Estimating the Effects of Large Shareholders Using a Geographic Instrument

Abstract

Large shareholders may play an important role for firm performance and policies, but identifying this empirically presents a challenge due to the endogeneity of ownership structures. We develop and test an empirical framework which allows us to separate selection from treatment effects of large shareholders. Individual blockholders tend to hold blocks in public firms located close to where they reside. Using this empirical observation, we develop an instrument – the density of wealthy individuals near a firm’s headquarters – for the presence of large, non-managerial individual shareholders in firms. These shareholders have a large impact on firms, controlling for selection effects.

Keywords: Large shareholders, blockholders, corporate policies, firm performance, liquidity, instrumental variable estimation

JEL Classification: G32, G34, G35