Large Shareholders and Corporate Policies

We develop an empirical framework that allows us to analyze the effects of heterogeneity across large shareholders, using a new blockholder-firm panel data set in which we can track all unique blockholders among large public U.S. firms. We find statistically significant and economically important blockholder fixed effects in investment, financial, and executive compensation policies. This evidence suggests that blockholders vary in their beliefs, skills, or preferences. Different large shareholders have distinct investment and governance styles: they differ in their approaches to corporate investment and growth, their appetite for financial leverage, and their attitudes towards CEO pay. We also find blockholder fixed effects in firm performance measures, and differences in style are systematically related to firm performance differences. Our results are consistent with influence for activist, pension fund, corporate, individual, and private equity blockholders, hut consistent with systematic selection for mutual funds. Finally, we analyze sources of the heterogeneity, and find that blockholders with larger block size, board membership, or direct management involvement as officers are associated with larger effects on corporate policies and firm performance.Large shareholders; blockholders; corporate policies; firm performance

Managerial Ownership Dynamics and Firm Value

From 1988 to 2003, the average change in managerial ownership is significantly negative every year for American firms. The probability of large decreases in ownership is strongly increasing in contemporaneous and past stock returns but the probability of large increases in ownership through managerial purchases of shares is not. The relation between changes in Tobin's q and past and contemporaneous changes in ownership depends critically on controlling for past stock returns. When controlling for past stock returns, past large decreases in managerial ownership are unrelated to current changes in Tobin's q but there is some evidence that past large increases in managerial ownership are positively related to current changes in Tobin's q. Because managers sell shares when a firm's stock is performing well, large contemporaneous decreases in managerial ownership are associated with increases in Tobin's q. We argue that our evidence is mostly inconsistent with existing theories and propose a managerial discretion theory of ownership consistent with our evidence.

Estimating the Effects of Large Shareholders Using a Geographic Instrument

Large shareholders may play an important role for firm performance and policies, but identifying this empirically presents a challenge due to the endogeneity of ownership structures. We develop and test an empirical framework which allows us to separate selection from treatment effects of large shareholders. Individual blockholders tend to hold blocks in public firms located close to where they reside. Using this empirical observation, we develop an instrument - the density of wealthy individuals near a firm's headquarters - for the presence of large, non-managerial individual shareholders in firms. These shareholders have a large impact on firms, controlling for selection effects.

Estimating the Effects of Large Shareholders Using a Geographic Instrument

Large shareholders may play an important role for firm policies and performance, but identifying an effect empirically presents a challenge due to the endogeneity of ownership structures. However, unlike other blockholders, individuals tend to hold blocks in corporations that are located close to where they live. Using this fact, we create an instrument – the density of wealthy individuals near a firm’s headquarters – for the presence of a large, non-managerial individual shareholder in a public firm. We show that these shareholders have a large impact on firms. Consistent with theories of large shareholders as monitors, we find that they increase firm profitability, increase dividends, reduce corporate cash holdings, and reduce executive compensation. Consistent with the view that there exist conflicts between large and small owners in public firms, we uncover evidence of substitution toward less tax-efficient forms of distribution (dividends over repurchases). In addition, our analysis shows that large shareholders reduce the liquidity of the firm’s stock.Large shareholders; blockholders; corporate policies; firm performance; liquidity; instrumental variable estimation

Estimating the Effects of Large Shareholders Using a Geographic Instrument

Large shareholders may play an important role for firm performance and policies, but identifying this empirically presents a challenge due to the endogeneity of ownership structures. We develop and test an empirical framework that allows us to separate selection from treatment effects of large shareholders. Individual blockholders tend to hold blocks in public firms located close to where they reside. Using this empirical observation, we develop an instrument (the density of wealthy individuals near a firm's headquarters) for the presence of large, nonmanagerial individual shareholders in firms. These shareholders have a large impact on firms, controlling for selection effect

Bank CEO Incentives and the Credit Crisis

We investigate whether bank performance during the credit crisis of 2008 is related to CEO incentives and share ownership before the crisis and whether CEOs reduced their equity stakes in their banks in anticipation of the crisis. There is no evidence that banks with CEOs whose incentives were better aligned with the interests of their shareholders performed better during the crisis and some evidence that these banks actually performed worse both in terms of stock returns and in terms of accounting return on equity. Further, option compensation did not have an adverse impact on bank performance during the crisis. Bank CEOs did not reduce their holdings of shares in anticipation of the crisis or during the crisis; further, there is no evidence that they hedged their equity exposure. Consequently, they suffered extremely large wealth losses as a result of the crisis.

Estimating the Effects of Large Shareholders Using a Geographic Instrument

Large shareholders may play an important role for firm performance and policies, but identifying this empirically presents a challenge due to the endogeneity of ownership structures. We develop and test an empirical framework which allows us to separate selection from treatment effects of large shareholders. Individual blockholders tend to hold blocks in public firms located close to where they reside. Using this empirical observation, we develop an instrument – the density of wealthy individuals near a firm’s headquarters – for the presence of a large, non-managerial individual shareholder in a firm. These shareholders have a large impact on firms, controlling for selection effects.

This Time Is the Same: Using Bank Performance in 1998 to Explain Bank Performance During the Recent Financial Crisis

We investigate whether a bank’s performance during the 1998 crisis, which was viewed at the time as the most dramatic crisis since the Great Depression, predicts its performance during the recent financial crisis. One hypothesis is that a bank that has an especially poor experience in a crisis learns and adapts, so that it performs better in the next crisis. Another hypothesis is that a bank’s poor experience in a crisis is tied to aspects of its business model that are persistent, so that its past performance during one crisis forecasts poor performance during another crisis. We show that banks that performed worse during the 1998 crisis did so as well during the recent financial crisis. This effect is economically important. In particular, it is economically as important as the leverage of banks before the start of the crisis. The result cannot be attributed to banks having the same chief executive in both crises. Banks that relied more on short-term funding, had more leverage, and grew more are more likely to be banks that performed poorly in both crises.

The dark side of outside directors: Do they quit when they are most needed?

Outside directors have incentives to resign to protect their reputation or to avoid an increase in their workload when they anticipate that the firm on whose board they sit will perform poorly or disclose adverse news. We call these incentives the dark side of outside directors. We find strong support for the existence of this dark side. Following surprise director departures, affected firms have worse stock and operating performance, are more likely to suffer from an extreme negative return event, are more likely to restate earnings, and have a higher likelihood of being named in a federal class action securities fraud lawsuit.

Are Market-Based Measures of Global Systemic Importance of Financial Institutions Useful to Regulators and Supervisors?

We analyze whether four market-based measures of the global systemic importance of financial institutions offer early warning signals during three financial crises. The tests based on the 2007–2008 crisis show that only one measure (∆CoVaR) consistently adds predictive power to conventional early warning models. However, the additional predictive power remains small and it is not normally confirmed for the Asian and the 1998 crises. We conclude that it is problematic to identify a market-based measure of systemic importance that remains valid across crises with different features. The same criticism also applies to several conventional proxies of systemic importance, of which size is the most consistent performer