The Governance Transfer of Blockholders: Evidence from Block Acquisitions and Earnings Management around the World

Abstract

We examine the governance transfer effect of corporate blockholders in a sample of 892 block acquisitions across 42 countries from 1990 to 2008. Using earnings management as a proxy for corporate governance outcome, we find that target firms’ earnings management is aligned with that of block acquirers after acquisitions, implying that blockholders transfer their own governance quality to investee firms. We further identify three economic mechanisms that underlie the governance transfer effect, namely, monitoring effectiveness, monitoring cost, and monitoring environment. Our findings provide new insights into the governance role of blockholders.

Keywords: Block Acquisition, Governance Transfer, Earnings Management, International Financial Markets

JEL Classification: G15, G32, G34, M41