IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Agency problem and ownership structure: Outside blockholder as a signal

Listed author(s):
  • Stepanov, Sergey
  • Suvorov, Anton
Registered author(s):

    We model the decision of an entrepreneur, seeking outside financing, on whether to sell a large equity share to a blockholder. A conventional theoretical rationale for the presence of an outside blockholder is mitigation of the agency problem via monitoring. Our model provides a novel insight: outside blockholders may be attracted by entrepreneurs with low, rather than high, agency problems in order to signal their low propensity to extract private benefits. Our result yields a new interpretation of an often documented positive relationship between outside ownership concentration in a firm and its market valuation: it may be driven by “sorting” rather than by the direct effect of monitoring. We show that the positive correlation may arise even if the blockholder derives private benefits and has no positive impact on the value of small shares. Our analysis also helps to explain why the market reacts more favorably to private placements of equity as opposed to public issues.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.sciencedirect.com/science/article/pii/S0167268116302530
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

    Volume (Year): 133 (2017)
    Issue (Month): C ()
    Pages: 87-107

    as
    in new window

    Handle: RePEc:eee:jeborg:v:133:y:2017:i:c:p:87-107
    DOI: 10.1016/j.jebo.2016.10.024
    Contact details of provider: Web page: http://www.elsevier.com/locate/jebo

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as
    in new window


    1. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    2. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    3. Mike Burkart & Fausto Panunzi & Andrei Shleifer, 2003. "Family Firms," Journal of Finance, American Finance Association, vol. 58(5), pages 2167-2202, October.
    4. Philippe Aghion & Patrick Bolton & Jean Tirole, 2004. "Exit Options in Corporate Finance: Liquidity versus Incentives," Review of Finance, Springer, vol. 8(3), pages 327-353.
    5. Becker, Bo & Cronqvist, Henrik & Fahlenbrach, Rüdiger, 2011. "Estimating the Effects of Large Shareholders Using a Geographic Instrument," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(04), pages 907-942, September.
    6. Sergey Stepanov, 2013. "Shareholder Protection and Outside Blockholders: Substitutes or Complements?," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 169(2), pages 355-381, June.
    7. Alexander Dyck & Luigi Zingales, 2004. "Private Benefits of Control: An International Comparison," Journal of Finance, American Finance Association, vol. 59(2), pages 537-600, 04.
    8. Bengt Holmstrom & Jean Tirole, 1997. "Financial Intermediation, Loanable Funds, and The Real Sector," The Quarterly Journal of Economics, Oxford University Press, vol. 112(3), pages 663-691.
    9. Himmelberg, Charles P. & Hubbard, R. Glenn & Palia, Darius, 1999. "Understanding the determinants of managerial ownership and the link between ownership and performance," Journal of Financial Economics, Elsevier, vol. 53(3), pages 353-384, September.
    10. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 461-488, June.
    11. John S. Earle & Csaba Kucsera & Álmos Telegdy, 2005. "Ownership Concentration and Corporate Performance on the Budapest Stock Exchange: do too many cooks spoil the goulash?," Corporate Governance: An International Review, Wiley Blackwell, vol. 13(2), pages 254-264, 03.
    12. Alex Edmans, 2009. "Blockholder Trading, Market Efficiency, and Managerial Myopia," Journal of Finance, American Finance Association, vol. 64(6), pages 2481-2513, December.
    13. Alex Edmans, 2014. "Blockholders and Corporate Governance," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 23-50, December.
    14. Stephen A. Ross, 1977. "The Determination of Financial Structure: The Incentive-Signalling Approach," Bell Journal of Economics, The RAND Corporation, vol. 8(1), pages 23-40, Spring.
    15. Wu, YiLin, 2004. "The choice of equity-selling mechanisms," Journal of Financial Economics, Elsevier, vol. 74(1), pages 93-119, October.
    16. Luc Laeven & Ross Levine, 2008. "Complex Ownership Structures and Corporate Valuations," Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 579-604, April.
    17. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-387, May.
    18. In-Koo Cho & David M. Kreps, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 179-221.
    19. Lins, Karl V., 2003. "Equity Ownership and Firm Value in Emerging Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(01), pages 159-184, March.
    20. Wouter Dessein, 2005. "Information and Control in Ventures and Alliances," Journal of Finance, American Finance Association, vol. 60(5), pages 2513-2549, October.
    21. Anat R. Admati & Paul Pfleiderer, 2009. "The "Wall Street Walk" and Shareholder Activism: Exit as a Form of Voice," Review of Financial Studies, Society for Financial Studies, vol. 22(7), pages 2445-2485, July.
    22. Rafael La Porta & Florencio Lopez-De-Silanes & Andrei Shleifer, 1999. "Corporate Ownership Around the World," Journal of Finance, American Finance Association, vol. 54(2), pages 471-517, 04.
    23. Marco Pagano & Ailsa Röell, 1998. "The Choice of Stock Ownership Structure: Agency Costs, Monitoring, and the Decision to Go Public," The Quarterly Journal of Economics, Oxford University Press, vol. 113(1), pages 187-225.
    24. Jean Tirole, 2006. "The Theory of Corporate Finance," Post-Print hal-00173191, HAL.
    25. Hertzel, Michael G & Smith, Richard L, 1993. " Market Discounts and Shareholder Gains for Placing Equity Privately," Journal of Finance, American Finance Association, vol. 48(2), pages 459-485, June.
    26. Barclay, Michael J. & Holderness, Clifford G. & Sheehan, Dennis P., 2007. "Private placements and managerial entrenchment," Journal of Corporate Finance, Elsevier, vol. 13(4), pages 461-484, September.
    27. 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.
    28. Sergey Stepanov, 2010. "Shareholder access to manager-biased courts and the monitoring/litigation trade-off," RAND Journal of Economics, RAND Corporation, vol. 41(2), pages 270-300.
    29. Wruck, Karen Hopper, 1989. "Equity ownership concentration and firm value : Evidence from private equity financings," Journal of Financial Economics, Elsevier, vol. 23(1), pages 3-28, June.
    30. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    31. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, January.
    32. Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
    33. Demsetz, Harold & Villalonga, Belen, 2001. "Ownership structure and corporate performance," Journal of Corporate Finance, Elsevier, vol. 7(3), pages 209-233, September.
    34. Wruck, Karen H. & Wu, YiLin, 2009. "Relationships, corporate governance, and performance: Evidence from private placements of common stock," Journal of Corporate Finance, Elsevier, vol. 15(1), pages 30-47, February.
    35. Alex Edmans & Gustavo Manso, 2011. "Governance Through Trading and Intervention: A Theory of Multiple Blockholders," Review of Financial Studies, Society for Financial Studies, vol. 24(7), pages 2395-2428.
    36. repec:hrv:faseco:30747162 is not listed on IDEAS
    37. Erik Lehmann & Jürgen Weigand, 2000. "Does the Governed Corporation Perform Better? Governance Structures and Corporate Performance in Germany," Review of Finance, European Finance Association, vol. 4(2), pages 157-195.
    38. Mike Burkart & Denis Gromb & Fausto Panunzi, 1997. "Large Shareholders, Monitoring, and the Value of the Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 112(3), pages 693-728.
    39. Faccio, Mara & Lang, Larry H. P., 2002. "The ultimate ownership of Western European corporations," Journal of Financial Economics, Elsevier, vol. 65(3), pages 365-395, September.
    40. Clifford G. Holderness, 2009. "The Myth of Diffuse Ownership in the United States," Review of Financial Studies, Society for Financial Studies, vol. 22(4), pages 1377-1408, April.
    41. Ronald C. Anderson & David M. Reeb, 2003. "Founding-Family Ownership and Firm Performance: Evidence from the S&P 500," Journal of Finance, American Finance Association, vol. 58(3), pages 1301-1327, 06.
    42. Ernst Maug, 1998. "Large Shareholders as Monitors: Is There a Trade-Off between Liquidity and Control?," Journal of Finance, American Finance Association, vol. 53(1), pages 65-98, 02.
    43. Claessens, Stijn & Djankov, Simeon & Lang, Larry H. P., 2000. "The separation of ownership and control in East Asian Corporations," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 81-112.
    44. Kelly Nianyun Cai & Hei Wai Lee & Vivek Sharma, 2011. "Underpricing Of Ipos That Follow Private Placement," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 34(3), pages 441-459, 09.
    45. Miller, Danny & Le Breton-Miller, Isabelle & Lester, Richard H. & Cannella Jr., Albert A., 2007. "Are family firms really superior performers?," Journal of Corporate Finance, Elsevier, vol. 13(5), pages 829-858, December.
    46. repec:hrv:faseco:30747196 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:eee:jeborg:v:133:y:2017:i:c:p:87-107. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.