Governance Under Common Ownership

69 Pages Posted: 20 Aug 2014 Last revised: 29 Aug 2018

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)

Doron Levit

University of Pennsylvania - Finance Department; European Corporate Governance Institute (ECGI)

Devin Reilly

University of Pennsylvania - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: August 14, 2018

Abstract

Conventional wisdom is that diversification weakens governance by spreading an investor too thinly. We show that, when an investor owns multiple firms ("common ownership"), governance through both voice and exit can strengthen -- even if the firms are in unrelated industries. Under common ownership, an informed investor has flexibility over which assets to retain and which to sell. She sells low-quality firms first, thereby increasing price informativeness. In a voice model, the investor's incentives to monitor are stronger since "cutting-and-running" is less profitable. In an exit model, the manager's incentives to work are stronger since the price impact of investor selling is greater.

Keywords: Corporate governance, banks, blockholders, monitoring, intervention, exit, trading, common ownership.

JEL Classification: D72, D82, D83, G34

Suggested Citation

Edmans, Alex and Levit, Doron and Reilly, Devin, Governance Under Common Ownership (August 14, 2018). Review of Financial Studies, Forthcoming; European Corporate Governance Institute (ECGI) - Finance Working Paper No. 437/2014. Available at SSRN: https://ssrn.com/abstract=2482935 or http://dx.doi.org/10.2139/ssrn.2482935

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

Doron Levit

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

European Corporate Governance Institute (ECGI) ( email )

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

Devin Reilly

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

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