Unveiling the role of multiple blockholders: Evidence from closely held firms

• Author: Giovanni Battista Dagnino,Annalisa Russino,Pasquale Massimo Picone
• DOI: http://doi.org/10.1111/corg.12299
• Published date: 01 November 2019
• Date: 01 November 2019

ORIGINAL ARTICLE

Unveiling the role of multiple blockholders: Evidence from

closely held firms

Annalisa Russino

1

|Pasquale Massimo Picone

1

|Giovanni Battista Dagnino

2

1

Department of Economics, Business, and

Statistics, University of Palermo, Palermo, Italy

2

Department of Law, LUMSA, Palermo, Italy

Correspondence

Pasquale Massimo Picone, Department of

Economics, Business, and Statistics, University

of Palermo, Italy, University of Palermo,

Palermo 90128, Italy.

Email: pasqualemassimo.picone@unipa.it

Abstract

Research Question/Issue: This paper disentangles how the modes of ownership

distribution among multiple blockholders and their heterogeneity shape principal–

principal conflicts and, in turn, affect firm performance. The paper offers empirical

evidence from a panel of Italian closely held firms over the period 2009–2014.

Research Findings/Insights: We explore the principal–principal conflicts among

blockholders across two distinct control structures. When a single blockholder controls

the firm, principal–principal conflicts are shaped by the trade‐off between the align-

ment effect and the monitoring effect. In this scenario, we find that the relationship

between the two largest blockholders' ownership concentration and firm perfor-

mance is U‐shaped. Furthermore, we show that heterogeneity across the two largest

blockholder types has a negative effect on performance. In the absence of a controlling

blockholder, firm control is usually obtained by forming coalitions, and principal–

principal conflicts involve the blockholders inside the controlling coalition and the

other shareholders. We find that the ownership distribution and heterogeneity across

blockholder types are negatively related to the size of controlling coalitions, and in

turn, the size of controlling coalitions is positively correlated with firm performance.

Theoretical/Academic Implications: We contribute to the principal–principal segment

of agency theory by showing that the presence of a controlling blockholder is a key

variable that alters the relationship between blockholders' ownership concentration

and corporate performance, as well as the relationship between heterogeneity across

the largest blockholders and firm performance.

Practitioner/Policy Implications: Our findings across control structures in which

multiple blockholders are present suggest that blockholders take different roles

depending on the control structure in which they are involved. The implications of

these findings relate to the design of the ownership structure of a firm.

KEYWORDS

corporate governance, blockholder type, closely held firms, ownership distribution, principal–

principal conflicts

Received: 4 July 2018 Revised: 3 July 2019 Accepted: 4 July 2019

DOI: 10.1111/corg.12299

Corp Govern Int Rev. 2019;27:477–502. © 2019 John Wiley & Sons Ltdwileyonlinelibrary.com/journal/corg 477

1|INTRODUCTION

As corporate ownership distribution worldwide shows, the presence of

multiple shareholders holding a considerable proportion of shares in

one firm (termed as “blockholders”) is rather extensive (Becht &

Böhmer, 2003; Becht, Bolton, & Röell, 2003; Holderness, 2009;

Lehmann & Weigand, 2000). Interestingly, blockholders' interests are

not always convergent (Dittmann, Maug, & Schneider, 2008). For

instance, blockholders may have different preferences on the time

horizon of the investments, or they may look for private benefits.

As a consequence, the emergence of tensions among blockholders

(i.e., principal–principal conflicts) has attracted scholarly attention

(Gospel & Pendleton, 2005; Wang, 2017).

The principal–principal segment of agency theory argues that the

mode of ownership distribution (Peng & Sauerwald, 2013; Young,

Peng, Ahlstrom, Bruton, & Jiang, 2008) and the heterogeneity across

the blockholder types (Goshen & Hamdani, 2015) shape the rise of

conflicts among blockholders. However, extant empirical evidence is

rather contradictory. Regarding the role of ownership distributions in

shaping principal–principal conflicts, Konijn, Krussl, and Lucas (2011)

corroborate the idea that blockholders' ownership concentration

(BOC) leads to the alignment of controlling blockholders' interests

towards firm performance and thus find a positive relationship

between BOC and performance. Conversely, other studies maintain

that BOC is negatively associated with corporate performance

(Attig, El Ghoul, & Guedhami, 2009; Laeven & Levine, 2008; Maury

& Pajuste, 2005) and call attention to blockholders' private benefits

appropriation at the expense of other shareholders. Furthermore, a

third and rather influential research cluster shows that the relationship

between BOC and performance takes a quadratic form (De Miguel,

Pindado, & De la Torre, 2004; Gedajlovic & Shapiro, 1998; Thomsen

& Pedersen, 2000). This cluster of studies focuses on the

counterbalancing effects of BOC: the advantages related to monitoring

activities versus the costs deriving from entrenchment and/or

collusion.

Regarding the role of heterogeneity across the blockholder types in

shaping principal–principal conflicts, Laeven and Levine (2008) argue

that blockholders' difficulties in pursuing their strategic vision are

exacerbated when they are of different types. Thereby, the authors

find a negative relationship between heterogeneity across the

blockholder types and performance. Conversely, Cai, Hillier, and Wang

(2015) posit that such a relationship is positive because collusion ori-

ented towards rent‐seeking is more probable among similar

blockholders.

Overall, the extant literature falls short in regard to taking into

account firms' underlying control structure where the conflicts among

blockholders arise (i.e., if firm control is in the hands of a single

blockholder or it is secured through a coalition of blockholders). We

argue that the form of control is crucial in defining how blockholders

may pursue their strategic visions and extract private benefits, as well

as in shaping their interest in performing some monitoring activities

(Shleifer & Vishny, 1997). For instance, when principal–principal con-

flicts occur in the presence of a controlling blockholder, a full

monitoring action is not possible: Some initiatives are, by definition,

under the control of the controlling blockholder, which can easily

impose his or her strategic vision and preferences. The controlling

blockholder may try to capture the benefits of control that the other

shareholders cannot enjoy (Young et al., 2008). Noncontrolling

blockholders can only play the role of monitors, thereby helping to

reduce the misuse of corporate resources generated by the controlling

blockholders' opportunistic behavior. Conversely, in absence of a con-

trolling blockholder, all the blockholders can participate in the defini-

tion of firm strategies according to their preferences. In such case,

the key issue is the formation of control that usually occurs by means

of a blockholders' coalition (Bennedsen & Wolfenzon, 2000). The roles

of blockholders as controllers or monitors are not separated, and all

blockholders can exert both roles depending on the blockholders' coa-

lition that will prevail.

As a consequence, we argue that failing to distinguish between the

presence and the absence of a controlling blockholder becomes puz-

zling when it comes to analyzing how the modes of ownership distri-

bution among multiple blockholders and their heterogeneity shape

principal–principal conflicts and, in turn, affect firm performance.

Accordingly, we develop and test a set of hypotheses on the relation-

ship between BOC and performance, and on the relationship between

heterogeneity across the blockholder types and performance, by

distinguishing two scenarios: the presence and the absence of a con-

trolling blockholder. We contribute to the principal–principal segment

of agency theory by showing that the form of control is crucial in

defining the incentives of blockholders to extract private benefits

and to perform monitoring activities, as well as blockholders' ability

to pursue their strategic vision (Shleifer & Vishny, 1997).

Additionally, our choice to analyze a sample of closely held Italian

firms over the period 2009–2014 provides fresh empirical evidence to

the corporate governance literature. We explore the role of multiple

blockholders in a context where principal–principal conflicts are exacer-

bated and, given the lack of an effective market for corporate control,

the distribution of ownership is a key antecedent of principal–principal

conflicts (Peng & Sauerwald, 2013; Young et al., 2008).

The remainder of this paper is structured as follows. Section 2 epit-

omizes our theoretical background. We formulate the hypotheses by

distinguishing two scenarios: (a) the case where a single blockholder

controls the firm; and (b) the case where firm control is obtained by

forming a coalition. Section 3 illustrates the method by discussing

the research setting. Then, it describes the sample, the variables used

in the empirical analysis, and the econometric model specification.

Section 4 presents our empirical findings. Finally, Section 5 provides

a discussion of our findings, summarizes the implications for theory

and practice, and offers some lines for future research.

2|THEORY AND HYPOTHESES

Corporate governance studies have traditionally focused on the diverg-

ing interests between managers and shareholders that lead to principal–

agent conflicts (Jensen & Meckling, 1976). Remarkably, the presence of

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