Block Diversity and Governance

Abstract

We show that corporate governance practices vary predictably across different types of blockholders. Nonfinancial blockholders are six times as likely to self-identify as active shareholders relative to financial blockholders. Textual analysis of regulatory filings reveals that nonfinancial blocks tend to govern through tailored actions, while financial blocks govern through generic performance-based measures. The market responds positively when nonfinancial blocks enter small, volatile, and illiquid firms where close monitoring is likely to be valuable. Finally, we find that prior studies using the Russell index inclusion discontinuity may falsely attribute governance practices to institutional ownership and may instead capture nonfinancial blockholder governance.

Keywords: Blockholders, Shareholders, Governance, 13D Filings, 13G filings, Textual analysis, Russell discontinuity

JEL Classification: G30, G34, G39, G23