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Agency problem and ownership structure: Outside blockholder as a signal

Sergey Stepanov and Anton Suvorov

Journal of Economic Behavior & Organization, 2017, vol. 133, issue C, 87-107

Abstract: We model the decision of an entrepreneur, seeking outside financing, on whether to sell a large equity share to a blockholder. A conventional theoretical rationale for the presence of an outside blockholder is mitigation of the agency problem via monitoring. Our model provides a novel insight: outside blockholders may be attracted by entrepreneurs with low, rather than high, agency problems in order to signal their low propensity to extract private benefits. Our result yields a new interpretation of an often documented positive relationship between outside ownership concentration in a firm and its market valuation: it may be driven by “sorting” rather than by the direct effect of monitoring. We show that the positive correlation may arise even if the blockholder derives private benefits and has no positive impact on the value of small shares. Our analysis also helps to explain why the market reacts more favorably to private placements of equity as opposed to public issues.

Keywords: Agency problem; Blockholders; Monitoring; Ownership structure; Asymmetric information (search for similar items in EconPapers)
JEL-codes: D82 G32 G34 (search for similar items in EconPapers)
Date: 2017
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Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

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Handle: RePEc:eee:jeborg:v:133:y:2017:i:c:p:87-107