48 Pages Posted: 27 Jun 2013 Last revised: 10 Aug 2016
Date Written: July 25, 2014
This paper reviews the theoretical and empirical literature on the channels through which blockholders (large shareholders) engage in corporate governance. In classical models, blockholders exert governance through direct intervention in a firm’s operations, otherwise known as “voice.” These theories have motivated empirical research on the determinants and consequences of activism. More recent models show that blockholders can govern through an alternative mechanism known as “exit” — selling their shares if the manager underperforms. These theories give rise to new empirical studies on the two-way relationship between blockholders and financial markets, linking corporate finance with asset pricing. Blockholders may also worsen governance by extracting private benefits of control or pursuing objectives other than firm value maximization. I highlight the empirical challenges in identifying causal effects of and on blockholders as well as the typical strategies attempted to achieve identification. I close with directions for future research.
Keywords: large shareholders, governance, voice, activism, exit, informed trading
JEL Classification: D82, G14, G32, G34
Suggested Citation: Suggested Citation
Edmans, Alex, Blockholders and Corporate Governance (July 25, 2014). ECGI - Finance Working Paper No. 385. Available at SSRN: https://ssrn.com/abstract=2285781 or http://dx.doi.org/10.2139/ssrn.2285781
By Kevin Murphy