The governance transfer of blockholders: Evidence from block acquisitions and earnings management around the world


Author Information : Lili Dai (University of New South Wales)
Ravi Dharwadkar (Syracuse University)
Linna Shi (University of Cincinnati)
Bohui Zhang (University of New South Wales)

Year of Publication : 2017

Summary of Findings : Large corporate owners are more effective monitors when they have fewer agency problems than in the firms that they acquire, when they are geographically and operationally proximate to their targets, and when targets are in countries with weaker institutions for investor protection.

Research Questions : 1. Why are some corporate acquirers more effective in monitoring their targets firms than others?
2. Are corporate acquirers equally effective at monitoring local versus foreign acquisitions or acquisitions in same industry versus acquisitions in different industries?
3. Are corporate acquirers more concerned about monitoring targets in weaker governance contexts?

What we know : Both theory and research suggest that large owners (such as corporate acquirers) play a critical role in monitoring management and reducing agency problems.

Novel Findings : The paper identifies some important contingencies regarding monitoring effectiveness, monitoring costs, and monitoring environment and highlights how large owner monitoring varies in a broad sample of 892 block acquisitions across 42 countries from 1990 to 2008.

Novel Methodology : The focus on corporate block acquisitions around the world enables us to study the monitoring effectiveness of large owners in two rather unique ways. First, the corporate block acquirers in our sample hold less than 5% of a target firm's outstanding shares, and then purchase more than 5% but less than 50% of a target firm's share in the acquisition deal--therefore, the study is less plagued by causality concerns that are endemic to such type of research as the corporate block acquirer emerges as a large owner at a specific point in time. Second, by virtue of being a corporate acquirer, we can easily assess how it policies influence the target's policies. This is quite possible when the large owners are mutual funds, banks, insurance companies, etc.

Implications for Practice : As global mergers and acquisitions become more common, CEOs of corporate acquirers have to be cognizant of the monitoring implications of corporate acquisitions. Monitoring may be more difficult when targets are in different industries than the acquiring firm, when targets are in located in other countries, and when targets are located in countries with weaker governance contexts.

Implications on Research: Our work provides a new avenue for future research on the governance role of blockholders. While we use accounting measures as a proxy of governance outcomes, we would clarify that accounting is not the only issue that blockholders are concerned about; it is more likely that blockholders will affect firm policies in terms of various factors (e.g., operations, investment, and financing policies). It is worthwhile to further investigate the governance transfer effect on other governance processes and mechanisms, which can deepen our understanding of the monitoring role of blockholders and their impacts on shareholder value. Further, we believe that the implication that blockholders' governance will generate heterogeneous governance outcomes can be applied not only to corporate blockholders but also to other types of blockholders.

Full Citations : Dai, L., Dharwadkar, R., Shi, L., & Zhang, B. 2017. The governance transfer of blockholders: Evidence from block acquisitions and earnings management around the world. Journal of Corporate Finance, 45: 586-607.

Abstract : We examine the governance transfer effect of corporate blockholders in a sample of 892 block acquisitions across 42 countries from 1990 to 2008. Using earnings management as a proxy for corporate governance outcome, we find that target firms' earnings management is aligned with that of block acquirers after acquisitions, implying that blockholders transfer their own governance quality to investee firms. We further identify three economic mechanisms that underlie the governance transfer effect, namely, monitoring effectiveness, monitoring cost, and monitoring environment. Our findings provide new insights into the governance role of blockholders.

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Ravi Dharwadkar

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