Governing Multiple Firms
London Business School - Institute of Finance and Accounting; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)
University of Pennsylvania - Finance Department
University of Pennsylvania - Department of Economics
September 12, 2016
European Corporate Governance Institute (ECGI) - Finance Working Paper No. 437/2014
Conventional wisdom is that, when an investor owns multiple firms, governance is weaker because she is spread too thinly. We show that common ownership can strengthen governance; moreover, the channel through which it does so applies to both voice and exit, and equityholders and debtholders. Under common ownership, an informed investor has flexibility over which assets to retain and which to sell, and sells low-quality assets first. This increases adverse selection and thus price informativeness. In a voice model, the investor's incentives to monitor are stronger since "cutting-and-running" is less profitable. In an exit model, the manager's incentives to work are stronger since the price impact of investor selling is greater.
Number of Pages in PDF File: 45
Keywords: Corporate governance, banks, blockholders, monitoring, intervention, exit, trading
JEL Classification: D72, D82, D83, G34
Date posted: August 20, 2014 ; Last revised: September 13, 2016
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