Multiple large shareholders, control contests, and implied cost of equity

Abstract

In this paper, we examine whether the presence of multiple large shareholders alleviates firm's agency costs and information asymmetry embedded in ultimate ownership structures. We extend extant corporate governance research by addressing the effects of multiple large shareholders on firm's cost of equity capital-a proxy for firm's information quality. Using data for 1,165 listed corporations from 8 East Asian and 13 Western European countries, we find evidence that the implied cost of equity decreases in the presence of large shareholders beyond the controlling owner. We also find that the voting rights, the relative voting size (vis-à-vis the first largest shareholder) and the number of blockholders reduces firm's cost of equity. Interestingly, we uncover that the presence of multiple controlling shareholders with comparable voting power lowers firm's cost of equity. We also find that the identity of the second largest shareholder is important in determining the risk of corporate expropriation in family-controlled firms. Our regional analysis reveals that, mainly in East Asian firms, multiple large shareholders structures exert an internal governance role in curbing private benefits and reducing information asymmetry evident in cost of equity financing, perhaps to sidestep deficiencies in the external institutional environment. May 2008JEL classification: G32; G34 Key words: corporate governance, multiple large shareholders, cost of equity ____________________________________ * We thank Narjess Boubakri, Sadok El Ghoul, and Oumar Sy for insightful comments. We appreciate generous financial support from the Social Sciences and Humanities Research Council of Canada and outstanding research assistance from Walid Saffar. Multiple Large Shareholders, Control Contests, and Implied Cost of EquityAbstract In this paper, we examine whether the presence of multiple large shareholders alleviates firm's agency costs and information asymmetry embedded in ultimate ownership structures. We extend extant corporate governance research by addressing the effects of multiple large shareholders on firm's cost of equity capital-a proxy for firm's information quality. Using data for 1,165 listed corporations from 8 East Asian and 13 Western European countries, we find evidence that the implied cost of equity decreases in the presence of large shareholders beyond the controlling owner. We also find that the voting rights, the relative voting size (vis-à-vis the first largest shareholder) and the number of blockholders reduces firm's cost of equity. Interestingly, we uncover that the presence of multiple controlling shareholders with comparable voting power lowers firm's cost of equity. We also find that the identity of the second largest shareholder is important in determining the risk of corporate expropriation in family-controlled firms. Our regional analysis reveals that, mainly in East Asian firms, multiple large shareholders structures exert an internal governance role in curbing private benefits and reducing information...

Mandatory Disclosure Quality, Inside Ownership, and Cost of Capital

“…As such, our work is related to studies that examine the direct link between governance variables, broadly defined, and the cost of capital (e.g., Garmaise and Liu, 2004;Albuquerque and Wang, 2008;Attig et al, 2008;Ashbaugh-Skaife et al, 2009;Chen et al, 2009;Hail and Leuz, 2009 Attig et al (2008) and Chen et al (2009) use samples of international firms, and find a negative relation between proxies for the cost of capital and governance attributes including ownership. Our study differs in that our main disclosure variable, defined as mandatory disclosure requirements at the country-level, is more plausibly exogenous, and that we model ownership as an endogenous function of disclosure quality.…”

Examining the Relationship between Disproportional Ownership Mechanisms and Company Performance: An Empirical Research

“…Indeed, in line with previous research (Banz, 1981;Gedajlovic & Shapiro, 1998;Zattoni & Cuomo, 2010), findings in Table 5 document that the variable SIZE is significantly and positively related to the use of DOMs (,372 *** ). Thereby, the result emphasizes that, in larger Italian companies, disproportional ownership mechanisms play a relevant economic function Institutional Shareholder Services, 2007;Attig et al, 2008) as tools able to limit transaction costs and foster risks sharing (Watanabe, 2002;Gianfrate, 2007;Mishra, 2011). However, as highlighted by the sign of the regression coefficient on ROA t-1 , the adoption of law reforms aiming at improving investor protection may have encouraged the employment of alternative and more effective ownership solutions able to foster a better allocation of the resources achieved by the company activity (Saggese, 2013;Alvaro, Ciaravella, D"Eramo, & Linciano, 2014).…”

“…Indeed, as highlighted by the analysis, the use of DOMs increases as the past operating performance decreases and is limited when the past operating performance grows. This result suggests that, in Italy, DOMs are considered a proper ownership solution to address issues of managerial effectiveness as the past performance is limited (Lim & Kim, 2005;Attig, Guedhami, & Mishra, 2008;Mishra, 2011). This is especially true for larger companies.…”

“…Indeed, the regression analysis shows that the employment of DOMs grows as the past operating performance reduces and decreases as the company results improve. Thereby, while DOMs are still considered proper ownership solutions to overcame managerial issues (Lim & Kim, 2005;Attig et al, 2008;Mishra, 2011), the adoption of law reforms may have discouraged their use, making more effective alternative ownership structures able to foster a better allocation of company resources (Saggese, 2013;Alvaro et al, 2014). Moreover, research findings show that disproportional ownership mechanisms limit company outcomes, suggesting that the deviation from the proportionality principle due to DOMs negatively affects company performance as it does not fully transfer the outcomes of managerial decisions to controlling owners (Claessens et al, 2002;Lins, 2003;Gompers et al, 2003;Burkart & Lee, 2008).…”

Custo de capital ex-ante: variáveis explicativas e prêmio pelo risco de mercado no Brasil

“…Portanto, os retornos realizados podem não ser uma boa estimativa para os retornos esperados. Os modelos ex-ante foram utilizados como base para diversos estudos sobre relação entre o custo de capital e outras variáveis, como risco (Gode & Mohanram, 2001), aspectos jurídicos e regulação (Hail & Leuz, 2006) e governança corporativa (Attig, Guedhami, & Mishra, 2008).…”