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Estimating the expropriation of minority shareholders: Results from a new empirical approach

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  • Jose Guedes
  • Gilberto Loureiro

Abstract

A novel methodological approach is proposed to estimate the effect of separation of ownership and control by dominant shareholders on firm value. The approach offers two major innovations. First, it frees the researcher from the necessity of having to make an ad hoc judgment call regarding which firms feature entrenched owners and which don't. Under this approach, the main shareholder becomes entrenched when the Shapley Value (SV) of his voting rights crosses an unknown threshold that is estimated jointly with the other model parameters. This approach allows one to perform a test on the joint hypotheses that the incentive to expropriate held by the dominant shareholder impacts negatively the market performance of the firm if the main shareholder is entrenched but produces no impact otherwise. Secondly, it generates a market-based estimate of the critical level of power at which the main shareholder becomes entrenched. The method is applied to a sample of European firms and a threshold equal to 0.34 is estimated. Most firms from the UK have a main shareholder with a SV below the estimated threshold; in contrast, about half of the continental firms in the sample feature main shareholders whose power index is above the estimated threshold. A negative relationship is found between the incentive to expropriate and corporate valuation above the threshold, that is both statistically and economically significant; below the threshold, we find no evidence of a relationship.

Suggested Citation

  • Jose Guedes & Gilberto Loureiro, 2006. "Estimating the expropriation of minority shareholders: Results from a new empirical approach," The European Journal of Finance, Taylor & Francis Journals, vol. 12(5), pages 421-448.
  • Handle: RePEc:taf:eurjfi:v:12:y:2006:i:5:p:421-448
    DOI: 10.1080/13518470500459972
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    References listed on IDEAS

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    8. Stijn Claessens & Simeon Djankov & Joseph P. H. Fan & Larry H. P. Lang, 2002. "Disentangling the Incentive and Entrenchment Effects of Large Shareholdings," Journal of Finance, American Finance Association, vol. 57(6), pages 2741-2771, December.
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    Cited by:

    1. De-la-Hoz, Maria Camila & Pombo, Carlos, 2016. "Institutional investor heterogeneity and firm valuation: Evidence from Latin America," Emerging Markets Review, Elsevier, vol. 26(C), pages 197-221.
    2. repec:eee:reveco:v:51:y:2017:i:c:p:214-234 is not listed on IDEAS
    3. Jose Guedes & Gilberto Loureiro, 2007. "Controlling vs. Minority Shareholders: is There Expropriation? An Empirical Analysis of the Stock Price Performance of European Companies," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 5(1), pages 16-21, 05.
    4. 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.

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