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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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    Cited by:

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    2. Roberto Álvarez & Mauricio Jara-Bertín & Carlos Pombo, 2016. "Do institutional investors unbind firm financial constraints? Evidence from emerging markets," DOCUMENTOS CEDE 015114, UNIVERSIDAD DE LOS ANDES-CEDE.
    3. Chen, Yangyang & Rhee, S. Ghon & Veeraraghavan, Madhu & Zolotoy, Leon, 2015. "Stock liquidity and managerial short-termism," Journal of Banking & Finance, Elsevier, vol. 60(C), pages 44-59.
    4. Dimmock, Stephen G. & Gerken, William C. & Ivković, Zoran & Weisbenner, Scott J., 2018. "Capital gains lock-in and governance choices," Journal of Financial Economics, Elsevier, vol. 127(1), pages 113-135.
    5. repec:eee:jfinec:v:124:y:2017:i:3:p:632-653 is not listed on IDEAS
    6. repec:kap:jfsres:v:51:y:2017:i:3:d:10.1007_s10693-016-0249-y is not listed on IDEAS
    7. Bar-Isaac, Heski & Shapiro, Joel, 2017. "Blockholder Voting," CEPR Discussion Papers 11933, C.E.P.R. Discussion Papers.
    8. repec:spr:reaccs:v:22:y:2017:i:2:d:10.1007_s11142-017-9394-2 is not listed on IDEAS
    9. Appel, Ian R. & Gormley, Todd A. & Keim, Donald B., 2016. "Passive investors, not passive owners," Journal of Financial Economics, Elsevier, vol. 121(1), pages 111-141.
    10. repec:eee:jfinec:v:124:y:2017:i:2:p:285-306 is not listed on IDEAS
    11. repec:eee:reveco:v:51:y:2017:i:c:p:214-234 is not listed on IDEAS
    12. Roberto Alvarez & Mauricio Jara & Carlos Pombo, 2017. "Do institutional blockholders influence corporate investment? Evidence from emerging markets," DOCUMENTOS CEDE 015767, UNIVERSIDAD DE LOS ANDES-CEDE.
    13. Edmans, Alex & Holderness, Clifford, 2016. "Blockholders: A Survey of Theory and Evidence," CEPR Discussion Papers 11442, C.E.P.R. Discussion Papers.
    14. Pierre Collin-Dufresne & Vyacheslav Fos, 2013. "Moral Hazard, Informed Trading, and Stock Prices," NBER Working Papers 19619, National Bureau of Economic Research, Inc.
    15. Pombo, Carlos & Taborda, Rodrigo, 2017. "Stock liquidity and second blockholder as drivers of corporate value: Evidence from Latin America," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 214-234.
    16. Stepanov, Sergey & Suvorov, Anton, 2017. "Agency problem and ownership structure: Outside blockholder as a signal," Journal of Economic Behavior & Organization, Elsevier, vol. 133(C), pages 87-107.
    17. Zha Giedt, Jenny, 2017. "Why Do Firms Sell Out? Separating Targets’ Motives from Bidders’ Selection of Targets in M&A," MPRA Paper 81014, University Library of Munich, Germany, revised 23 Aug 2017.
    18. Firth, Michael & Gao, Jin & Shen, Jianghua & Zhang, Yuanyuan, 2016. "Institutional stock ownership and firms’ cash dividend policies: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 65(C), pages 91-107.
    19. Craig W. Holden & Stacey Jacobsen & Avanidhar Subrahmanyam, 2014. "The Empirical Analysis of Liquidity," Foundations and Trends(R) in Finance, now publishers, vol. 8(4), pages 263-365, December.
    20. Barbara G. Katz & Joel Owen, 2014. "An Evaluation of Shareholder Activism," Working Papers 14-09, New York University, Leonard N. Stern School of Business, Department of Economics.
    21. Huang, Kershen & Petkevich, Alex, 2016. "Corporate bond pricing and ownership heterogeneity," Journal of Corporate Finance, Elsevier, vol. 36(C), pages 54-74.
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    23. repec:oup:revfin:v:21:y:2017:i:1:p:7-31. is not listed on IDEAS
    24. Cheung, William Mingyan & Chung, Richard & Fung, Scott, 2015. "The effects of stock liquidity on firm value and corporate governance: Endogeneity and the REIT experiment," Journal of Corporate Finance, Elsevier, vol. 35(C), pages 211-231.

    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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