The classical corporation, as described by Berle and Means (1932), was characterized by ownership that is dispersed between many small shareholders, yet control was concentrated in the hands of managers. This ownership structure created the conflict of interest between managers and dispersed shareholders. More recent empirical work (see, e.g., La Porta et al. (1999) and Barca and Becht (2001)) has shown that ownership in many countries around the world is typically concentrated in the hands of a small number of large shareholders. As a result, an equally important agency conflict arises between large controlling shareholders and minority shareholders. On the one hand, large shareholders can benefit minority shareholders by monitoring managers (Shleifer and Vishny, 1986, 1997). On the other hand, large shareholders can be harmful if they pursue private goals that differ from profit maximization or if they reduce valuable managerial incentives (Shleifer and Vishny, 1997; and Burkart et al., 1997). In the presence of several large shareholders, a conflict of interest may arise between these controlling shareholders (see, e.g., Zwiebel (1995), Pagano and Röell (1998), and Bennedsen and Wolfenzon (2000)). They can compete for control, monitor each other, or form controlling coalitions to share private benefits. The question arises as to what determines the role of controlling shareholders in various firm policies and performance. Previous literature has noted that the incentives to expropriate minority shareholders are often exacerbated by the fact that the capital invested by the controlling shareholders is relatively lower than the voting control they achieve through the use of dual class shares (i.e., shares with differential voting rights) or stock pyramids (e.g., Claessens et al., 2002). Moreover, the identity of the shareholder (e.g., family vs. financial institution) is important for understanding the role of controlling shareholders (see, e.g., Holderness and Sheehan (1988), Volpin (2002), Claessens et al. (2002), and Burkart et al. (2003)). Using Swedish data, Cronqvist and Nilsson (2003) show that the agency costs of family owners are larger than the agency costs of other controlling owners. The role of controlling shareholders in transition countries is exacerbated by the fact that the legal and general institutional environment remains underdeveloped. In such an environment, strong owners may be the second best option to weak legal protection of investors (La Porta et al., 1997, 1998). The transition countries of central and eastern Europe are experiencing increasingly concentrated control structures, typically with the controlling owner actively involved in the management of the firm (Berglöf and Pajuste, 2003). Moreover, experience from transition countries suggests that foreign direct investment, where investors take controlling positions, have been critical to the successful restructuring of privatized firms. This thesis consists of four self-contained chapters that empirically examine various corporate governance issues. The common theme throughout the thesis is the focus on large shareholders, their identity, as well as to whether they deviate from the principle of one share-one vote. In particular, I examine the effect of large shareholders on firm value (in the first and third chapters), dividend policies (in the second chapter), and stock returns (in the final chapter). The first two chapters employ the data from Finland, the third looks at companies in seven European countries where deviations from one share-one vote are common, and the final one explores the evidence from transition countries. / Diss. Stockholm : Handelshögskolan, 2004

Market Liquidity, Active Investment, and Markets for Information. This paper studies a financial market in which investors choose among investment strategies that exploit information about different fundamentals. On the one hand, the presence of other informed investors generates illiquidity. On the other hand, investors who use different strategies can serve as quasi-noise traders for each other, thereby also supplying each other with liquidity. Thus, investment strategies can be substitutes or complements. Such externalities in information acquisition have effects on investor herding, comovement in prices and liquidity across assets, trade volume, and the informational role of prices. They further affect the relationship between financial markets and information markets. Information market competition fosters investor diversity, whereas monopoly power promotes investor herding. Also, in order to benefit from quasi-noise trading, a financial institution may engage in both proprietary trading and information sales. Security-Voting Structure and Bidder Screening. This paper shows that non-voting shares can promote takeovers. When the bidder has private information, shareholders may refuse to tender because they suspect to sell at an ex-post unfavourable price. The ensuing friction in the sale of cash flow rights can prevent an efficient sale of control. Separating cash flow and voting rights mitigates this externality, thereby facilitating takeovers. In fact, the fraction of non-voting shares can be used to discriminate between efficient and inefficient bidders. The optimal fraction decreases with managerial ability, implying an inverse relationship between firm value and non-voting shares. As non-voting shares increase control contestability, share reunification programs entrench managers of widely held firms, whereas dual-class recapitalizations can increase shareholder wealth. Signaling in Tender Offer Games. This paper examines whether a bidder can use the terms of the tender offer to signal the post-takeover security benefits to the shareholders of a widely held target firm. As atomistic shareholders extract all the gains in security benefits, signaling equilibria are subject to a constraint that is absent from bilateral trade models. The buyer (bidder) must enjoy gains from trade that are excluded from bargaining (private benefits), but can nonetheless be relinquished and enable shareholders to draw inference about the security benefits. Restricted bids and cash-equity offers do not satisfy these requirements. Dilution, debt financing, probabilistic takeover outcomes and toeholds are all viable signals because they make bidder gains depend on the security benefits in a predictable manner. In all the signaling equilibria, lower-valued types must forgo a larger fraction of their private benefits and these signaling costs prevent some takeovers. When the bidder has additional private information about the private benefits as in the case of two-dimensional bidder types, fully revealing equilibria cease to exist. This does not hold once bidders can offer not only cash or equity but also (more) elaborate contingent claims. Offers which include options avoid inefficiencies and implement the symmetric information outcome. Goldrush Dynamics of Private Equity. This paper presents a simple dynamic model of entry and exit in a private equity market with heterogeneous private equity firms, a depletable stock of target companies, and rational learning about investment profitability. The predictions of the model match a number of stylized facts: Aggregate fund activity follows waves with endogenous transitions from boom to bust. Supply and demand in the private equity market are inelastic, and the supply comoves with investment valuations. High industry performance precedes high entry, which in turn precedes low industry performance. There are persistent differences in fund performance across private equity firms, first-time funds underperform the industry, and first-time funds raised in booms are unlikely to be succeeded by a follow-on fund. Fund performance and fund size are positively correlated across firms, but negatively correlated across consecutive funds of a private equity firm. Finally, booms can make ”too much capital chase too few deals.” Reputable Friends as Watchdogs: Social Ties and Governance. To examine how governance is affected when a designated supervisor befriends the person to be supervised, this paper embeds a delegated monitoring problem in a social structure: the supervisor and the agent are friends, and the supervisor desires to be socially recognized for having integrity. Strengthening the friendship weakens the supervisor’s monitoring incentives, forging an alliance against the principal (bonding). But the agent also grows more reluctant to put the supervisor’s perceived integrity at risk, thus becoming more aligned with the principal (bridging). If the supervisor’s desire for social recognition is strong, the principal’s preferences regarding the supervisor-agent friendship are bipolar. Weak friendship makes the supervisor monitor intensively to save face. Strong friendship leads the supervisor to abandon monitoring but the agent to behave well in order to protect the supervisor from losing face. The strength of friendship necessary for the latter outcome decreases in the supervisor’s desire for esteem; that is, image concerns leverage the bridging effect of friendship. This suggests that overlapping personal and professional ties can enhance delegated governance in cultures or contexts where social recognition is important, and provides a novel perspective on issues related to crony capitalism, corporate governance, and organizational culture. / Diss. Stockholm : Handelshögskolan, 2009 Sammanfattning jämte 5 uppsatser