On the impact of outside blockholders’ voting power

• DOI: https://doi.org/10.1108/CG-05-2015-0074
• Published date: 04 April 2016
• Date: 04 April 2016
• Pages: 330-346
• Author: Zhonghui Hugo Wang
• Subject Matter: Strategy,Corporate governance

On the impact of outside blockholders’

voting power

Zhonghui Hugo Wang

Zhonghui Hugo Wang is

an Assistant Professor at

the Bryan School of

Business and Economics,

University of North

Carolina at Greensboro,

Greensboro, North

Carolina, USA.

Abstract

Purpose –The purpose of this paper is to complement existing research of the relationship between

concentrated ownership and firm performance by theoretically exploring the impact of outside

blockholders on the firm, primarily from the perspective of voting power.

Design/methodology/approach –This paper proposes theoretical propositions based on analyses

and logical extension of results of the existing theoretical and empirical studies.

Findings –This paper proposes three theoretical predictions: First, voting power provides outside

blockholders a necessary condition to pursue shared and private benefits of control, and it is positively

correlated with blockholders’ capability of influencing firm value. Second, everything else being equal,

an outside blockholder is more (less) likely to pursue private benefits than shared benefits when the

equity market is efficient and when the blockholder’s voting power is less (more) than 50 per cent. Third,

controlling outside blockholders can capitalize on their voting power to appoint managerial delegates

and board representatives to the invested firms for the purpose of pursuing private benefits of control.

Originality/value –This paper tries to make two contributions to the corporate governance literature.

First, this research relies on a new perspective to explore the relationship between ownership structure

and firm value. Second, this paper presents the first theoretical argument which states that controlling

outside blockholders rely on their managerial delegates and board representatives to pursue their

private benefits of control.

Keywords Corporate governance, Ownership, Voting power

Paper type Conceptual paper

Introduction

Existing literature has not established an unequivocal conclusion of the relationship

between ownership structure and firm value (Dalton et al., 2003). For example, recent

empirical studies (Coles et al., 2012) challenge the results of prior research regarding the

relationship between managerial ownership and firm value (Morck et al., 1988;McConnell

and Servaes, 1990). Prior research also generally shows an insignificant relationship

between outside blockholders’ ownership and firm value (Demsetz and Lehn, 1985;

McConnell and Servaes, 1990).

Two intriguing research questions, thus, arise: What is the impact of outside blockholders

on the firm, if not firm value? What are the potential circumstances under which outside

blockholders affect the firm?

To better understand the relationship between outside blockholders and the firm, this paper

tries to “open the black box” to reveal possible underlying mechanisms that allow outside

blockholders to influence the firm.

Outside blockholders, who are non-employees and who have at least 5 per cent ownership,

are prevalent and heterogeneous around the world and have the incentive and ability to

influence their invested firms (La Porta et al., 1999;Villalonga and Amit, 2009). Outside

blockholders can utilize their voting power to accomplish a variety of objectives. On the one

Received 31 May 2015

Revised 6 September 2015

6 December 2015

Accepted 16 December 2015

PAGE 330 CORPORATE GOVERNANCE VOL. 16 NO. 2 2016, pp. 330-346, © Emerald Group Publishing Limited, ISSN 1472-0701 DOI 10.1108/CG-05-2015-0074

hand, blockholders bring shared benefits to all shareholders by monitoring the

management (Denis and McConnell, 2003;Pergola and Verreault, 2009); on the other

hand, blockholders, especially those controlling ones with at least 20 per cent voting

power, can obtain the exclusive power and ability to influence and control their invested

firms and secure exclusive private benefits for themselves, even at the cost of other

shareholders (Shleifer and Vishny, 1997;Holderness, 2003). Moreover, controlling outside

blockholders can capitalize on their voting power to assign managerial delegates and

board representatives to their invested firms (Holderness and Sheehan, 1988).

By exploring the substantial influences of outside blockholders, primarily from the

perspective of voting power, this paper proposes three theoretical propositions to offer

partial explanations to the questions related to the impact of outside blockholders: First,

voting power provides an outside blockholder a necessary condition to pursue shared and

private benefits of control, and it is positively correlated with an outside blockholder’s

capability of influencing firm value. Second, everything else being equal, an outside

blockholder is more (less) likely to pursue private benefits than shared benefits when the

equity market is efficient (Malkiel, 2003) and when the blockholder’s voting power is less

(more) than 50 per cent. Third, controlling outside blockholders can capitalize on their

voting power to appoint their managerial delegates and board representatives to the

invested firms for the purpose of pursuing private benefits of control. In summary, this

paper argues that an outside blockholder’s impact on firm value is jointly influenced by the

blockholder’s capability of and incentive to pursuing shared and private benefits of control.

Moreover, an outside blockholder’s managerial delegates and board representatives can

enhance the blockholder’s capability of pursuing private benefits.

By offering theoretical analyses that help explain the impact of outside blockholders on

their invested firms and how they can ensure their influences from the perspective of voting

power, this study makes two contributions to the corporate governance literature. First, this

research uses existing agency theory studies of ownership structure (La Porta et al., 1999)

and shareholder conflicts (Villalonga and Amit, 2009;Holderness, 2003) to offer a new

perspective of exploring the relationship between ownership structure and firm value. The

analyses of this paper bear both theoretical and empirical implications. From the theoretical

perspective, this paper, unlike prior studies that focus on the direct connection between

ownership and firm value (Burkart et al., 1997), emphasizes the underlining factors of

blockholder’s shared and private benefits of control that influence the relationship between

ownership structure and firm value. In other words, this paper clearly identifies that the

impact of outside blockholders’ voting power on firm value may come from the combined

effect of blockholder’s shared and private benefits of control. Furthermore, this paper

argues that outside blockholders’ voting power is correlated with the large shareholders’

capability of and incentives to pursuing private benefits and/or shared benefits which

influence firm value. These theoretical arguments bear empirical implications which

potentially help explain the lack of consistent findings of the relationship between

ownership structure and firm value (Demsetz and Villalonga, 2001). These theoretical

analyses effectively suggest that empirical studies of the relationship between ownership

structure and firm performance should separate the impact of blockholder’s shared

benefits of control from that of private benefits of control and consider the joint effect of the

large shareholders’ capacity of and incentives to pursuing private benefits and/or shared

benefits.

Second, this study extends traditional agency theory analyses of the relationships among

shareholders, management and boards of directors by presenting the first theoretical

argument which states that controlling outside blockholders can rely on their managerial

delegates and board representatives to pursue private benefits of control. It enriches

existing studies of the impact of large shareholders on management (Young et al., 2008)by

explaining why and illustrating how controlling blockholders can capitalize on their voting

power to ensure that their managerial delegates serve the interests of their principals. It

VOL. 16 NO. 2 2016 CORPORATE GOVERNANCE PAGE 331