Blockholders: A Survey of Theory and Evidence

Research Retrieved: November, 2016 (PDF below)
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Issue

Against the common belief that particularly a large portion of US firms is widely-held, Edmans and Holderness (2016) illustrate the international omni-presence of block ownership and discuss the role of blockholders in corporate governance.

Key Findings

  • Blockholders are omni-present: The authors use a sample of hand-collected data on 375 randomly chosen US firms to illustrate the landscape of blockholders in the United States and show that albeit the notion that U.S. firms are widely held, 96% of U.S. firms already had at least one blockholder in 1995. Moreover, if there was such a blockholder, the average block had a considerable size, comprising 26% the shares outstanding.
  • There is no universal definition of blockholders: Whether a large shareholder counts as a blockholder is currently mostly defined by a percentage or by a dollar value threshold of firm ownership. Percentage cut-offs (e.g. 5, 10 or 20%) are widely used in the literature, despite the fact that there is no empirical or theoretical validation of what percentage constitutes a block. Edmans and Holderness also argue that much smaller blocks can represent substantial power, for instance, if small blockholders are able to convince other investors to vote along with them.
  • Blockholder attention matters: Recent studies have shown that not only the absolute size of a block, but also blockholder distraction and the relative size of their holdings in relation to their total wealth should be taken into consideration. Both factors influence the incentives and the ability of blockholders to direct attention towards individual companies.
  • Blockholder heterogeneity matters, too: In understanding blockholder behaviour and respective academic studies, the importance of blockholder heterogeneity has to be recognized. Their types, governance styles as well as the situational context all substantially influence how they contribute to corporate governance.

 

Practical Relevance

Above and beyond, Edmans and Holderness review and align existing theoretical and empirical studies on voice, exit and the cost of blockholders. The survey is comprehensive and clearly-structured. Therefore, it provides a useful overview for practitioners interested in empirical and theoretical research. And, it can be drawn upon as a recent reference work for questions concerning the impact of blockholders on corporate governance.