What Do Shareholders’ Coalitions Really Want? Evidence from Italian voting trusts

Abstract

This paper studies the effects of having multiple large shareholders who share the control of firms, by analysing a unique dataset of Italian shareholders' agreements (voting trusts). We investigate the separation between ownership and control granted by such agreements, showing that, on average, a voting trust owning 52 per cent of the total company's cash-flow rights is able to exercise up to 87 per cent of the total board rights; the wedge is particularly beneficial to the largest shareholder within the voting trust who is able to get the majority of board rights despite owning only a minority fraction of the company's cash-flow rights. Then, an event-study analysis of a sample of voting trusts' announcements is performed. The results support the "entrenchment effects" hypothesis (Stulz, 1988) linking the ownership structure and the firm value, and are consistent with the view that, in Italy, voting trust agreements are mainly aimed at both protecting controlling shareholders from hostile takeovers and entrenching incumbent management.

Examining the Relationship between Disproportional Ownership Mechanisms and Company Performance: An Empirical Research

“…In this sense, the research supports the entrenchment view predicting that the deviation from the proportionality principle due to DOMs hampers the shareholder value maximization and limits company performance as it does not fully transfer the outcomes of managerial decisions to controlling owners (Claessens et al, 2002;Lins, 2003;Gompers et al, 2003;Burkart & Lee, 2008). Thereby, the study emphasizes that disproportional ownership increases agency threats and fosters the extraction of private benefits to the detriment of minority investors (Morck et al, 1988;Zattoni, 1999;Gianfrate, 2007). The negative effect of DOMs on company outcomes is also associated with a significant and negative relationship between company size and TOBIN_Q.…”

“…Indeed, despite large shareholders owning substantial cash-flow rights improve managerial monitoring and limit the classic agency costs (Shleifer & Vishny, 1997), their presence fosters the extraction of private control benefits (Bebchuk, Kraakman, & Triantis, 2000;Gianfrate, 2007). This circumstance is especially widespread in most Asian markets and European countries where the phenomenon is mainly due to the presence of pyramidal structures, cross shareholdings, multiple voting shares, non-voting shares, priority shares, golden shares, voting-right ceilings, ownership ceilings, depositary certificates, voting trusts, partnerships limited by shares, and loyalty shares (Bianco & Casavola, 1999;Zattoni, 1999;Volpin, 2002;Ferrarini, 2006;Institutional Shareholder Services, 2007).…”

“…This circumstance is especially widespread in most Asian markets and European countries where the phenomenon is mainly due to the presence of pyramidal structures, cross shareholdings, multiple voting shares, non-voting shares, priority shares, golden shares, voting-right ceilings, ownership ceilings, depositary certificates, voting trusts, partnerships limited by shares, and loyalty shares (Bianco & Casavola, 1999;Zattoni, 1999;Volpin, 2002;Ferrarini, 2006;Institutional Shareholder Services, 2007). Indeed, these ownership tools produce a wedge between controlling and minority shareholders and a full violation of the OSOV rule since they directly or indirectly assign the former with more control than cash-flow rights (Burkart & Lee, 2008;Zattoni, 1999;Gianfrate, 2007;Saggese, 2013).…”

“…Indeed, in line with previous research (Banz, 1981;Gedajlovic & Shapiro, 1998;Zattoni & Cuomo, 2010), findings in Table 5 document that the variable SIZE is significantly and positively related to the use of DOMs (,372 *** ). Thereby, the result emphasizes that, in larger Italian companies, disproportional ownership mechanisms play a relevant economic function Institutional Shareholder Services, 2007;Attig et al, 2008) as tools able to limit transaction costs and foster risks sharing (Watanabe, 2002;Gianfrate, 2007;Mishra, 2011). However, as highlighted by the sign of the regression coefficient on ROA t-1 , the adoption of law reforms aiming at improving investor protection may have encouraged the employment of alternative and more effective ownership solutions able to foster a better allocation of the resources achieved by the company activity (Saggese, 2013;Alvaro, Ciaravella, D"Eramo, & Linciano, 2014).…”

Control-Enhancing Mechanisms in Italian Companies

“…Referring to Italy, the investigation by Gianfrate (2007) demonstrates particularly interesting results on the consequences produced by syndicate agreements in terms of disproportionality between board rights on one side and dividend rights on the other. He estimates that on average a voting agreement with a syndicated share 52% of cash flow rights is able to exercise up to 87% of rights to elect a company board of directors.…”