Blockholders and Corporate Governance

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.

Behind the Scenes: The Corporate Governance Preferences of Institutional Investors

“…On the other hand, activism may be performed more often by short-term investors-14 It should be noted that our measure of voice intensity is designed to capture the degree to which institutional investors use different types of voice rather than the degree to which they use any one type. 15 For a more extensive review of the theories relating liquidity to shareholder intervention, see Edmans (2014). in particular, hedge funds-who intervene to procure short-term profits. For instance, short-term investors may push for actions that are profitable in the short term but detrimental to firm value in the long term (e.g., Bratton and Wachter (2010)).…”

Clustered shareholder activism

“…Goranova and Ryan (2014) highlight that shareholders may differ along several dimensions, including their investment horizons, business relationships with the firm, portfolio considerations, and discrepancies between cash flow and voting rights. Similarly, Edmans (2014) argues that a large shareholder may-through eroding managerial initiative, reducing liquidity, and extracting private benefits-exacerbate rather than solve corporate governance problems at the firm. Porta, Lopez-De-Silanes, Shleifer, and Vishny (1999) Lastly, PP costs, which arise through heterogeneous interests, may worsen as the bulk of activism campaigns are categorized as "private activism," where management settles privately with the activist.…”

Foreign Monitoring and Audit Quality: Evidence from Korea

“…The monitoring of managers has the characteristics of public goods, and as a result, only external block shareholders that can afford the cost of monitoring managers would be able to monitor the managers actively for the purpose of increasing firm value [2,21]. Among external shareholders not participating in management activities, only those shareholders with large stakes have an incentive to monitor the managers' decision-making [4,22,23]. Furthermore, those external block shareholders who hold their shares for an extended period of time tend to monitor management activities more efficiently, since they have better access to the company's internal information compared with minority shareholders [1,[24][25][26].…”

“…Under agency theory, the auditor is employed to monitor the manager's performance on behalf of the shareholders, because the manager as an agent may place his interests above those of the owners, giving rise to agency costs for preventing a manager's opportunistic behavior [23,48,57,69]. We select the level of the agency problem as the moderating variable that affects the relationship between foreign monitors and audit quality.…”