Governance and Comovement Under Common Ownership

Alex Edmans, Doron Levit and Devin Reilly

No 10119, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper studies the corporate governance and asset pricing implications of investors owning blocks in multiple firms. Common wisdom is that multi-firm ownership weakens governance because the blockholder is spread too thinly. We show that this need not be the case. In a single-firm benchmark, the blockholder governs through exit, selling her stake if the firm underperforms. With multiple firms, the blockholder may sell even a value-maximizing firm, to disguise her exit from another underperforming firm as being motivated by a portfolio-wide liquidity shock. This reduces the manager's effort incentives and weakens governance. On the other hand, governance can be stronger, because selling one firm and not the other is a powerful signal of underperformance. Common ownership leads to firms' stock prices being correlated, even if their fundamentals are uncorrelated. We derive empirical predictions for the direction of correlation and for whether governance is stronger or weaker with multiple firms.

Keywords: Blockholders; Corporate governance; Exit; Trading; Correlation (search for similar items in EconPapers)
JEL-codes: D72 D82 D83 G34 (search for similar items in EconPapers)
Date: 2014-08
References: Add references at CitEc
Citations: View citations in EconPapers (3)

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Working Paper: Governance and Comovement Under Common Ownership (2014)
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