Ownership structure and corporate governance: The need to further explore mutual and complex relationships

• Author: Alessandro Zattoni,Praveen Kumar
• Date: 01 September 2017
• Published date: 01 September 2017
• DOI: http://doi.org/10.1111/corg.12217

EDITORIAL

Ownership structure and corporate governance: The need to

further explore mutual and complex relationships

Ownership and corporate governance are strictly intertwined by mutual

and complex relationships (e.g., Kumar & Zattoni, 2015; Zattoni, 2011).

First, ownership structure determines the nature of agency problems.

More precisely, when ownership is widely held, companies are affected

by type I agency problems, i.e., by the conflict of interests between top

managers and minority shareholders (Berle & Means, 1932; Kumar &

Zattoni, 2014a). Conversely, when ownership is highly concentrated in

the hands of one or few shareholders, companies are affected by type II

agency problems, i.e., by the conflict of interests between controlling

and minority shareholders (Kumar & Zattoni, 2014b). These agency prob-

lems are exacerbated when the proportionality rule (i.e. one share—one

vote) is not respected due to the use of control enhancing mechanisms

(CEMs) (e.g., Aslan & Kumar, 2012; Cuomo, Zattoni, & Valentini, 2013;

La Porta, Lopez‐de‐Silanes, Shleifer, & Vishny, 1999). These mechanisms

are quite diffused in large listed companies operating in Continental

European and Asian countries, but they are also present in some

companies located in Anglo‐Saxon countries (e.g., Claessens, Djankov, &

Lang, 2000; Faccio & Lang, 2002; Zattoni & Judge, 2012). The use of CEMs

both determines a deviation from the proportionality rule, and makes more

difficult (and sometimes arbitrary or impossible) to understand who

controls a firm (e.g. Zattoni, 1999). By increasing the opaqueness of the

ownership structure and by locking the control of the firm, these

mechanisms make it more difficult for potential investors to understand

the governance and value of firms (Kumar & Zattoni, 2014c, 2017).

From a second and complementary perspective, ownership

structure is a key governance mechanism that may contribute to solv-

ing agency problems (Boyd & Solarino, 2016). This happens because

large blockholders may be good monitors of top managers (e.g. Kumar

& Zattoni, 2014b; Shleifer & Vishny, 1986), and—through their vigilant

activity—may address type I agency problems. According to traditional

CG literature, institutional investors are ideal blockholders as they

have financial interests aligned with minority shareholders and, at the

same time, enough voting power to influence assembly decision‐mak-

ing and to challenge top management decisions (e.g., Goranova &

Ryan, 2014; McNulty & Nordberg, 2016; Shleifer & Vishny, 1997).

Furthermore, the CG literature has advanced the idea that some types

of controlling shareholders may have beneficial effects on corporate

governance and firm performance (e.g., Thomsen & Pedersen, 2000).

For example, family ownership can mitigate managerial short‐termism

as its long‐term orientation allows resources to be accumulated and

deviation from short‐term decisions taken by peers (e.g., Kumar &

Zattoni, 2016; van Essen, Strike, Carney, & Sapp, 2015). In emerging

economies, business groups can outperform independent companies

as they may fill the institutional voids by exchanging and sharing

valuable resources within affiliated companies (e.g., Carney,

Gedajlovic, Heugens, Van Essen, & Van Oosterhout, 2011; Khanna &

Rivkin, 2001; Zattoni, Pedersen, & Kumar, 2009). Finally, state

ownership, traditionally considered pernicious for firm performance,

has recently been found to have a positive impact, at least in some

emerging economies (e.g., Grosman, Okhmatovskiy, & Wright, 2016;

Le & Buck, 2011; Wang & Shailer, 2017).

Despite increasing research efforts, many important issues

regarding ownership structure and its effects on corporate governance

mechanisms and firm performance remain unexplored. The four papers

published in this issue help us to extend our understanding of the com-

plex and mutual relationships between ownership and governance.

In the first paper, Park, Tinaikar, and Shin analyze how managers'

divergence between control and cash flow rights can affect the

analysts' information environment, i.e. the public and private informa-

tion they consider in their forecasts. To address this issue, the authors

collected data on US listed companies with dual class shares in the

period 1994–2011. The results show that both analysts' private and

public information are negatively affected by insiders' divergence

between control and cash flow rights, and that this effect is higher

for firms with lower firm‐level uncertainty and in the period before

the introduction of SOX. The study has the merit of extending the

literature on managerial ownership and analysts' information environ-

ment by considering the influence of managers' divergence between

control and cash flow rights, and by analyzing the potential impact of

the firm environment (i.e. firm‐level uncertainty and external

regulation). These results have implications for practitioners and policy

makers as they underline that the entrenchment effects associated

with the insiders' divergence of control and cash flow rights affect

not only minority shareholders, but also financial analysts, so produc-

ing a negative impact on stock market efficiency.

In the second paper, Visintin, Pittino, and Minichilli explore

non‐family CEO turnover in private family firms. To address the

ambiguous results of previous studies developed on agency theory

premises, the authors collected longitudinal data on 917 Italian private

family firms with revenues over €50 million. The results show that

non‐family CEOs are less likely to be dismissed after poor performance

when fewer family members are firm shareholders or its board

members. The study supports a behavioral‐agency theory explanation

on how the potential goal divergence among family members (either

DOI: 10.1111/corg.12217

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