Corporate Financial and Investment Policies in the Presence of a Blockholder on the Board

Abstract

We examine the relation between the presence of an independent director who is a blockholder (IDB) and corporate policies, risk-taking and market valuation. After accounting for endogeneity, firms with an IDB have significantly (1) lower levels of cash holdings, payout and R&D expenditures, (2) higher levels of capital expenditures, and (3) lower risk. The market appears to value IDB presence and the associated decrease in dividend yield. About 75% of the IDBs in our sample are individual investors, who drive most of our results. Our findings suggest that IDB presence plays a valuable role in shaping some corporate policies and allocating corporate resources.

Keywords: Agency Problems, Corporate Governance, Independent Directors, Boards of Directors, Blockholders, Large Shareholders, Corporate Policies, Cash Holdings, Dividends, Investment, Financial Leverage, Firm Risk, Firm Valuation

JEL Classification: G32, G34, G35