Governance under common ownership
Journal
Review of Financial Studies
Subject
Finance
Publishing details
Authors / Editors
Edmans A;Levit D;Reilly D
Biographies
Publication Year
2019
Abstract
Conventional wisdom is that diversification weakens governance by spreading an investor too thinly. We show that, when an investor owns multiple firms (“common ownership”), governance through both voice and exit can strengthen –even if the firms are in unrelated industries. Under common ownership, an informed investor has flexibility over which assets to retain and which to sell. She sells low-quality firms first, thereby increasing price informativeness. In a voice model, the investor’s incentives to monitor are stronger since “cutting-and-running” is less profitable. In an exit model, the manager’s incentives to work are stronger since the price impact of investor selling is greater.
Keywords
Corporate governance; Banks; Blockholders; Monitoring; Intervention; Exit; Trading; Common ownership
Available on ECCH
No