The governance role of multiple large shareholders: evidence from the valuation of cash holdings
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The governance role of multiple large shareholders: evidence from the valuation of cash holdings Najah Attig • Sadok El Ghoul • Omrane Guedhami Sorin Rizeanu
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Published online: 10 July 2011 Ó Springer Science+Business Media, LLC. 2011
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. Keywords Corporate governance Multiple large shareholders Cash holdings Firm performance
N. Attig Saint Mary’s University, Halifax, NS B3H 3C3, Canada e-mail: [email protected] S. El Ghoul University of Alberta, Edmonton, AB T6C 4G9, Canada e-mail: [email protected] O. Guedhami (&) University of South Carolina, Columbia, SC 29205, USA e-mail: [email protected] S. Rizeanu University of Victoria, Victoria, BC V8P 5C2, Canada e-mail: [email protected]
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1 Introduction Over the past 30 years, a large stream of corporate governance research has focused on the conflicts of interest that arise from the separation of ownership and control. The first generation of research dealt with the agency conflicts in the typical Berle and Means corporation—widely owned by small investors but controlled by professional managers (e.g., Jensen and Meckling 1976; Morck et al. 1988). As public firms around the world are generally not widely held but rather are controlled by large shareholders (La Porta et al. 1999), a second generation of research focused on the conflicts between controlling owners and minority shareholders (e.g., Denis and McConnell 2003; Shleifer and Vishny 1997). More recently, corporate governance research has shifted attention to the impact of the presence of multiple large shareholders (MLS) on firms’ agency problems (e.g., Laeven and Levine 2008; Maury and Pajuste 2005;). In this paper we extend this stream of research by highlighting the role of multiple large shareholders in mitigating firms’ governance problems as evidenced by the valuation of cash holdings. We are interested in firms’ cash holdings—cash and cash equivalents—because they can be converted into private benefits at a lower cost than other assets (Myers and Rajan 1998) and thus are likely to be used in a discretionary fashion, particularly when corporate governance is poor, resulting in a decrease i
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