Blockholders and Corporate Governance

Posted: 25 Nov 2014

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: December 2014

Abstract

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.

Suggested Citation

Edmans, Alex, Blockholders and Corporate Governance (December 2014). Annual Review of Financial Economics, Vol. 6, pp. 23-50, 2014, Available at SSRN: https://ssrn.com/abstract=2530472 or http://dx.doi.org/10.1146/annurev-financial-110613-034455

Alex Edmans (Contact Author)

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