Large Shareholders and Firm Risk-Taking Behavior

Abstract

We investigate whether multiple large shareholders (MLS) affect corporate risk-taking. Using hand-collected data on French publicly-listed companies over the period 2003-2007, we show that the presence, number and voting power of MLS, other than the largest controlling shareholder (LCS), are associated with greater variability in operating performance (ROA), market value (Tobin’s Q) and stock returns. In contrast, the presence of a single LCS is associated with less variability in firm performance, especially when the divergence between the LCS’s control and cash flow rights is large. This result suggests that MLS are able to prevent the LCS from dictating its preference for low-risk projects in order to protect its future consumption of private benefits. As a consequence, firms undertake better investments regardless of their intrinsic risks, and this eventually leads them to achieve higher performance. MLS are thus confirmed to play a critical role in corporate governance.

Keywords: Risk-taking, ownership structure, benefit of control, contestability, corporate governance

JEL Classification: G30, G32, G34