In our paper, Large Shareholders and Corporate Policies, which was recently accepted for publication in the Review of Financial Studies, we investigate whether large shareholders play an important role for corporate policy choices and firm performance. We argue that one explanation for the lack of large-sample evidence of blockholder effects is that large shareholders differ from each other, and existing empirical frameworks do not incorporate blockholder heterogeneity into an economic analysis of large shareholders. To account for this heterogeneity, we develop an empirical framework and to construct a new blockholder-firm panel data set that can be used to analyze the economic effects of blockholder heterogeneity. The novel feature of our data set is that it allows us to identify and track all unique large shareholders among large U.S. public firms − in essence the Standard and Poor’s (S&P) 1,500 universe − from 1996 to 2001. This data set allows us to take the analysis of large shareholders to the smallest possible economic unit: the individual blockholder. Our empirical approach involves running panel regressions in which corporate policy and firm performance variables are regressed on year and firm fixed effects as well as time-varying firm-level characteristics to control for observable and unobservable firm heterogeneity, and most importantly, blockholder fixed effects.
We find statistically significant and economically important blockholder fixed effects in investment, financial, and executive compensation policies. This evidence suggests that blockholders vary in their beliefs, skills, or preferences. Different large shareholders have distinct investment and governance styles: they differ in their approaches to corporate investment and growth, their appetites for financial leverage, and their attitudes towards CEO pay. Given the evidence on blockholder heterogeneity and corporate policies, we ask whether firm performance is systematically related to the particular large shareholder present in a firm. We find blockholder fixed effects in firm performance measures, and differences in style are systematically related to firm performance differences. a blockholder in the 75th (25th) percentile is associated with 4% (3%) higher (lower) return on assets (ROA), all else equal, which are large effects given that the average ROA is around 5% in our sample.
The documented blockholder effects in firm policies could be consistent with either an influence explanation, in the sense that large shareholders impact policies, or a selection interpretation, in that blockholders systematically select firms in which they invest major stakes based on a preference for certain policies. Our evidence is more consistent with influence for activist, pension fund, corporate, individual and private equity blockholders, but more consistent with systematic selection for large mutual fund shareholders. Finally, we analyze sources of the heterogeneity, and find that blockholders with a larger block size, board membership, direct management involvement as officers, or with a single decision maker are associated with larger effects on corporate policies and firm performance.
The full paper is available for download here.