Large Shareholders and Corporate Control By: Andrei Shleifer and Robert Vishny
Dec 18, 2015
Overview
There exists a free rider problem with corporate monitoring
This problem can be corrected with a large shareholder model.
Three Important Questions
• Under what circumstances will we observe a tender offer as opposed to a proxy fight or an internal management shake-up?
• Under what circumstances will we observe a tender offer as opposed to a proxy fight or an internal management shake-up?
• Under what circumstances will we observe a tender offer as opposed to a proxy fight or an internal management shake-up?
• Under what circumstances will we observe a tender offer as opposed to a proxy fight or an internal management shake-up?
• How strong are the forces pushing toward increasing concentration of ownership of a diffusely held firm?
• Why do corporate and personal investors commonly hold stock in the same firm, despite their disparate tax preferences?
Shareholder Structure
Fortune 500 sample reveals typical composition
Who are the largest shareholders?
Role of the large shareholder in takeovers
First Proposition
Impact of an increase in proportion of shares held by L
Larger shareholders are seen as more valuable
How does this impact small shareholders?
Second Proposition
Suppose there is an increase in legal costs
Williams Act of 1968
Other impact of takeovers facilitated by large shareholders
More Mechanisms
The actions of L can serve as a signal for small shareholders
Proxy Contests
The “Jawboning” Mechanism
Pretakeover Trading
Trades by L have an impact on price
L would prefer secret buying
The large shareholder is unlikely to sell.
Pretakeover Trading
A 13-D disclosure form is required
Problems could get worse by time of filing
Why do large shareholders exist?
What are tax implications?
Taxes mean different people will hold different valuations.
Small shareholders and large shareholders may support different payment forms.
Dividend Policies
Small shareholders may actually favor a dividend policy
Paying for monitoring is not permitted.