linking corporate finance with asset pricing. Blockholders may also worsen governance by extracting private benefits of control or pursuing objectives other than firm value maximization. I highlight the empirical challenges in identifying causal effects of and on blockholders as well as the typical strategies attempted to achieve identification. I close with directions for future research.

Suggested Citation

  • Alex Edmans, 2014. "Blockholders and Corporate Governance," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 23-50, December.
  • Handle: RePEc:anr:refeco:v:6:y:2014:p:23-50
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    References listed on IDEAS

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    More about this item

    Keywords

    large shareholders; governance; voice; activism; exit; microstructure;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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