Chapter 5 Flashcards
(15 cards)
Large Shareholder Monitoring
larger Shareholder big enough stake that it makes sense to spend ressources to monitor management
thus provide solution for free rider problem
o 1. Higher incentive to decrease agency costs
o 2. Much easier to coordinate actions since voting power is no split
However concentrated ownership also has drawbacks
o 1. Large shareholders primarily represent their own interest
2. Maximization of their own utility might harm other shareholder (minority shareholder expropriation) (theft/transfer pricing) Private benefit of control
Private benefits of control (Grossman and Hart)
- Security benefits shared by all shareholder
- Benefits from monitoring by large shareholder
- Monitoring by small shareholder will be limited, hence monitoring only effective if party large enough to internalize externalities of collective action - Private Benefit often comes as expense of other shareholders
- Non-transferable benefits beyond security benefits
- E.g., squeeze-out of minority shareholders in a tender offer (at a price below the value of the shares)
Morck, Schleifer and Vishny - Managerial Ownership and control (1998)
Convergence of interest hypothesis
If managers hold little equity and dispersed shareholder then company assets might be used to benefit managers rather than shareholders
Eg. Shirking, perquisite-taking
Cost of deviation from value-maximization decline as management ownership rises (Jensen & Meckling)
As manager stake rises, they pay more of these costs and less likely to squander wealth
Company value increases with managerial ownership!
Entrenchment hypothesis
If manager only small stake, the market for corporate control may force to value maximize
In contrast if he own enough equity he can secure his employment may indulge in non-value maximizing behavior
Corporate assets can be less valuable when managed by individual free from checks!
Find non linear relationship:
o Firm value increases with ownership 0 – 5 %
o Decreases in 5 – 25%
o Increases again above 25% but at decreasing rate
Criticism:
Low explanatory power R2, low cross-sectional variation of ownership, omission of non-managerial ownership
Thomson, Peterson, Kvist (2006)
relation between blockholders and the values of the largest companies in the EU and the US
–> continental europe
Blockholder have significant neg impact on effect on firm value
Conflict minotity and blockholder
–> US and UK no significant impact
Claessens, Djankov, Fan (2002)
impact of disproportional ownership on the market value of equity
Distinguishes between cash-flow rights and control rights by using information on pyramid structures, crossholdings among firms, and dual-class shares for each firm
Family firms Advantages
Family Firms Characteristics
Villalonga and Amit (2006)
Andres (2008)
Pérez-Gonzales
Examines impact of inherited CEO position on firm performance
Main argument against: selecting from small pool limits good candidates
Empirical evidence indicates that family firms outperform, but only if certain criteria are met
− Control-enhancing mechanisms
− Family Involvement
− CEO characteristics
− Evidence indicates that nepotism hurts performance by limiting the scope of labor market competition
Corporate control and market for control
corporate control as “the rights to determine the management of corporate resources”
market for corporate control: “The lower the stock price, relative to what it could be with more efficient management, the more attractive the takeover becomes to those who believe that they can manage the company more efficiently.”
Bear hug
A bear hug is an offer to buy a publicly listed company at a significant premium to the market price of its shares. Bear hugs are used to pressure a reluctant company’s board to accept the bid or risk upsetting its shareholders.
Takeovers
Takeovers are widely interpreted as the critical corporate governance mechanism, without which managerial discretion cannot be effectively controlled (Easterbrook and Fischel)
Negatives:
1. High takeover costs
2. Empire building
3. Liquid capital markets
4. Political opposition
Hedge Fund Characteristics
Hedge fund: aggressively managed portfolio taking positions on speculative opportunities
No agreed definition, most activism hedge funds operate in Event-Driven category
But four characteristics:
1. They are pooled, privately organized investment vehicles
2. They are administered by professional investment managers with performance-based compensation and significant investments in the fund
3. They are not widely available to the public
4. They operate outside of securities regulation and registration requirements.
Long Term effects of hedge fund activism
Activities of hedge funds give substance to the hope that hedge funds may act “like real owners” and provide a check on management discretion
− Seem to be successful in reducing agency costs even though they hold relatively small stakes
− Sometimes benefit from friendly interactions with management (and in this way resemble large blockholders), but other times they are openly confrontational with target boards when they perceive them as entrenched
