Governing Multiple Firms
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 Pennsylvania - Finance Department
University of Pennsylvania - Department of Economics
June 22, 2015
European Corporate Governance Institute (ECGI) - Finance Working Paper No. 437/2014
Common wisdom is that governance is weaker when a blockholder owns stakes in multiple firms, because she is spread too thinly. We show that this need not be the case. First, common ownership increases the punishment for shirking. In a single-firm benchmark, the blockholder governs through exit, selling her stake if the firm underperforms. The price decline is small, because the sale could result from a liquidity shock rather than shirking. With multiple firms, selling one firm and retaining others is a powerful signal of underperformance. Second, common ownership increases the reward for working. If the blockholder suffers a liquidity shock, she need not sell a value-maximizing firm as she can sell other firms in her portfolio. In contrast, common ownership can weaken governance if the blockholder sells all firms, including value-maximizing ones, to disguise the sale of underperforming firms as motivated by a portfolio-wide liquidity shock.
Number of Pages in PDF File: 45
Keywords: Blockholders, corporate governance, exit, trading
JEL Classification: D72, D82, D83, G34
Date posted: August 20, 2014 ; Last revised: June 23, 2015
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