Blockholders and Corporate Governance

Edmans, Alex

doi:10.2139/ssrn.2285781

Cited by 99 publications

(147 citation statements)

References 142 publications

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“…Thus, the prominence of blockholders and their effect on FRQ should be of direct interest to accounting researchers. Edmans (2014) offers the conclusion that the issue of 2.…”

Section: Introductionmentioning

confidence: 99%

Blockholder Exit Threats and Financial Reporting Quality

Dou

Hope

Thomas

et al. 2018

Contemporary Accting Res

112

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Recent theoretical and empirical studies suggest that blockholders (shareholders with ownership ≥ 5 percent) exert governance through the threat of exit. Blockholders have strong incentives to gather private information and sell their shares when managers are perceived to underperform. To prevent blockholders from selling their shares and the firm from suffering a stock price decline, managers align their actions with the interests of shareholders. As a result of the greater manager‐shareholder alignment, managers' actions are more likely to be in shareholders' best interest, and consequently there is less need for managers to manipulate earnings. Consistent with these predictions from economic theory, we find evidence that as exit threat increases, firms have higher financial reporting quality. Theory also predicts that the impact of blockholders' exit threat on financial reporting quality (FRQ) should increase as the manager's wealth is tied more closely to the stock price, and this is what we find. Our study contributes to the research on the impact of shareholders on FRQ and to an emerging literature on the impact of blockholders in financial markets. Blockholders play an important role in managers' reporting outcomes through their actions as informed investors.

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“…Thus, the prominence of blockholders and their effect on FRQ should be of direct interest to accounting researchers. Edmans (2014) offers the conclusion that the issue of 2.…”

Section: Introductionmentioning

confidence: 99%

Blockholder Exit Threats and Financial Reporting Quality

Dou

Hope

Thomas

et al. 2018

Contemporary Accting Res

112

View full text Add to dashboard Cite

show abstract

“…Such mechanisms include incentives seeking to align management with shareholder interests (e.g., equity-based compensation) as well as various monitoring mechanisms (e.g., independent boards of directors) (see literature review by Dalton, Hitt, Certo, & Dalton, 2007). A mechanism that has received particular attention in the more recent corporate governance literature is informed trading by small blockholders (Admati & Pfleiderer, 2009;Edmans, 2009Edmans, , 2014. This mechanism involves monitoring of firms by small blockholders (in the sense that they collect detailed information about the firm's performance), who then do not (usually) intervene in the management of the firm directly (as boards of directors or large blockholders may do).…”

Section: Agency Theory Informed Trading By Small Blockholders Andmentioning

confidence: 99%

“…Dispersed shareholders lack incentives and means to gather information about strategies and investments of firms. Hence, their trading is based on publicly visible (past) earnings information (Edmans, 2009(Edmans, , 2014. This entails that the stock price, in the first instance, reflects near-term cost effects but not longer term positive effects of investments on earnings, at least until they have started to materialize.…”

Section: Short Termism and Its Effects On Shc Investmentsmentioning

confidence: 99%

“…To develop the theory, the article draws on recent literature at the intersection of corporate governance and corporate finance, depicting informed trading by small blockholders as an important corporate governance mechanism in the U.S. capital market system (e.g., Edmans, 2009Edmans, , 2014. This literature is integrated with a diverse literature (spanning finance, accounting, and strategy) on securities analysts-who are employed by small blockholders and play a central part in this corporate governance mechanism-as well as the strategic HRM literature, providing information on near-and long-term effects of SHC investments.…”

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confidence: 99%

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The HRM–capital market link: Effects of securities analysts on strategic human capital

Krausert

2017

Human Resource Management

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This article develops theory about an agency problem affecting the strategic human capital (SHC) of the firm. It proposes three categories of SHC-related choices managers must make that imply a trade-off between near-and long-term performance. Dispersed shareholding, firm coverage by securities analysts, and their practice of publishing quarterly earnings forecasts are argued to entail a bias in management incentives, shifting the balance in this trade-off toward near-term performance. To restore the balance, securities analysts would need to distinguish transitory from recurring effects of SHC-related choices in their valuation models (e.g., treating certain labor cost savings during cyclical downturns as transitory). Restoring the balance would also require them to anticipate long-term effects in their long-term earnings forecasts (e.g., long-term positive effects of retaining employees with valuable skills during cyclical downturns). The article discusses specific transitory cost effects and long-term effects they could potentially take into account. The skills and incentives needed by analysts to account for such effects are argued to vary across firm segments. K E Y W O R D Sagency theory, corporate governance, financial analysis, high-performance work systems, human capital disclosure, intangibles, intellectual capital disclosure, nonfinancial information, securities analysts, short termism, strategic human capital, temporal effects

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“…Our paper also bears a connection to Matvos and Ostrovsky (2010), who analyze strategic considerations in mutual fund voting abstracting from business ties. At the most general level, our paper relates to the role of blockholders in corporate governance (see Edmans (2013) for a survey) and the emerging literature on how the incentives of institutional blockholders affect governance (e.g., Dasgupta and Piacentino (2015)).…”

mentioning

confidence: 99%

Ties That Bind: How Business Connections Affect Mutual Fund Activism

Cvijanović

Dasgupta

Zachariadis

2016

The Journal of Finance

172

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We investigate whether business ties with portfolio firms influence mutual funds' proxy voting using a comprehensive data set spanning 2003 to 2011. In contrast to prior literature, we find that business ties significantly influence pro-management voting at the level of individual pairs of fund families and firms after controlling for ISS recommendations and holdings. The association is significant only for shareholder-sponsored proposals and stronger for those that pass or fail by relatively narrow margins. Our findings are consistent with a demand-driven model of biased voting in which company managers use existing business ties with funds to influence how they vote.

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Blockholders and Corporate Governance

Cited by 99 publications

References 142 publications

Blockholder Exit Threats and Financial Reporting Quality

Blockholder Exit Threats and Financial Reporting Quality

The HRM–capital market link: Effects of securities analysts on strategic human capital

Ties That Bind: How Business Connections Affect Mutual Fund Activism

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