Dhillon, Amrita and Rossetto, Silvia (2009) Corporate control and multiple large shareholders. Working Paper. University of Warwick, Department of Economics, Coventry.

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Abstract

Many firms have more than one blockholder, but finance theory suggests that one blockholder should be sufficient to bestow all benefits on a firm that arise from concentrated ownership. This paper identifies a reason why more blockholders may arise endogenously. We consider a setting where multiple shareholders have endogenous conflicts of interest depending on the size of their stake. Such conflicts arise because larger shareholders tend to be less well diversified and would therefore prefer the firm to pursue more conservative investment policies. When the investment policy is determined by a shareholder vote, a single blockholder may be able to choose an investment policy that is far away from the dispersed shareholders' preferred policy. Anticipating this outcome reduces the price at which shares trade. A second blockholder (or more) can mitigate the conflict by shifting the voting outcome more towards the dispersed shareholders' preferred investment policy and this raises the share price. The paper derives conditions under which there are blockholder equilibria.The model shows how different ownership structures affect firm value and the degree of underpricing in an IPO.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HD Industries. Land use. Labor
Divisions:	Faculty of Social Sciences > Warwick Business School Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Corporate governance, Stockholders' voting, Corporations -- Investor relations
Series Name:	Warwick economic research papers
Publisher:	University of Warwick, Department of Economics
Place of Publication:	Coventry
Date:	January 2009
Number:	No.891
Number of Pages:	57
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
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URI:	http://wrap.warwick.ac.uk/id/eprint/1326

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