Advancing the Literature on Ownership Structure and Corporate Governance

• DOI: http://doi.org/10.1111/corg.12191
• Author: Alessandro Zattoni,Praveen Kumar
• Published date: 01 January 2017
• Date: 01 January 2017

EDITORIAL

Advancing the Literature on Ownership Structure and

Corporate Governance

Corporate ownership tends to be concentrated internationally

(Claessens, Djankov, & Lang, 2000; Faccio & Lang, 2002; Zattoni

& Judge, 2012). Moreover, ownership structure –which includes,

for example, the deviation between voting and cash flow owner-

ship, multiple classes of shares, cross‐holding across firms –is

known to have a major influence on the quality of corporate gover-

nance (CG). For example, the concentration of voting power in the

hands of controlling shareholder(s) through a dual share class struc-

ture (where one class of shares retains most of the voting power)

allows diversion of firm's resources and design of investment and

financial policies to the benefit of the dominant shareholder(s) at

the expense of minority shareholders and other stakeholders

(Zattoni, 1999). Indeed, Bebchuk, Kraakman, and Triantis (2000)

identify dual share class structure as a particularly nefarious form

of corporate governance. More generally, the CG literature high-

lights the effects of ownership structure on various important

aspects of firms, such as commitment of critical stakeholders

(Zattoni, 2011), their equity valuation (Kumar & Zattoni, 2015),

and investment policy and cost of capital (Aslan & Kumar, 2012,

2014; Maury & Pajuste, 2011).

However, many important issues regarding ownership structure

and its effects on CG remain unexplored. The adverse effects of cer-

tain types of ownership structures (such as dual class equity struc-

ture) on CG and firm performance are widely studied and

presumably well known by investors, media, and policymakers. But

what factors are important in pressuring firms to remove such own-

ership structures? Cuomo, Zattoni, and Valentini (2013) underline

the influence of investor protection, but other factors (e.g., institu-

tional investors, tax policies, or public/policy pressures) can also play

a role. There is also a presumption in the literature that large share-

holders (e.g. families) tend to improve CG quality, other things being

equal. However, while the literature shows that family control

appears to have a positive impact on firm performance, a lot remains

to be explored for a full understanding of the advantages and disad-

vantages of large shareholders like families (Kumar & Zattoni, 2016;

van Essen, Strike, Carney, & Sapp, 2015). In addition, do institutional

or block shareholders always improve CG quality and performance

(e.g. Kavadis & Castaner, 2015; McNulty & Nordberg, 2016)? What

are the implications of having multiple, and sometimes dissenting,

large shareholders (e.g. Bauer, Moers, & Viehs, 2015)? The four

papers in this issue extend significantly our understanding of these

important questions.

In the first paper, Lauterbach and Pajuste explore whether

media pressure and reputational concerns put pressure on firms

to improve CG by eliminating (or diluting) the dual class share

structure. Their study is of substantial interest from a variety of

perspectives. The impact of media attention on firm behavior gen-

erates intense interest amongst academics and in the press. Simi-

larly, whether reputational concerns are effective in improving CG

performance is interesting because it is an example of the effects

of intangible and “soft”forces on important corporate decisions.

However, the empirical estimation of the role of media and reputa-

tion is challenging because archival data to measure these effects

are not easily available. Starting with a sample of European “unifica-

tions”(i.e., elimination of dual class shares to a single “one‐share‐

one‐vote”structure), Lauterbach and Pajuste do web search on

two major European business newspapers to record negative senti-

ment regarding the dual class shares in general and for each com-

pany in their sample. To address, endogeneity and reverse

causality concerns (e.g., unifications in particular industries or com-

panies may spur media interest), they also construct a global mea-

sure of media interest in corporate governance. Finally, they use

corporate social responsibility (CSR) scores as an empirical proxy

for the company's sensitivity to its public image and reputation.

The main findings of the paper are that media criticism raises the

likelihood of unification, other things held fixed; and firms more

sensitive to their public image are more likely to unify their equity

class structure, other things being equal. The results and the novel

empirical methodology to identify the effects of important but hard

to measure CG‐related forces will likely generate considerable inter-

est in the paper.

In the second paper, Armitage et al. highlight an important issue

with respect to the role of institutional investors in CG. The literature

generally views institutional investors (such as asset management

groups) as exerting a positive effect on CG performance, based on

the implicit assumption that each institutional investor acts as a single

large investor. Armitage et al. convincingly demonstrate that this view

may be questionable, or at least not generally applicable. The reason is

straightforward: Asset management groups, typically the most impor-

tant types of shareholders (such as in the UK), are composed of differ-

ent funds managed by different portfolio (or fund) managers. While,

the different fund managers investing in a company may often agree

with respect to CG‐related issues, it is plausible that they may disagree

in a significant fraction of cases. If this is the case, then the literature

DOI 10.1111/corg.12191

2© 2017 John Wiley & Sons Ltd Corporate Governance: An International Review 2017; 25:2–3wileyonlinelibrary.com/journal/corg