Ultimate Institutional Owner and Takeover Defenses in the Controlling versus Minority Shareholders Context

Abstract

Manuscript Type: EmpiricalResearch Question/Issue: We examine the relationship between the level of voting rights held by the principal owner and the use of defense measures in Spanish listed firms when the owner is an institutional investor. Research Findings/Results: When a bank or a fund is the principal shareholder, the level of defense increases. However, while a larger bank's voting rights exercises a negative effect on the probability and level of defense, the effect of a fund's voting rights is U-shaped. Moreover, the results show that the coalition of two banks as the largest shareholders increases the defense. Theoretical Implications: Our study is, to the best of our knowledge, the first to analyze the relationship between institutional control and defense in the controlling versus minority shareholders conflict. The results show the importance of the nature of the institutional owner in the ownership-protection relationship. Thus, while in banks there is a substitution effect between voting rights and anti-takeover measures, in funds that substitution effect occurs up to a certain level of voting rights, above which defense increases because of the possible reduction of exit barriers of their investment. Practical Implications: The results indicate that European regulators should pay special attention to firms controlled by institutional investors. Ownership and anti-takeover measures are used by institutional owners to guarantee their power positions. Therefore, in an environment of concentrated ownership, the presence of institutional investors restricts the corporate control market as they either maintain high levels of ownership or facilitate the adoption of defense measures.

Dominant institutional owners and firm value

“…Dominant shareholders typically have large shareholdings that are stable over time, which gives them both the incentive and the ability to positively influence the firm's governance and in turn performance (e.g., Vishny, 1986, 1997;La Porta et al, 1998Claessens et al, 2002;Burkart et al, 2003;Villalonga and Amit, 2006;Ruiz-Mallorquí and Santana-Martín, 2009). Moreover, in contrast to the US-UK context, dominant shareholders tend to be insiders and consequently are actively involved in running the firm.…”

“…Which of the two applicable scenarios above will arise is likely to depend in part on the dominant investor's type. Focusing our attention on institutional investors, which are among those dominant shareholders that have an important role in the corporate decision-making process (e.g., La Porta et al, 1999;Faccio and Lang, 2002;Ruiz-Mallorquí and Santana-Martín, 2009), we consider two types of institutions that can be distinguished according to their business objectives (e.g., Brickley et al, 1988;Almazan et al, 2005;Borokhovich et al, 2006;Li et al, 2006;Cornett et al, 2007;Ruiz-Mallorquí and Santana-Martín, 2009;: institutional investors that can maintain business relationships with the firms in which they have an ownership share (banking institutions and insurance companies), and institutional investors whose business activity is not related to the company in which they hold a position (investment and pension funds). Given an environment characterized by weak protection of external investors, both types of institutions are likely to have incentives to be the dominant shareholder in the firm, as such a position increases the value of their participation.…”

El Consejero Dominical y el Gobierno Corporativo / Institutional Directors and Corporate Governance

“…This allows them to be more independent of the firm, and consequently, it is more probable that they will take an active part in monitoring and exerting pressure to instigate changes (Almazán et al, 2005;Ferreira and Matos, 2008;Jara-Bertín et al, 2012;Pucheta-Martínez and García-Meca, 2014;Ruiz-Mallorquí and Santana-Martín, 2009), thereby mitigating agency problems between shareholders and managers. Additionally, these directors prefer to invest in a long-term horizon (Tihanyi et al, 2003).…”

“…Sánchez-Marín et al (2011) Khan et al (2005), Lee and Chen (2011) and Victoravich et al (2013) find that institutional ownership impacts positively on CEO pay. This may be because institutional owners have sufficient power to make decisions according to their own interests and against those of minority owners to maintain their controlling position (Cornett et al, 2007;Ruiz-Mallorquí and Santana-Martín, 2009). Therefore, institutional shareholders tend to negotiate privately with firms (Carleton et al, 1998) to get their own aims met, and thereby, they may entrench (collude) with management team (Pound, 1988).…”

“…Thus, institutional directors can be classified into two groups: pressuresensitive institutional directors and pressure-resistant institutional directors (e.g. Almazán et al, 2005;Brickley et al, 1988;Chen et al, 2007;Cornett et al, 2007;López-Iturriaga et al, 2015;Pucheta-Martínez and García-Meca, 2014;Ruiz-Mallorquí and Santana-Martín, 2009). …”