Multiple Large Shareholders, Control Contests, and Implied Cost of Equity
Saint Mary's University - Department of Finance & Management Science
University of South Carolina - Moore School of Business
Dev R. Mishra
University of Saskatchewan - Edwards School of Business
October 10, 2008
AFFI/EUROFIDAI, Paris December 2008 Finance International Meeting AFFI - EUROFIDAI
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-a-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.
Number of Pages in PDF File: 46
Keywords: corporate governance, multiple large shareholders, cost of equityworking papers series
Date posted: October 13, 2008
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