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
April 20, 2016
European Corporate Governance Institute (ECGI) - Finance Working Paper No. 437/2014
We study the effect of an investor owning multiple firms on governance through both voice and exit, and by both 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 an exit model, the manager's incentives to work are stronger since the price impact of investor selling is greater. In a voice model, the investor's incentives to monitor are stronger since "cutting-and-running" is less profitable. Our results contrast with conventional wisdom that common ownership always weakens governance by spreading an investor too thinly.
Number of Pages in PDF File: 55
Keywords: Corporate governance, banks, blockholders, monitoring, intervention, exit, trading
JEL Classification: D72, D82, D83, G34
Date posted: August 20, 2014 ; Last revised: May 3, 2016
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