Shareholder Homogeneity And Firm Value The Disciplining-Books Pdf

SHAREHOLDER HOMOGENEITY AND FIRM VALUE THE DISCIPLINING
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I Introduction, An important question is how shareholders affect firm value Corporate finance stresses. the role of controlling shareholders as the main supervisors of managers and therefore as. key determinants of firm value and stock price Holmstrom and Tirole 1993 Bolton and. Von Thadden 1998a 1998b Kahn and Winton 1998 Noe 2002 Faure Grimaud and. Gromb 2003 However it does not consider the role of the non controlling shareholders. Asset pricing posits that all the shareholders affect the stock price However this takes. place through the direct impact on price as opposed to directly disciplining the. managers Little attention has been devoted to studying how the overall shareholder. structure and therefore the characteristics of the non controlling shareholders. affects firm value by conditioning managerial decisions. This paper addresses this issue by studying the link between the distribution of the. non controlling shareholders managerial behavior and firm value We focus on. shareholder homogeneity We conjecture that homogeneous shareholders are likely to. interpret information about the firm in a similar way and as a result to react in an. informally coordinated fashion to the news about the firm This implies that in the. presence of homogenous shareholders an unsatisfactory piece of news induces a sell off of. the firm stock that will bring about a sharp drop in price. The implicit threat of the shareholder sell off makes it more expensive for equity. incentivized managers or controlling shareholders to engage in money wasting activities. Less leeway for managers translates into better management and more value enhancing. strategies At the same time the higher the degree of shareholder homogeneity the more. the management will try to meet investor expectations This by reducing the market. dispersion of forecasts and their errors will effectively increase standard measures of firm. transparency Firms with homogeneous shareholders should therefore be characterized by. higher transparency as well as higher profitability and stock price. These considerations suggest that the degree of homogeneity among shareholders. may act as a disciplining device and represent an indirect and market based source of. corporate governance This applies to US type public companies with dispersed. ownership as well as to the family owned or tightly controlled companies more typical in. Europe and Asia In the former case the existence of a high degree of homogeneity. among non controlling shareholders would act as a disciplining device against potentially. entrenched managers In the latter case homogeneity would act as a disciplining device. against the controlling shareholders, What defines shareholder homogeneity and how do we proxy for if We argue that. a main source of homogeneity is related to the investor s age Indeed different cohorts of. investors have been exposed to different fads and cultures and have had different. experiences For example investors who have lived through a stock market bubble will. react differently to information about future cash flows than investors who have. experienced only a stock market boom One generation learns but then you get a lot of. new guys The question is of the people in the market now they don t remember 1929. but do they remember 1987 It s always the new boys who need to get a baptism of fire. Each successive group of speculators is able to persuade itself that its own situation is. unique in history Kindleberger 2001 Moreover investors of different ages have. different objectives Different life cycle considerations for example may induce them to. give different weights to different types of shares Poterba and Samwick 1997. Alternatively similar college experiences may induce investors to interpret. information in similar ways As a source of social interaction college both shapes the. thinking of the investor and defines a lasting network of relationships That is college. based interaction defines the common general imprinting due to the type and quality of. education delivered by the school and shapes the bonding with other people attending. the same school that persists over time on a friendship or alumni based relationship. People who went to the same college and received the same education should have a. similar view of the world Social interaction has been shown to affect stock market. participation Hong Kubik and Stein 2003 as well as portfolio choice Massa and. Simonov 2005, We therefore define two proxies for investor homogeneity based on either the age. cohort of the shareholders or their college affiliation For each firm we measure the. degree of homogeneity across all its individual non controlling shareholders The. availability of complete information on all the shareholders for each firm allows us to. devise a unique identifying strategy that pins down the exogenous component of the. shareholder structure Relying on the recent findings on local investment bias. Huberman 2001 Coval and Moskowitz 1999 2001 Hong Kubik and Stein 2005 we. exploit the location of shareholders as an identifying restriction This allows us to. address the issue created by the endogenous nature of ownership structure Demsetz. 1983 Demsetz and Lehn 1985, We show that greater homogeneity raises firm profitability and stock price Firms. with higher shareholder homogeneity have higher stock market valuations and are more. profitable In particular firms with homogeneity one standard deviation greater than the. average display stock prices Tobin s Q 13 higher than average their profit margins. are 30 higher than average 10 and 23 respectively in the case of ROA and ROE. Moreover homogeneity reduces analyst error and analyst dispersion An increase in. homogeneity of one standard deviation reduces the standard deviation of forecast. estimates by 36 of its unconditional mean This suggests the existence of a novel. channel through which shareholder characteristics affect the value of the firm. These results are consistent with the findings of Boot and Thakor 2004 and. Dittmar and Thakor 2005 who posit that firm value is an increasing function of the. alignment between shareholders and managers Their predictions are consistent with ours. if we consider the increase in transparency as an increase in alignment between the. shareholders and the firm, It is also important to note that an extensive literature e g Blau 1977 Westphal.
and Zajac 1995 Bourgeois Eisenhardt and Kahwajy 1997 Carter Simkins and Simpson. 2003 Adams and Ferreira 2005 has analyzed the impact of board diversity homogeneity. on firm value In general the idea is that the main benefit of a diverse team is that. team members are able to provide different perspectives on important issues which. may reduce the probability of complacency in decision making Diversity may add. value by bringing different perspectives experiences and opinions to the table Adams. and Ferreira 2005 It could be the case that shareholder homogeneity may in fact proxy. for board homogeneity We directly account for this possibility by running a horse race. between measures of board and shareholder homogeneity The results show that. shareholder homogeneity affects firm value in a way that is independent and more. important than board homogeneity, Our findings contribute to the literature along different dimensions In particular. our results are related to the theory on the determinants of corporate governance and to. the literature on the role of blockholders and institutional investors It has been argued. that managers are disciplined by either direct governance Gompers Ishii and Metrick. 2003 or by indirect governance Indirect governance has in general been associated with. blockholders or institutional shareholders i e investors who have the resources to. monitor managers and the power to correct them Holmstrom and Tirole 1993 Cremers. and Nair 2004 For example Kahn and Winton 1998 Bolton and Von Thadden. 1998a 1998b and Noe 2002 describe the role played by concentrated shareholdings. and show how these shareholdings emerge Faure Grimaud and Gromb 2003 describe. how concentrated shareholdings engage in value increasing activities Our main. contribution is to provide evidence of a hidden source of governance and a more. indirect form of managerial discipline i e one that is related to the degree of. shareholder homogeneity of the individual non controlling shareholders. Second we contribute to the literature that relates shareholder composition i e. ownership structure to firm performance Morck Shleifer and Vishny 1988 McConnell. and Servaes 1990 1995 Himmelberg Hubbard and Palia 1999 Holderness Kroszner and. Sheenan 1999 Franks and Mayer 2001 Franks Mayer and Renneboog 2001 McConnell. Servaes and Lins 2003 Unlike the standard approaches that focus on subsets of. relevant controlling shareholders e g blockholders institutional investors we show the. role played by the overall set of investors including minority shareholders More. specifically we show that it is not only a subset of qualified shareholders that affects. firm performance but that the entire ownership structure matters Moreover the use of. a unique identifying strategy that pins down the exogenous component of the. shareholder structure addresses the issue of endogeneity that has plagued the literature. Third we complement the literature on social interaction by providing evidence on. the impact of social interaction on firm value The literature on social interaction has. mostly focused on the way social interaction affects individual behavior e g Ellison and. Fudenberg 1995 Bala and Goyal 1998 Bertrand Luttmer and Mullainathan 1999 Only. recently has social interaction been shown to affect stock market participation and. portfolio choice Hong Kubik and Stein 2003 However this paper is to our knowledge. the first to show the direct impact of social interaction on firm value and stock price We. also relate to the burgeoning literature on the role of homogeneity in finance and in the. agency literature in particular Crawford and Sobel 1982 Cremer 1993 Aghion and. Tirole 1997 Dessein 2002 Shared beliefs within an organization decrease agency. problems lower the need to monitor and facilitate coordination Van den Steen 2004. The paper is structured as follows In the next section we set out the hypotheses. In Section III we describe the data In Section IV we relate shareholder homogeneity to. the way shareholders react to news In Section V we provide empirical evidence of the. impact of shareholder homogeneity on firm transparency In Section VI we relate. shareholder homogeneity to firm profitability while in Section VII we study how. homogeneity affects stock price A discussion of the results is provided in Section VIII A. brief conclusion follows,II Testable Restrictions, We now lay out our testable restrictions We will focus on the economic intuition while. a formal simple model is provided in the Appendix We start from a simple fact. homogeneous shareholders tend to interpret information in the same way This means. that in the presence of news about the firm the more homogenous the shareholders are. the more they will react in a similar way Heterogeneous shareholders instead by. applying different priors to the same news will draw different conclusions about the. value of the firm Therefore in aggregate their reaction will be more muffled In other. words homogeneity by informally coordinating shareholders amplifies their reaction. This implies that in the presence of homogenous shareholders negative news about a. firm will induce a more pronounced sell off of the firm stock and a sharper drop than it. would be in the case of more heterogeneous shareholders. H1 Higher homogeneity increases the reaction of the shareholders to negative news. We argue that the managers are aware of the implicit threat of the shareholder. sell off The higher cost of disappointing the shareholders induces managers to meet. investor expectations thereby minimizing the market dispersion of forecasts and their. errors According to the standard measures this will appear as an increase in firm. transparency, H2 Firms characterized by greater homogeneity among shareholders are more. transparent, At the same time higher homogeneity increases the incentives of equity. incentivized managers not to disappoint their shareholders by engaging in money. wasting activities This implies a positive correlation between shareholder homogeneity. and firm reported profitability, H3 Firms characterized by greater homogeneity among shareholders are more profitable.
The combined effect of higher transparency and higher profitability should increase. the price of the firm, H4 Firms characterized by greater homogeneity among shareholders have higher prices. These considerations suggest a sort of disciplining effect provided by shareholder. homogeneity That is more homogeneous investors are able to impose better discipline. on the management controlling shareholders reducing their incentives to engage in value. destruction or value appropriation Before proceeding to the tests we will describe the. data and the methodology we will use, III Data Construction of the Variables and Methodology. A Data Sources, We use data obtained from a number of different sources For each investor we have age. and detailed information on individual stockholdings broken down at the stock level. SHAREHOLDER HOMOGENEITY AND FIRM VALUE We are grateful to Sven Ivan Sundqvist for numerous helpful discussions and for providing us with the data I Introduction An important question is how shareholders affect firm value Corporate finance stresses the role of controlling shareholders as the main supervisors of managers and therefore as key determinants of firm value and stock price

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