Blockholders: A Survey of Theory and Evidence

127 Pages Posted: 13 Aug 2016 Last revised: 8 Jul 2019

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)

Clifford G. Holderness

Boston College - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: March 11, 2017

Abstract

This paper reviews the theoretical and empirical literature on the role of blockholders (large shareholders) in corporate governance. We start with the underlying property rights of public corporations; we discuss how blockholders are critical in addressing free-rider problems and why, like owners of private property in general, blockholders are likely to be active in firm governance. We then examine what distinguishes a blockholder from an ordinary shareholder and advocate additional definitions from the typical threshold of 5% ownership. We next present new evidence on the frequency and characteristics of blockholders in United States corporations. Then we develop a simple unifying model to present theories of blockholder governance through both voice (direct intervention) and exit (selling one's shares). We survey the empirical evidence on blockholder governance, emphasizing the empirical challenges in identifying causal effects involving blockholders. We highlight the lack of credible instruments for blockholders and argue that exogenous variation should not be a prerequisite for research -- a narrow focus on identification may lead to a focus on identifying narrow questions. We emphasize the value of descriptive research with blockholders and how endogeneity concerns can be addressed with economic logic and by directly testing alternative explanations. We close with suggestions for future research.

Keywords: Large shareholders, blockholders, governance, voice, activism, exit, microstructure, property rights

JEL Classification: D72, D82, D83, G14, G32, G34

Suggested Citation

Edmans, Alex and Holderness, Clifford G., Blockholders: A Survey of Theory and Evidence (March 11, 2017). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 475/2016. Available at SSRN: https://ssrn.com/abstract=2820976 or http://dx.doi.org/10.2139/ssrn.2820976

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

Clifford G. Holderness

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States
617-552-2768 (Phone)
617-277-8071 (Fax)

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