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Blockholders and Corporate Governance

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  • Edmans, Alex

Abstract

This paper reviews the theoretical and empirical literature on the different 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 the alternative mechanism of “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, and the typical strategies attempted to achieve identification. I close with directions for future research.

Suggested Citation

  • Edmans, Alex, 2013. "Blockholders and Corporate Governance," CEPR Discussion Papers 9708, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:9708
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    Cited by:

    1. 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.
    2. repec:oup:revfin:v:21:y:2017:i:1:p:7-31. is not listed on IDEAS
    3. Huang, Kershen & Petkevich, Alex, 2016. "Corporate bond pricing and ownership heterogeneity," Journal of Corporate Finance, Elsevier, vol. 36(C), pages 54-74.
    4. repec:eee:jfinec:v:127:y:2018:i:1:p:113-135 is not listed on IDEAS
    5. Bar-Isaac, Heski & Shapiro, Joel, 2017. "Blockholder Voting," CEPR Discussion Papers 11933, C.E.P.R. Discussion Papers.
    6. repec:eee:jfinec:v:128:y:2018:i:3:p:576-602 is not listed on IDEAS
    7. repec:spr:reaccs:v:22:y:2017:i:2:d:10.1007_s11142-017-9394-2 is not listed on IDEAS
    8. 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.
    9. Pierre Collin-Dufresne & Vyacheslav Fos, 2013. "Moral Hazard, Informed Trading, and Stock Prices," NBER Working Papers 19619, National Bureau of Economic Research, Inc.
    10. repec:eee:jfinec:v:124:y:2017:i:2:p:285-306 is not listed on IDEAS
    11. 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.
    12. 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.
    13. repec:eee:reveco:v:51:y:2017:i:c:p:214-234 is not listed on IDEAS
    14. repec:eee:jfinec:v:124:y:2017:i:3:p:632-653 is not listed on IDEAS
    15. 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.
    16. 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.
    17. 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.
    18. repec:kap:jfsres:v:51:y:2017:i:3:d:10.1007_s10693-016-0249-y is not listed on IDEAS
    19. 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.
    20. 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.
    21. 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.
    22. 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.
    23. Edmans, Alex & Holderness, Clifford, 2016. "Blockholders: A Survey of Theory and Evidence," CEPR Discussion Papers 11442, C.E.P.R. Discussion Papers.
    24. 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.
    25. repec:eee:corfin:v:45:y:2017:i:c:p:586-607 is not listed on IDEAS

    More about this item

    Keywords

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

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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