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Laeven: International Monetary Fund, CEPR, and ECGI; Levine: Brown University and NBER. Corresponding author: Ross Levine, Department of Economics, Brown University, Providence, RI, 02912, USA, Telephone: 401-863-2170. We would like to thank Robert McDonald (the Editor), an anonymous referee, Mike Burkart, Stijn Claessens, Armando Gomes, Luc Renneboog, Karl Lins, Ivo Welch, Daniel Wolfenzon, and seminar participants at the University of Minnesota and Tilburg University for helpful comments. Ying Lin provided expert research assistance. This research was initiated while Laeven was at the World Bank.
Zwiebel (1995) presents a model in which the dispersion of ownership across large shareholders is negatively associated with the number of blockholders sharing the benefits of control. Gomes and Novaes (2001) study the ex-post bargaining among large shareholders and how this affects small shareholders. Winton (1993) emphasizes the free-rider problem in monitoring with multiple blockholders.
Substantial work documents the predominance of firms with at least one large owner around the world (La Porta and others, 1999). Claessens and others (2000) show that only 3% of the Asian firms in their sample lack a controlling owner. Faccio and Lang (2002) show that 86% of companies in Europe have a large owner. Even in the United States, research demonstrates the importance of concentrated ownership (Eisenberg, 1976; Demsetz, 1983; Morck, Shleifer, and Vishny, 1988; Holderness and Sheehan, 1988; and Holderness, Kroszner, and Sheehan, 1999).
Our work also relates to recent findings that nepotism within family-controlled firms hurts firm performance (Perez-Gonzalez, 2006, and Bennedsen and others, 2006). In firms where the largest shareholder is a family, we find that the presence and type of other large shareholders is closely associated with the dispersion of cash-flow rights, which suggests that all family firms are not the same and advertises the potential value of controlling for the types of other large owners when assessing the performance of family firms.
In terms of corporate valuations, there is strong evidence that family-owned firms under-perform after ownership is handed over to the second generation of the family – the so-called succession problem (see, for example, Bennedsen and others 2006; and Perez-Gonzalez, 2006), but there is mixed evidence on the performance of family-owned firms in general (see, for example, Morck and others 1988; and Anderson and Reeb, 2003).
Similarly, in Bloch and Hege (2001), the dispersion of cash-flow rights reduces corporate performance because other large shareholders will monitor the largest shareholder more intensively when the dispersion of cash-flow rights is small.
We were concerned that the slope coefficients might vary across industries. So, we also included the interactions between Cash-flow-1 minus Cash-flow-2 and a dummy variable for each industry. The results hold across the different industries, though the link with valuations is less pronounced in the financial and general services industries.
Another reason why X and u may be correlated is the existence of measurement error in X.
Another approach would be to use firm-fixed effects estimation to difference out the unobservable characteristics (see, for example, Himmelberg and others, 1999). However, this approach assumes that unobservable characteristics are time-invariant and requires time-series data on firm ownership, which we do not have. Also, see Palia (2001).
In unreported regressions, we use the dummy variable Founder, which equals one if the company’s founder is on the board of directors and zero otherwise, as an instrument for the cash-flow rights of the largest owner. Bitler and others (2005) find that Founder explains the largest shareholders ownership stake. Endogeneity of one regressor may influence the estimated coefficients on the other regressors. When using Founder as an instrument for cash-flow rights of the largest owner, our findings on dispersion do not change.
Including this interaction term in all the other regressions in Table 5 has no appreciable effect on the cash-flow dispersion coefficient.
We also exclude firms with a majority owner from the Table 6 regressions to focus only on firms with complex ownership structures, but obtain similar results when these firms are included.
These results are available at the following website: http://www.econ.brown.edu/fac/Ross_Levine/IndexLevine.htm.