Thursday, November 13, 2014

Ownership and Control

I read an interesting blog recently about ownership and control.  The post (available here) was written entirely from a legal perspective and dealt with courts deciding if there was a controlling shareholder. This makes a difference in legal standards regarding fairness in mergers and acquisitions.  Certainly, one has control of the firm with ownership exceeding 50%. In most of the cases considered, the shareholders held sizeable blocks of shares, often close to, but just below 50% and the courts were trying to decide if there was de facto control.

If we are talking economic reality, there is considerable evidence that even very small  levels of ownership can influence board decisions and corporate behavior.  In fact, the literature is so large, that I couldn't begin to do justice to it in this blog.  Suffice it to say, that it is standard to control for insider and blockholder ownership in analyses of corporate events and substantial research has shown that even small levels of concentrated ownership can affect decisions.   Indeed, even twenty years ago, one article involving executive ownership showed a different relation between CEO turnover and performance in cases where the ownership level exceeded 1%.  Above this level, there was an insignificant relationship between turnover and performance.  The article also found that turnover rates were higher in firms with unaffiliated blockholders and lower in firms where blockholders were associated with management.

In an even older article by the author, we compared resisted and unresisted mergers and asked the question, "Why does management resist?"  It wasn't the bid premia - they were insignificantly different across contested and uncontested deals.  It wasn't the other terms of the deal, they were also similar.  The only factor that differentiated the cases was managerial ownership.  Consider the potential conflicts, if a deal succeeds management is much more likely to lose their jobs.  From a personal standpoint (as opposed to shareholder welfare) it may be optimal to resist.   In cases where management resisted, the only significant differentiating factor was managerial ownership.  Where management had even slightly higher levels of ownership, and hence stood to gain more from the deal in selling their shares, they were significantly less likely to resist.  In other work, we have shown that managerial resistance is the single most important factor in predicting whether a deal is completed

Since the time of thoses article, there have been scores of papers finding links between ownership, control and corporate decisions in general.  So yes, ownership matters and it can affect control at levels substantially below any 50% threshold.

All the best,


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