Ultimate Institutional Owner and Takeover Defenses in the Controlling versus Minority Shareholders Context

• DOI: http://doi.org/10.1111/j.1467-8683.2009.00735.x
• Published date: 01 March 2009
• Author: Domingo J. Santana‐Martín,M. Victoria Ruiz‐Mallorquí
• Date: 01 March 2009

Ultimate Institutional Owner and Takeover

Defenses in the Controlling versus Minority

Shareholders Context

M. Victoria Ruiz-Mallorquí* and Domingo J. Santana-Martín

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: We examine the relationship between the level of voting rights held by the principal owner and

the use of defense measures in Spanish listed f‌irms when the owner is an institutional investor.

Research Findings/Results: When a bank or a fund is the principal shareholder, the level of defense increases. However,

while a larger bank’s voting rights exercises a negative effect on the probability and level of defense, the effect of a fund’s

voting rights is U-shaped. Moreover, the results show that the coalition of two banks as the largest shareholders increases

the defense.

Theoretical Implications: Our study is, to the best of our knowledge, the f‌irst to analyze the relationship between

institutional control and defense in the controlling versus minority shareholders conf‌lict. The results show the importance

of the nature of the institutionalowner in the ownership-protection relationship. Thus, while in banks there is a substitution

effect between voting rights and anti-takeover measures, in funds that substitution effect occurs up to a certain level of

voting rights, above which defense increases because of the possible reduction of exit barriers of their investment.

Practical Implications: The results indicate that European regulators should pay special attention to f‌irms controlled by

institutional investors. Ownership and anti-takeover measures are used by institutional owners to guarantee their power

positions. Therefore, in an environment of concentrated ownership, the presence of institutional investors restricts the

corporate control market as they either maintain high levels of ownership or facilitate the adoption of defense measures.

Keywords: Corporate Governance, Institutional Shareholder, Takeover Defenses, Spain

INTRODUCTION

There are few studies that analyze the relationship

between ownership by institutional investors and the

use of defense measures, and those that do are inconclusive

and focused on the Anglo-Saxon context (e.g., Jarrel and

Poulsen, 1987; Brickley, Lease and Smith, 1988; Agrawal and

Mandelker, 1990; 1992; Mallette and Fowler, 1992; Duggal

and Millar, 1994; Payne, Millar and Glezen, 1996; Borok-

hovich, Brunarski, Harman and Parrino, 2006). Therefore,

continental Europe constitutes an exceptionally suitable

setting in which to expand knowledge of that relationship.

Anglo-Saxon markets are characterized by their greater

protection of minority shareholders (La Porta, Lopez-de-

Silanes, Shleifer and Vishny, 1998) and the importance of the

classic agency conf‌lict between shareholders and managers

(e.g., Jensen and Meckling, 1976; Fama, 1980; Fama and

Jensen, 1983). However, the principal agency conf‌lict in con-

tinental Europe and many other countries focuses on the

expropriation of minority shareholders’ wealth by the con-

trolling shareholders (e.g., La Porta et al., 1998; La Porta,

Lopez-de-Silanes and Shleifer, 2000; Burkart, Panunzi and

Shleifer, 2003). Therefore, it is necessary to analyze the rela-

tionship between institutional ownership and defense in

this type of context, where both the predominant agency

conf‌lict and the institutional environment differ from those

in the Anglo-Saxon markets.

In that respect, just as Gompers, Ishii and Metrick (2003)

show that, in the Anglo-Saxon context, defense measures

are harmful to the f‌irm as their use reduces not only

*Addresses for Correspondence: Department of Finance and Accounting, University

of Las Palmas de Gran Canaria, 35.017 Las Palmas de Gran Canaria, Spain. Tel:

0034928451817; Fax: 0034928458177; E-mail: vruiz@defc.ulpgc.es.

238

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© 2009 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2009.00735.x

corporate performance, but also the eff‌icacy of the gover-

nance system and this may exacerbate the agency problem

between controlling and minority shareholders. This is

because the presence of such measures reduces the disci-

pline that can be exercised by internal governance mecha-

nisms and by the corporate control market. Defense

measures enable controlling shareholders to use their posi-

tion of power to adopt decisions aimed at obtaining private

benef‌its to the detriment of the other shareholders (e.g.,

Cuervo, 2002; Nenova, 2003).

The incentives to use defense measures may depend on

the nature of controlling shareholders. This is because the

use of power can differ signif‌icantly depending on the

nature of the principal shareholder (e.g., Thomsen and Ped-

ersen, 2000; Cuervo, 2002). On that line, institutional inves-

tors are among the most important controlling shareholders

in continental Europe (e.g., La Porta, Lopez-de-Silanes and

Shleifer, 1999; Faccio and Lang, 2002). In that context, unlike

in the Anglo-Saxon environment, the control exercised by

these investors enables them to be part of the internal

decision-making process and so act in their own interests

regardless of those of the minority shareholders (e.g.,

Barclay, Holderness and Pontiff, 1993; Hoshi, Kashyap and

Scharftein, 1993; Weinstein and Yafeh, 1998).

Moreover, when analyzing the effect of institutional

control on corporate decisions, it is important not to con-

sider institutional investors as a single type of investor. In

that respect, various authors (e.g., Brickley et al., 1988; Payne

et al., 1996; Almazan, Hartzell and Starks, 2005; Borokhovich

et al., 2006; Chen, Harford and Li, 2007; Cornett, Marcus,

Saunders and Tehranian, 2007) do not consider institutional

investors a homogenous group, but distinguish between

those institutions that may have business relations with the

f‌irms they invest in and other institutional investors with no

such relations. The presence or absence of business relation-

ships can condition the institutional investors’ levels of

inf‌luence and their ability to exercise control in corporate

decisions.

In line with the above, the objective of this paper is to

study the relationship between institutional control and the

defense measures established in the company bylaws of

listed Spanish f‌irms between 1996 and 2006. The study aims

to add to the literature in various aspects. Firstly, the results

serve to provide knowledge about the relationship between

institutional ownership and defense when the agency con-

f‌lict is between controlling versus minority shareholders: an

aspect that has hardly been addressed from the perspective

of this agency problem. In that respect, Cuervo (2002) points

out that it is just as important to examine the relationships

between controlling and minority shareholders as it is to

understand the relationship most addressed in the litera-

ture, namely that between managers and shareholders.

Thus, there is no reason why the results of studies set in the

United States should be valid in the context of Continental

Europe. This is not only because of the different agency

conf‌licts and institutional environments, but also because

the defense measures used in Europe differ from those fre-

quently used in countries in the Anglo-Saxon sphere of

inf‌luence.1Secondly, the control chain methodology pro-

posed by La Porta et al. (1999), Claessens, Djankov and Lang

(2000), and Faccio and Lang (2002), measures institutional

control as the percentage of voting rights held by the ulti-

mate owner when that owner is institutional. The consider-

ation of the ultimate owner’s level of control represents a

signif‌icant advance over previous papers as the lack of a

complete specif‌ication of ownership could lead to a dual

error. On the one hand, it could result in a shareholder being

assigned a level of ownership that does not coincide with

what is really held, and, on the other hand, it could attribute

control to an agent that is not in the ultimate position of the

control chain. Moreover, the ultimate owner is identif‌ied for

each year from 1996 to 2006. Thirdly, as institutional owners

may be pursuing different objectives when they participate

in a f‌irm’s ownership, in line with other studies (e.g., Brick-

ley et al., 1988; Duggal and Millar, 1994; Payne et al., 1996;

Borokhovich et al., 2006), this paper distinguishes between

institutional investors that may maintain business relations

with the f‌irms in which they invest (banks) and those that do

not (investment funds). As far as we know, no works that

focus on the context of Continental Europe make this dis-

tinction by analyzing the relationship between institutional

control and defense. Finally, this research examines how the

presence of institutional investors of the same nature (homo-

geneous structures) affects the protectin of f‌irms, which con-

stitutes another previously unstudied aspect.

To accomplish the proposed objective, the paper is orga-

nized as follows. The second section details the characteris-

tics of institutional control in Spain, while the third section

addresses the theoretical arguments supporting the hypoth-

eses. The methodological issues are set out in the fourth

section and the results of our empirical application are pre-

sented in Section 5. The sixth and f‌inal section sets out the

conclusions reached in the study.

INSTITUTIONAL ENVIRONMENT IN SPAIN

In the institutional environment that characterizes contrac-

tual relations in Spain, there are aspects that make the

country a suitable context in which to analyze the relation-

ship between institutional ownership and the defense mea-

sures used by f‌irms. Spain has traditionally been one of the

countries in which banks have maintaineda signif‌icant pres-

ence in economic and business development, not only as

creditors but also as controlling shareholders in f‌irms (e.g.,

Cuervo, 1991; Steinherr and Huveneers, 1994). This reality is

similar to that in other countries (e.g., Germany, Italy) and

differs from the Anglo-American model of f‌inancial system,

in which the f‌inancial markets play a much more important

role. However, recent years have seen an evolution from the

traditional situation toward a hybrid model (Schmidt and

Hryckiewicz, 2006). Nevertheless, banking institutions, at

least in the case of Spain, have been able to adapt to the

change by integrating into those markets and adapting their

business (Cestona, Surroca and Tribó, 2005). This develop-

ment in the f‌inancial markets has enabled another type of

institution, the investment fund, to break into the Spanish

markets and take important positions as shareholders while

banking institutions have been reducing their presence as

shareholders of listed f‌irms.

That transformation of the Spanish f‌inancial markets can,

to a great extent, be explained by the growth of the Spanish

ULTIMATE INSTITUTIONAL OWNER AND TAKEOVER DEFENSES 239

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