JED, Vol. 20, No.2, August 2018, pp. 65-93
Large Shareholders and Firm Value: Interaction between Power and Incentive to Expropriate
Abstract:This study examines the relationship between large shareholders and firm value and how this
relation varies with the large shareholders’ power and incentive to expropriate a firm’s wealth.
We find this relation is U shaped with the turning point at around 45% and 65% for the largest
shareholders and total blockholders, respectively. The higher the power (or higher control
right) means the more the expropriation or lower firm value. However, in firms with controlling
blockholders (beyond 50% control right approximately), blockholders have enough power to
manipulate firm’s activities but their incentive to expropriate decreases due to private benefits
being lower. This study also finds that firms in high investor protection countries are associated
with higher values than those in low investor protection countries for any blockholding level,
but the difference in firm value between weak investor protection countries and strong investor
protection countries is highest when expropriation by blockholders is largest.
Keywords:Ownership concentration; blockholders; Tobin’s Q; firm value