What Determines the Fraction of Board Seats Controlled by the Dominant Shareholder in a Company?

Posted: 9 Jun 2010

See all articles by Jay Dahya

Jay Dahya

Zicklin School of Business, Baruch College - The City University of New York

Orlin Dimitrov

SKKU

John J. McConnell

Purdue University

Date Written: May 31, 2010

Abstract

In their 2008 paper, Dahya, Dimitrov, and McConnell find that corporate values are lower when a higher fraction of the firm’s board of directors is associated with the dominant shareholder, especially in countries with weak legal regimes. Our study presents a simple model that is consistent with these findings. The model, however, offers a number of additional testable implications regarding the determinants of the composition of the board of directors. It predicts that more directors will be associated with the dominant shareholder in countries with weaker shareholder protection, when the dominant shareholder holds less cash flow rights and more voting rights, when the firm has lower investment opportunities, and more free cash flow, i.e. smaller need for external funds. We use the Dahya et al. (2008) dataset to provide empirical support for each of these additional predictions.

Keywords: International, Directors, Governance, Valuation, Investor Protection

JEL Classification: F39, G32, G34, G30, K40, K42

Suggested Citation

Dahya, Jay and Dimitrov, Orlin and McConnell, John J., What Determines the Fraction of Board Seats Controlled by the Dominant Shareholder in a Company? (May 31, 2010). Available at SSRN: https://ssrn.com/abstract=1622883

Jay Dahya

Zicklin School of Business, Baruch College - The City University of New York ( email )

55 Lexington Ave., Box B13-260
New York, NY 10010
United States

Orlin Dimitrov

SKKU ( email )

53 Myeongnyun-dong 3-ga Jongno-ju
Guro-gu
Seoul, 110-745
Korea, Republic of (South Korea)

John J. McConnell (Contact Author)

Purdue University ( email )

MGMT, KRAN
403 West State St.
West Lafayette, IN 47907-2056
United States
765-494-5910 (Phone)
765-494-7863 (Fax)

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