Blockholders and Corporate Governance

45 Pages Posted: 28 Oct 2013

See all articles by Alex Edmans

Alex Edmans

London Business School - Institute of Finance and Accounting; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

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Date Written: October 2013

Abstract

This paper reviews the theoretical and empirical literature on the different 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 the alternative mechanism of “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, and the typical strategies attempted to achieve identification. I close with directions for future research.

Keywords: activism, exit, governance, large shareholders, microstructure, voice

JEL Classification: G34

Suggested Citation

Edmans, Alex, Blockholders and Corporate Governance (October 2013). CEPR Discussion Paper No. DP9708. Available at SSRN: https://ssrn.com/abstract=2346245

Alex Edmans (Contact Author)

London Business School - Institute of Finance and Accounting ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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