Complex Ownership Structures and Corporate Valuations

Laeven, Luc; Levine, Ross

doi:10.1093/rfs/hhm068

Cited by 453 publications

(160 citation statements)

References 47 publications

Supporting

Mentioning

124

Contrasting

Unclassified

Order By: Relevance

“…If so, do the MLS have incentives to pursue a high-risk investment strategy as opposed to the low-risk strategy of the dominant shareholder? The importance of this research question is echoed by recent findings that approximately one-third of the firms in Western Europe (Faccio & Lang, 2002;Laeven & Levine, 2008) and by the current study that approximately one-half of the firms in East Asia (excluding Japan) have more than one large shareholder in their ownership structures. Yet, it is unclear how the corporate risk-taking tendency is affected if a firm has more than one large shareholder (i.e., MLS) with substantial voting rights.…”

Section: Introductionmentioning

confidence: 65%

“…In this paper, we examine the link between the presence and power of multiple large shareholders (MLS) and Corporate Risk Taking (CRT) to uncover the internal governance role of the MLS and the extent to which the MLS affect the pursuit of an efficient risky investment policy. Prior literature on MLS is limited but indicates that firms with MLS have higher values (Laeven & Levine, 2008;Maury & Pajuste, 2005) and a lower cost of equity capital (Attig, Guedhami, & Mishra, 2008) compared with their counterparts with a dominant shareholder. Furthermore, Attig, Ghoul, and Guedhami (2009), using a sample of East Asian firms, uncovered that the effect of the MLS is more pronounced in the situations in which firms have higher agency problems, in which they curb the diversion of the firms' resources by playing a valuable monitoring role.…”

Section: Introductionmentioning

confidence: 99%

“…These arguments imply that the MLS monitor (either directly through voting in board/shareholder meetings or by trading on the firm's shares) the activities of the dominant shareholder and prevent the firm from undertaking suboptimal investment decisions, suggesting a positive association of the MLS with CRT. While there is empirical evidence that MLS reduce the expropriation of corporate resources and play a monitoring role, as evident from the higher valuation of firms with MLS (Attig et al, 2009;Laeven & Levine, 2008;Maury & Pajuste, 2005) and the lower cost of equity (Attig et al, 2008), the role of MLS in corporate risk taking is purely an empirical question, which we examine in this study.…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Multiple Large Shareholders and Corporate Risk Taking: Evidence from East Asia

Mishra

2011

Corporate Governance: An International Review

122

View full text Add to dashboard Cite

Manuscript Type: EmpiricalResearch Question/Issue: Prior literature suggests that weak external governance mechanisms negatively affect corporate risk taking (CRT). However, strong internal governance is likely to mitigate the shortcomings of external governance. In a sample of East Asian firms, we examine whether the presence and voting power of multiple large shareholders (MLS) beyond the dominant shareholder effectively manage internal governance and mitigate agency problems, as measured by their effect on CRT. Research Findings/Insights: In a sample of 1,686 firms from nine countries, while the presence of a dominant shareholder is associated with a lower CRT, the presence and voting rights of the MLS are strongly associated with a higher CRT. Furthermore, the effect of the MLS on CRT is strongly positive in family dominated firms (as opposed to non-family dominated firms). Theoretical/Academic Implications: We interpret these findings as evidence that in firms featuring a dominant shareholder with the power and incentives to extract private benefits of control by undertaking a conservative investment policy, the power and presence of MLS improve internal governance by mitigating agency problems between the dominant shareholder and minority shareholders and help promote a more optimal non-conservative investment policy. Practitioner/Policy Implications: In countries where financial markets are still developing and in countries where the dominant shareholder structures are widespread, the policy makers may encourage MLS structures in general and in the privatization of state enterprises.

show abstract

Section: Introductionmentioning

confidence: 65%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

Multiple Large Shareholders and Corporate Risk Taking: Evidence from East Asia

Mishra

2011

Corporate Governance: An International Review

122

View full text Add to dashboard Cite

show abstract

“…Supporting these theories on the valuable governance role of multiple major shareholders, Faccio, Lang, and Young (2001) find higher dividend rates in firms with several large shareholders, which they attribute to the disciplinary impact of cross-monitoring restricting the extraction of private benefits. Similarly, valuation (Laeven and Levine 2008) and equity pricing (Attig, Guedhami, and Mishra 2008) evidence implies that an uneven distribution of cash-flow rights among large shareholders leaves smaller investors more susceptible to expropriation. Accordingly, we predict that firms without active internal monitoring by multiple large shareholders will rely more on the presence of a Top 10 auditor to protect outside investors' interests; that is, group firms substitute between these forms of monitoring.…”

Section: Multiple Large Shareholdersmentioning

confidence: 99%

Auditor Choice and Its Implications for Group‐Affiliated Firms

Fang

Pittman

Zhang

et al. 2017

Contemporary Accting Res

View full text Add to dashboard Cite

We examine which of two opposing financial reporting incentives that group-affiliated firms experience shapes their accounting transparency evident in auditor choice. In one direction, complex group structure and intragroup transactions enable controlling shareholders to pursue diversionary activities that they later hide by distorting reported earnings. In the other direction, as outside investors price-protect against potential expropriation, controlling shareholders may be eager to improve financial reporting quality in order to alleviate agency costs. To empirically clarify whether group affiliation affects company insiders' incentives to address minority shareholders' concerns over agency costs, we examine auditor selection of group firms relative to stand-alone firms. In comparison to nongroup firms, our evidence implies that group firms are more likely to appoint Top 10 audit firms in China, especially when their controlling shareholders have stronger incentives to improve external monitoring of the financial reporting process. After isolating group firms, we find that the presence of a Top 10 auditor translates into higher earnings and disclosure quality, higher valuation implications for related-party transactions, and cheaper equity financing, implying that these firms benefit from engaging a high-quality auditor. In additional analysis consistent with our predictions, we find that group firms that are Top 10 clients pay higher audit fees and their controlling shareholders are more constrained against meeting earnings benchmarks through intragroup transactions and siphoning corporate resources at the expense of minority investors. Collectively, our evidence supports the narrative that insiders in firms belonging to business groups weigh the costs and benefits stemming from auditor choice. *Accepted by Joseph Carcello. We are especially grateful to Joseph Carcello and two anonymous referees for their insightful and detailed comments that have significantly improved our paper. We thank Long Chen, Lauren Dreher, Rebecca Hann, Jayanthi Krishnan, Clive Lennox, Adi Masli, Oliver Rui, Stephen Taylor, and Martin Wu for their insights into an earlier version of this paper. Our paper has also benefited from comments from participants at the 2013 Auditing Midyear Conference in New Orleans, the 2013 AAA Annual Meeting in Anaheim, the 5th DC Area Accounting Symposium at George Mason University, and

show abstract

“…However, the choice of ownership threshold used to define institutional block-holders seems to be rather arbitrary in the literature. The ownership threshold of 5 percent is commonly used in the finance literature to define blockholders (Agrawal & Mandelker, 1990;Chung et al, 2002;Dechow et al, 1996;DeFond & Jiambalvo, 1994), whereas 10 percent ownership has been used in the corporate governance literature (Attig, Guedhami, & Mishra, 2008;La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 2002;Laeven & Levine, 2008;Mishra, 2011). Three ownership thresholds (5, 10, and 20 percent) are used to define institutional blockholders in the present paper.…”

Section: Block-holdings and Abnormal Accrualsmentioning

confidence: 99%

Which Types of Institutional Investors Constrain Abnormal Accruals?

Wang¹

2013

Corporate Governance

View full text Add to dashboard Cite

Manuscript Type Empirical Research Question/Issue This study analyses which type of institutional investors constrains accruals management using a sample of UK listed firms in the period of 1997–2010. Research Findings/Results Empirical results show that block‐holding levels, investment strategies, and investment durations influence institutional investors' role in constraining accruals management of the investee firms. Institutional investors with 10–20 percent ownership, adopting an active investment strategy, and having moderate investment duration significantly decrease the probability of income‐inflating abnormal accruals but increase the probability of income‐deflating abnormal accruals. In addition, these three aspects have a significant joint impact on accruals management. Even after considering the interaction among the three aspects of institutional investors, 10–20 percent block‐holding and moderate investment duration remain as significant driving forces on the constraint of accruals management by institutional investors. Further tests are conducted for sub‐sample periods of 2001–2005 and 2007–2009. Institutional investors with an active investment strategy and moderate investment duration are better motivated to constrain accruals management of UK firms during 2001–2005 when there were vigorous regulatory changes in corporate governance. Institutional investors with a passive investment strategy and short investment duration encouraged accruals management during the recent financial crisis (2007–2009). Theoretic/Academic Implications The findings of the paper provide some much needed clarity to the mixed evidence in the extant literature on the role of institutional investors in constraining accruals management. Block‐shareholding level, investment strategies, and the actual investment duration are valid dimensions to reflect their heterogeneous incentives in monitoring managerial discretions in accruals management. Institutional investors are a complex group of diverse types of financial institutions and would be more appropriately analyzed with multiple dimensions in future research on their monitoring of managerial discretion. Practitioner/Policy Implications This study underpins the concern of UK policymakers over the short‐term investment orientation of institutional investment by showing that institutional investors with less than one year investment duration significantly encourage accruals manipulations. Policymakers may pay attention to the three aspects, as identified in the present paper, of institutional investors in terms of enhancing shareholder engagement with their investee firms.

show abstract

Complex Ownership Structures and Corporate Valuations

Cited by 453 publications

References 47 publications

Multiple Large Shareholders and Corporate Risk Taking: Evidence from East Asia

Multiple Large Shareholders and Corporate Risk Taking: Evidence from East Asia

Auditor Choice and Its Implications for Group‐Affiliated Firms

Which Types of Institutional Investors Constrain Abnormal Accruals?

Contact Info

Product

Resources

About