Do Shareholder Coalitions Modify the Dominant Owner's Control? The Impact on Dividend Policy

• Published date: 01 November 2015
• Date: 01 November 2015
• Author: Domingo Javier Santana‐Martín,Félix J. López‐Iturriaga
• DOI: http://doi.org/10.1111/corg.12126

Do Shareholder Coalitions Modify the Dominant

Owner’s Control? The Impact on Dividend Policy

Félix J. López-Iturriaga*, and Domingo Javier Santana-Martín

ABSTRACT

Manuscript Type: Empirical

Research Question: We examine the effect of shareholder coalitionson the corporate payout policy in Spain, a context charac-

terized by the presence of dominant shareholders.

Research Findings: Our results show that shareholder coalitionsaffect payout policy negatively(both for dividends and shares

repurchases). We also find that the divergence between the voting rights involved in the coalition and the dominant owner’s

voting rights is negatively related to dividends.

Theoretical/Academic Implications: Our findings suggest thatshareholder coalitions can serveas an instrument for the dom-

inant shareholdersto extract private benefits. Ourresults also mean that the dominantowner uses the coalition as a mechanism

to amplify his or her control over the firm and reduce the cost of expropriation.

Practitioner/Policy Implications: Regulators should pay attention to the double role of shareholder agreements, as these coa-

litions could become an entrenchment mechanism fordominant shareholders. Our results highlight the importance of consid-

ering shareholder agreements when investors analyze the corporate dividend policy.

Keywords: Corporate Governance, Shareholder Coalitions, Dividends, Dominant Owner, Ownership Structure

INTRODUCTION

Recent research shows that corporate ownership is more

concentrated than previously thought in most countries

around the world (Bennedsen & Nielsen, 2010; Holderness,

2009; La Porta, Lopez-de-Silanes, & Shleifer, 1999; Villalonga

& Amit, 2006). Thus, unlike the Anglo-Saxon context, in

countries with large shareholders, weak legal protections for

minority investors, and relatively illiquid financial markets,

dominantowners have the incentivesand the ability to control

managers’actions. In such a concentratedownership environ-

ment, the main conflict of interest is no longer between man-

agers and shareholders but between the dominant owner

and the minority shareholders (Burkhart, Panunzi, & Shleifer,

2003; La Porta, López-de-Silanes, Shleifer, & Vishny, 2000b;

Renders & Gaeremynck, 2012).

This set of relations is decisively shaped by shareholder co-

alitions, whichcan be effective instruments for maintaining or

increasing the dominant owners’control (Claessens, Djankov,

Fan, & Lang, 2002; Faccio & Lang, 2002; Laeven & Levine,

2008). Shareholder coalitions are generally considered to be

at the core of the freedom of contract or the inherent right to

self-organization principle. Thus, the mechanism is legally

available in almost allEuropean countries.

1

Belot (2010) notes

that the use of shareholder coalitions is far from anecdotal in

Europe. Roosenboom and Schramade (2006) find that more

than one out of four French initial public offerings features a

shareholder coalition; Boubaker (2007), Bianchi and Bianco

(2006), and Santana-Martín (2010),respectively,show that ap-

proximately 33 percent of French listed firms, 34.5 percent of

Italian listed firms,and 27 percent of Spanish listed firms fea-

tured a coalition in 2009. Furthermore, as documented by

Bianchi and Bianco (2006), in some countries such as Italy,

there has been a shift in the instruments to ensure corporate

control over an extensive use of shareholders’coalitions. In-

deed, 40 percent of recently listed Italian firms are controlled

by coalitions.Accordingly,shareholder coalitionsare, after py-

ramidal structures, the most commonly used control-enhancing

mechanisms, especially in non-Anglo-Saxon countries.

At the same time, thefinancial and institutional crisisaffect-

ing European countries in recent years has led scholars,

policymakers, and investors to pay increased attention to the

distribution of corporate profits, be it by way of dividends,

stock buybacks, or other techniques. As the European Com-

mission (2011) explicitly acknowledges, the corporate earnings

distribution policy is a crucial touchstone in the relationship

between companies and their shareholders. According to the

European Commission, a proper balance between dividends

and reserves has to be struck, which necessitates going deeper

into the factors concerning the relations among shareholders

that could affect the distribution policy.

There is a close but still unclear connection between the in-

stitutional environment, the corporate control structure and

*Addressfor correspondence:Félix J. López-Iturriaga,University of Valladolid,School of

Businessand Economics, Avda.Valle del Esgueva6, 47011 Valladolid, Spain.Tel: +34 983

184 395; Fax: +34983 423 299; E-mail: flopez@eco.uva.es

© 2015 JohnWiley & Sons Ltd

doi:10.1111/corg.12126

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Corporate Governance: An International Review, 2015, 23(6): 519–533