Scandinavian Working Papers in Economics

SIFR Research Report Series,
Institute for Financial Research

No 64: Estimating the Effects of Large Shareholders Using a Geographic Instrument

Bo Becker , Henrik Cronqvist () and Rüdiger Fahlenbrach
Additional contact information
Bo Becker: Harvard Business School
Henrik Cronqvist: Claremont McKenna College
Rüdiger Fahlenbrach: Swiss Federal Institute of Technology Lausanne

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

JEL-codes: G31; G32; G34; G35

49 pages, June 15, 2008

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