Do Large Blockholders Reduce Risk?

• Author: Imants Paeglis,David Newton
• Date: 01 March 2019
• Published date: 01 March 2019
• DOI: http://doi.org/10.1111/jacf.12332

IN THIS ISSUE:

Agency

Capitalism

8The Rise of Agency Capitalism and the Role of Shareholder

Activists in Making It Work

Ronald J. Gilson, Columbia and Stanford Law Schools, and

Jeffrey N. Gordon, Columbia Law School

23 e Eect of Shareholder Approval of Equity Issuances

Around the World

Clifford G. Holderness, Boston College

42 Does Mandatory Shareholder Voting Prevent Bad Acquisitions?

e Case of the United Kingdom

Marco Becht, Université libre de Bruxelles, CEPR, and ECGI; Andrea Polo, Luiss University,

Universitat Pompeu Fabra, EIEF, Barcelona GSE, CEPR and ECGI; and Stefano Rossi, Bocconi

University, CEPR, and ECGI

62 e Early Returns to International Hedge Fund Activism: 2000-2010

Marco Becht, Université libre de Bruxelles, CEPR, and ECG; Julian Franks, London Business

School, CEPR, and ECGI; Jeremy Grant, Berenberg Bank; and Hannes Wagner, Bocconi University,

ECGI, and IGIER

81 How Has Takeover Competition Changed Over Time?

Tingting Liu, Iowa State University, and Harold Mulherin, University of Georgia

95 Do Large Blockholders Reduce Risk?

David Newton and Imants Paeglis, Concordia University

113 Estimating the Equity Risk Premium and Expected Equity Rates

of Return: e Case of Canada

Laurence Booth, University of Toronto

126 Save the Buyback, Save Jobs

Greg Milano and Michael Chew, Fortuna Advisors

VOLUME 31

NUMBER 1

WINTER 2019

APPLIED

CORPORATE FINANCE

Journal of

95

Journal of Applied Corporate Finance • Volume 31 Number 1 Winter 2019

H

In exploring our proposition, we make four contributions to

the literature on blockholder ownership and rm risk. First, we

show that the identity of a blockholder, an often ignored attri-

bute, can aect corporate performance and value. We document

that the ownership of individual blockholders is associated with

lower corporate risk, while corporate block ownership appears

to have no eect on rm risk. Second, we show that the iden-

tity of blockholders other than the largest also appears to aect

corporate performance and value. But whereas the presence of

other individual blockholders magnies the risk-reducing eect

of the largest individual blockholder, the presence of corporate

blockholders tends to counteract such an inuence. ird, we

make the new discovery that companies with dual-class share

structures tend to be associated with greater risk than their

single-class counterparts. Fourth, making use of advances in

asset-pricing, we decompose rm risk into generally accepted

factors, which allows for a more detailed identication of risks

that are, or are not, likely to be inuenced by the ownership of

the largest individual blockholders. is has not been addressed

by earlier studies. Our use of these rened measures of risk

allowed us to observe that higher rm-specic risk of compa-

nies with large individual blockholders is biased towards positive

outcomes. We suggest that this is evidence of eective manage-

ment practices. And consistent with this suggestion, we nd

evidence of greater productivity in companies with larger indi-

vidual blockholdings.

Each of our contributions connects to one of four associated

strands of literature. e rst area we contribute to concerns the

pervasiveness of blockholders in U.S. public companies¹ and

their role in increasing operating performance and rm value.²

Yet, we know very little about the inuence of such investors on

stock volatility.³ To the best of our knowledge, only two prior

studies have explicitly examined the inuence of blockholders

on risk. Our article extends the ndings of these studies in

1 For a review of the blockholder literature, see C. Holderness, “Blockholders Are

More Common in the United States Than You Might Think,” Journal of Applied Corpo-

rate Finance, Vol. 22 (2010), pp. 75-85; and C. Holderness, “A Survey of Blockholders

and Corporate Control,” Economic Policy Review, Vol. 9 (2003), 51-63.

2 See, e.g., R. Anderson and D. Reeb, “Founding-Family Ownership and Firm Per-

formance: Evidence from the S&P 500,” The Journal of Finance, Vol. 58(3) (2003a),

pp. 1301-1328; B. Villalonga and R. Amit, “How do Family Ownership, Control and

Management Affect Firm Value?,” Journal of Financial Economics, Vol. 80(2) (2006),

pp. 385-417; L. Laeven and R. Levine, “Complex Ownership Structures and Corporate

Valuations,” The Review of Financial Studies, Vol. 21(2) (2008), pp. 579-604; and N.

Basu, I. Paeglis, and M. Toffanin, “Reading Between the Blocks,” Journal of Corporate

Finance, Vol. 45 (2017), pp. 294-317.

3 Several papershave examinedthe inuenceof largeblockholders ona rm’s

earnings volatility. K. John, L. Litov, and B. Yeung, “Corporate Governance and Risk-

Taking,” The Journal of Finance,Vol.63(4)(2008), pp.1679-1728,fail tondany

signicantinuenceofthelargestblockholder’sownershipontheearningsvolatility.M.

Faccio,M-T.Marchica,and R.Mura,“LargeShareholder DiversicationandCorporate

Risk-Taking,” The Review of Financial Studies, Vol. 24(11) (2011), pp. 3601-3641, for

theirsampleofEuropeanrms,ndthatrmscontrolledbylargediversiedblockholders

undertakeriskierinvestmentsasopposedtothosecontrolledbytheirundiversiedcoun-

terparts.

4 S. Rossetto and R. Stagliano, “Ownership Concentration and Firm Risk. Evidence

fromthe US,”WorkingPaper,ToulouseSchool ofEconomics (2012),nda negative

relationshipbetweenownershipofthelargestblockholderandarm’stotalriskfortheir

sampleofUSrms.R.AndersonandD.Reeb,“Founding-FamilyOwnership,Corporate

Diversication,and Firm Leverage,” The Journal of Law and Economics, Vol. 46(2)

(2003b),pp.653-684,ndthattheinuenceoffoundingfamiliesonthetotalandrm

specicriskdependscruciallyonthefoundingfamily’sgenerationinchargeoftherm.

David Newton and Imants Paeglis, Concordia University*

owdounderdiversiedlong-termshareholdersreducetheriskassociatedwithholding

largeequitystakesincompanies?Weproposethatsuchblockholdersusetheirinu-

ence, be it direct or indirect, to reduce corporate risk. Further, we hypothesize that

thisinuencewillbemorepronouncedforindividualblockholders,sincetheyarelikelytobe

morerisk-averseandlessdiversiedthantheircorporatecounterparts.Usingacomprehensive

and hand-collected sample of all CRSP and Compustat-listed companies, we tested and found

support for our hypotheses.

Do Large Blockholders Reduce Risk?

*For helpful comments, we would like to thank Nilanjan Basu, Rahul Ravi, and Pari-

anenVeeren.Theauthorsgratefullyacknowledge nancialsupportfromtheSocial Sci-

ences and Humanities Research Council of Canada (SSHRC). We remain solely respon-

sible for any remaining errors.