Governance Through Trading and Intervention: A Theory of Multiple Blockholders

By Alex Edmans, Gustavo Manso. 2011

793 citations recorded by the source corpus.

Traditional theories argue that governance is strongest under a single large blockholder, as she has high incentives to undertake value-enhancing interventions. However, most firms are held by multiple small blockholders. This article shows that, while such a structure generates free-rider problems that hinder intervention, the same coordination difficulties strengthen a second governance mechanism: disciplining the manager through trading. Since multiple blockholders cannot coordinate to limit their orders and maximize combined trading profits, they trade competitively, impounding more information into prices. This strengthens the threat of disciplinary trading, inducing higher managerial effort. The optimal blockholder structure depends on the relative effectiveness of manager and blockholder effort, the complementarities in their outputs, information asymmetry, liquidity, monitoring costs, and the manager's contract. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/3d325be5b69832ce72c4618c5d80105394f70ebf

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Citations in the corpus

Multiple large shareholders and corporate investment: Evidence from China (2018, neutral): “Edmans and Manso (2011) ﬁ nd that 70% of U.S. ﬁ rms have multiple blockholders with 5% or more of a ﬁ rm's equity.”
The Effect of Liquidity on Governance (2011, background): “The “voice-B” theories of Coffee (1991), Bhide (1993), and Maug (2002), and the “exit” theories of Edmans (2009) and Edmans and Manso (2011) argue that liquidity makes it easier for the blockholder to sell her shares subsequently.”
The governance role of multiple large shareholders: evidence from the valuation of cash holdings (2011, positive): “, Laeven and Levine 2008; Maury and Pajuste 2005) as well as through their role as informed traders (Edmans and Manso 2011).”
Blockholders and Corporate Governance (2014, neutral): “In Edmans (2009) and Edmans & Manso (2011), the blockholder has full discretion regarding when to sell, but in Admati & Pfleiderer (2009), she may suffer a liquidity shock that forces her to sell regardless of the manager's action.”
Distracted Shareholders and Corporate Actions (2016, background): “Edmans and Manso (2011) show that monitoring by multiple minority blockholders – as opposed to monitoring by only few large blockholders – can be an optimal equilibrium outcome.”
Ownership structure, control contestability, and corporate debt maturity (2015, background): “This is consistent with previous studies of French firms, such as Faccio and Lang (2002) and Boubaker and Labégorre (2008).”