Estimating the Effects of Large Shareholders Using a Geographic Instrument

Bo Becker, Henrik Cronqvist and Ruediger Fahlenbrach

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: Large shareholders may play an important role for firm performance and policies, but identifying an effect empirically presents a challenge due to the endogeneity of ownership structures. We develop and test an empirical framework which allows us to separate selection from treatment effects of large shareholders. Unlike other blockholders, individuals tend to hold blocks in public firms located close to where they reside. Using this empirical observation, we develop an instrument--the density of wealthy individuals near a firm's headquarters--for the presence of a large, non-managerial individual shareholder in a firm. These shareholders have a large impact on firms, controlling for selection effects. Consistent with theories of large shareholders as monitors, we find that they increase firm profitability, increase dividends, reduce corporate cash holdings, and reduce executive compensation. Consistent with the view that there exist conflicts between large and small owners in public firms, we uncover evidence of substitution toward less tax-efficient forms of distribution in firms with blocks. In addition, large shareholders reduce the liquidity of the firm's stock.

Date: 2008-08
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Citations: View citations in EconPapers (8)

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Related works:
Journal Article: Estimating the Effects of Large Shareholders Using a Geographic Instrument (2011)
Working Paper: Estimating the Effects of Large Shareholders Using a Geographic Instrument (2011)
Working Paper: Estimating the Effects of Large Shareholders Using a Geographic Instrument (2010)
Working Paper: Estimating the Effects of Large Shareholders Using a Geographic Instrument (2008)
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