SIFR Research Report Series, Institute for Financial Research
Bo Becker, Henrik Cronqvist
Estimating the Effects of Large Shareholders Using a Geographic Instrument
() and Rüdiger Fahlenbrach
Abstract: Large shareholders may play an important role for firm
policies and performance, but identifying an effect empirically presents a
challenge due to the endogeneity of ownership structures. However, unlike
other blockholders, individuals tend to hold blocks in corporations that
are located close to where they live. Using this fact, we create an
instrument – the density of wealthy individuals near a firm’s headquarters
– for the presence of a large, non-managerial individual shareholder in a
public firm. We show that these shareholders have a large impact on firms.
Consistent with theories of large shareholders as monitors, we find that
they increase firm profitability, increase dividends, reduce corporate cash
holdings, and reduce executive compensation. Consistent with the view that
there exist conflicts between large and small owners in public firms, we
uncover evidence of substitution toward less tax-efficient forms of
distribution (dividends over repurchases). In addition, our analysis shows
that large shareholders reduce the liquidity of the firm’s stock.
Keywords: Large shareholders; blockholders; corporate policies; firm performance; liquidity; instrumental variable estimation; (follow links to similar papers)
JEL-Codes: G31; G32; G34; G35; (follow links to similar papers)
49 pages, June 15, 2008
Latest version: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1101012
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