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Estimating the Effects of Large Shareholders Using a Geographic Instrument

  • Becker, Bo

    (Harvard Business School)

  • Cronqvist, Henrik

    ()

    (Claremont McKenna College)

  • Fahlenbrach, Rüdiger

    (Swiss Federal Institute of Technology Lausanne)

Large shareholders may play an important role for firm policies and performance, but identifying an effect empirically presents a challenge due to the endogeneity of ownership structures. However, unlike other blockholders, individuals tend to hold blocks in corporations that are located close to where they live. Using this fact, we create an instrument – the density of wealthy individuals near a firm’s headquarters – for the presence of a large, non-managerial individual shareholder in a public firm. We show that these shareholders have a large impact on firms. Consistent with theories of large shareholders as monitors, we find that they increase firm profitability, increase dividends, reduce corporate cash holdings, and reduce executive compensation. Consistent with the view that there exist conflicts between large and small owners in public firms, we uncover evidence of substitution toward less tax-efficient forms of distribution (dividends over repurchases). In addition, our analysis shows that large shareholders reduce the liquidity of the firm’s stock.

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Paper provided by Institute for Financial Research in its series SIFR Research Report Series with number 64.

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Length: 49 pages
Date of creation: 15 Jun 2008
Date of revision:
Handle: RePEc:hhs:sifrwp:0064
Note: Latest version: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1101012
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