Governance Through Trading and Intervention: A Theory of Multiple Blockholders
London Business School - Institute of Finance and Accounting; University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)
University of California, Berkeley - Haas School of Business
June 29, 2011
Review of Financial Studies, Vol. 24, No. 7, pp. 2395-2428, July 2011
AFA 2009 San Francisco Meetings Paper
ECGI - Finance Working Paper No. 225/2008
EFA 2008 Athens Meetings Paper
U of Penn, Inst for Law & Econ Research Paper No. 08-09
Traditional theories argue that governance is strongest under a single large blockholder, as she has large incentives to undertake value-enhancing interventions. However, most firms are held by multiple small blockholders. This paper shows that, while such a structure generates free-rider problems that hinder intervention, the same co-ordination difficulties strengthen a second governance mechanism: disciplining the manager through trading. Since multiple blockholders cannot co-ordinate to limit their orders and maximize combined trading profits, they trade competitively, impounding more information into prices. This strengthens the threat of disciplinary trading, inducing higher managerial effort. The optimal blockholder structure depends on the relative effectiveness of manager and blockholder effort, the complementarities in their outputs, information asymmetry, liquidity, monitoring costs, and the manager's contract.
Number of Pages in PDF File: 31
Keywords: Multiple blockholders, corporate governance, market efficiency, informed trading, free-rider problem, Wall Street Rule, voting with your feet
JEL Classification: D82, G14, G32
Date posted: March 17, 2008 ; Last revised: December 7, 2011
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