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Governance under common ownership

Journal

Review of Financial Studies

Subject

Finance

Publishing details

Review of Financial Studies 2019 Vol 32:7 p 2673-2719

Authors / Editors

Edmans A;Levit D;Reilly D

Biographies

Alex Edmans

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


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