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http://ssrn.com/abstract=2482935
 
 

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Governance and Comovement Under Common Ownership


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

August 19, 2014

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

Abstract:     
This paper studies the corporate governance and asset pricing implications of investors owning blocks in multiple firms. Common wisdom is that multi-firm ownership weakens governance because the blockholder is spread too thinly. We show that this need not be the case. In a single-firm benchmark, the blockholder governs through exit, selling her stake if the firm underperforms. With multiple firms, the blockholder may sell even a value-maximizing firm, to disguise her exit from another underperforming firm as being motivated by a portfolio-wide liquidity shock. This reduces the manager's effort incentives and weakens governance. On the other hand, governance can be stronger, because selling one firm and not the other is a powerful signal of underperformance. Common ownership leads to firms' stock prices being correlated, even if their fundamentals are uncorrelated. We derive empirical predictions for the direction of correlation and for whether governance is stronger or weaker with multiple firms.

Number of Pages in PDF File: 63

Keywords: Blockholders, corporate governance, exit, trading, correlation

JEL Classification: D72, D82, D83, G34

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Date posted: August 20, 2014 ; Last revised: August 30, 2014

Suggested Citation

Edmans, Alex and Levit, Doron and Reilly, Devin, Governance and Comovement Under Common Ownership (August 19, 2014). 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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