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The governance role of multiple large shareholders: evidence from the valuation of cash holdings

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Abstract

This paper investigates the governance role of multiple large shareholders (MLS, henceforth), as evidenced by their impact on the valuation of cash holdings. For a sample of 2,723 firms from 22 countries, we find that the presence of MLS enhances the valuation of firms’ cash holdings. In particular, we show that the valuation of cash is positively associated with an even distribution of blockholders’ voting rights and with higher contestability of the largest shareholder’s control. We also show that the impact of MLS on the valuation of cash holdings is more pronounced for family-controlled firms, consistent with investors perceiving family owners as associated with greater expropriation risk. Overall, our results contribute to the literature on corporate governance by showing that MLS improve internal monitoring and moderate the agency costs of firms’ cash holdings.

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Notes

  1. We note, however, that Gomes and Novaes’ (2005) model suggests that the governance role of MLS depends on firm characteristics and the level of (external) investor protection. For instance, in an environment with weak protection of minority shareholders, MLS’ shared control can play an efficient governance role.

  2. Specifically, 1996 is used for France, Germany, Italy, Switzerland, and the UK; 1997 is used for Spain and Portugal; 1998 is used for Sweden and Norway; and 1999 is used for Austria, Belgium, Finland, and Ireland.

  3. Despite their coverage period (late 1990s), these unique data sources of ultimate ownership have been used by several recent studies, including Attig et al. (2008), Boubakri and Ghouma (2010), Boubakri et al. (2010), Fan and Wong (2005), Guedhami and Mishra (2009), Kalcheva and Lins (2007), Laeven and Levine (2008), and Leuz et al. (2009).

  4. Following Opler et al. (1999) and Bates et al. (2009), we set R&D expenses to zero for firms that do not report R&D expenses.

  5. We report the results of the cash holding model by country in Appendix 2. Our conclusions remain qualitatively similar when we use excess cash calculated against industry, rather than country, following Bates et al. (2009) and Dittmar and Mahrt-Smith (2007).

  6. Excluding the UK and Japan from our sample preserves the main finding in our study that investors value excess cash more in firms with MLS.

  7. We follow Pinkowitz et al. (2006) in estimating the t statistic. Specifically, we run a stacked regression (on the full sample) that controls for the partitioning variable (e.g., MLSD) and its interaction with XCASH. The reported statistic of the difference in the estimated coefficients on XCASH between the two subsamples is the t statistic of the coefficient on the interaction between the partitioning variable and XCASH from the stacked regression.

  8. We obtain similar results when we analyze subsamples based on the Herfindahl index of the difference between voting rights (HERFDVOTE) and the relative Shapley value (RSHAPLEY).

  9. La Porta et al. (1999) argue that powerful families are likely to exercise (political) pressure on state representatives.

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Acknowledgments

We thank Narjess Boubakri, Nocera Giacomo, Chuck Kwok, Benjamin Maury, Andrei Nikiforov, Kendall Roth, and especially three anonymous reviewers for their insightful comments. Our research has also benefited from comments of participants at the 2010 Southwestern Finance Association Meeting, the 2009 Academy of International Business Meeting, the 2009 Financial Management Association Meeting, the 2009 European Financial Management Association Meeting, and the 2009 International Finance Conference. We appreciate generous financial support from Canada’s Social Sciences and Humanities Research Council.

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Authors and Affiliations

  1. Saint Mary’s University, Halifax, NS, B3H 3C3, Canada

    Najah Attig

  2. University of Alberta, Edmonton, AB, T6C 4G9, Canada

    Sadok El Ghoul

  3. University of South Carolina, Columbia, SC, 29205, USA

    Omrane Guedhami

  4. University of Victoria, Victoria, BC, V8P 5C2, Canada

    Sorin Rizeanu

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  1. Najah Attig
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  2. Sadok El Ghoul
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  4. Sorin Rizeanu
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Correspondence to Omrane Guedhami.

Appendices

Appendix 1

See Table 7.

Table 7 Number of firms per country after data cleanup
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Appendix 2

See Table 8.

Table 8 Determinants of cash holdings by country
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Attig, N., El Ghoul, S., Guedhami, O. et al. The governance role of multiple large shareholders: evidence from the valuation of cash holdings. J Manag Gov 17, 419–451 (2013). https://doi.org/10.1007/s10997-011-9184-3

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