Abstract

http://ssrn.com/abstract=2482935
 
 

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Governing Multiple Firms


Alex Edmans


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)

Doron Levit


University of Pennsylvania - Finance Department

Devin Reilly


University of Pennsylvania - Department of Economics

June 22, 2015

European Corporate Governance Institute (ECGI) - Finance Working Paper No. 437/2014

Abstract:     
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


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Date posted: August 20, 2014 ; Last revised: June 23, 2015

Suggested Citation

Edmans, Alex and Levit, Doron and Reilly, Devin, Governing Multiple Firms (June 22, 2015). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 437/2014. Available at SSRN: http://ssrn.com/abstract=2482935

Contact Information

Alex Edmans (Contact Author)
London Business School - Institute of Finance and Accounting ( email )
Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
University of Pennsylvania - The Wharton School ( email )
3733 Spruce Street
Philadelphia, PA 19104-6374
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
European Corporate Governance Institute (ECGI) ( email )
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
Centre for Economic Policy Research (CEPR) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Doron Levit
University of Pennsylvania - Finance Department ( email )
The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

Devin Reilly
University of Pennsylvania - Department of Economics ( email )
160 McNeil Building
3718 Locust Walk
Philadelphia, PA 19104
United States
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