Governance Under Common Ownership
Review of Financial Studies, Forthcoming
69 Pages Posted: 20 Aug 2014 Last revised: 29 Aug 2018
Date Written: August 14, 2018
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: Suggested Citation