Skip to main content Accessibility help
×
Home

Blockholder Heterogeneity, CEO Compensation, and Firm Performance

  • Christopher P. Clifford and Laura Lindsey

Abstract

This paper examines heterogeneity in blockholder monitoring across investor types. We document which blockholder types (e.g., mutual funds, hedge funds) are more likely to be associated with active monitoring and show that firms targeted by such blockholders are more likely to increase the equity portion of chief executive officer (CEO) pay. Further, using market-wide and exogenous shocks to liquidity to identify differences in efficacy across blockholder types, we observe greater operating-performance improvements in actively monitored firms when passive monitoring is less effective, suggesting causal impact. We propose differences in compensation arrangements across blockholder types as a mechanism underlying blockholders’ heterogeneous role.

Copyright

Corresponding author

* Clifford (corresponding author), chris.clifford@uky.edu, Gatton College of Business and Economics, University of Kentucky; Lindsey, laura.lindsey@asu.edu, W. P. Carey School of Business, Arizona State University.

References

Hide All
Acharya, V. V., and Pedersen, L. H.. “Asset Pricing with Liquidity Risk.” Journal of Financial Economics, 77 (2005), 375410.
Admati, A. R., and Pfleiderer, P.. “The ‘Wall Street Walk’ and Shareholder Activism: Exit as a Form of Voice.” Review of Financial Studies, 22 (2009), 26452685.
Aggarwal, R. K., and Samwick, A. A.. “Executive Compensation, Strategic Competition, and Relative Performance Evaluation: Theory and Evidence.” Journal of Finance, 54 (1999), 19992043.
Agrawal, A., and Nasser, T.. “Blockholders on Boards and CEO Compensation, Turnover and Firm Valuation.” Working Paper, University of Alabama (2012).
Aiken, A. L.; Clifford, C. P.; and Ellis, J. A.. “Hedge Funds and Discretionary Liquidity Restrictions.” Journal of Financial Economics, 116 (2015), 197218.
Allen, J. W., and Phillips, G. M.. “Corporate Equity Ownership, Strategic Alliances, and Product Market Relationships.” Journal of Finance, 55 (2000), 27912815.
Almazan, A.; Hartzell, J. C.; and Starks, L. T.. “Active Institutional Shareholders and Costs of Monitoring: Evidence from Executive Compensation.” Financial Management, 34 (2005), 534.
Amihud, Y.Illiquidity and Stock Returns: Cross-Section and Time-Series Effects.” Journal of Financial Markets, 5 (2002), 3156.
Amihud, Y., and Mendelson, H.. “Asset Pricing and the Bid-Ask Spread.” Journal of Financial Economics, 17 (1986), 223249.
Baker, G., and Hall, B.. “CEO Incentives and Firm Size.” Journal of Labor Economics, 22 (2004), 767798.
Banerjee, S.; Leleux, B.; and Vermaelen, T.. “Large Shareholdings and Corporate Control: An Analysis of Stake Purchases by French Holding Companies.” European Financial Management, 3 (1997), 2343.
Barber, B. M., and Lyon, J. D.. “Detecting Abnormal Operating Performance: The Empirical Power and Specification of Test Statistics.” Journal of Financial Economics, 41 (1996), 359399.
Barclay, M. J., and Holderness, C. G.. “Private Benefits from Control of Public Corporations.” Journal of Financial Economics, 25 (1989), 371395.
Becker, B.; Cronqvist, H.; and Fahlenbrach, R.. “Estimating the Effects of Large Shareholders Using a Geographic Instrument.” Journal of Financial and Quantitative Analysis, 46 (2011), 907942.
Bethel, J. E.; Liebeskind, J. P.; and Opler, T.. “Block Share Purchases and Corporate Performance.” Journal of Finance, 53 (1998), 605634.
Bhagat, S.; Black, B.; and Blair, M.. “Relational Investing and Firm Performance.” Journal of Financial Research, 27 (2004), 130.
Bharath, S. T.; Jayaraman, S.; and Nagar, V.. “Exit as Governance: An Empirical Analysis.” Journal of Finance, 68 (2013), 25152547.
Bhide, A.The Hidden Costs of Stock Market Liquidity.” Journal of Financial Economics, 34 (1993), 3151.
Black, B. S., and Coffee, J. C.. “Hail Britannia? Institutional Investor Behavior under Limited Regulation.” Michigan Law Review, 92 (1994), 19972087.
Borokhovich, K. A.; Brunarski, K.; Harman, Y. S.; and Parrino, R.. “Variation in the Monitoring Incentives of Outside Stockholders.” Journal of Law and Economics, 49 (2006), 651680.
Brav, A.; Jiang, W.; Partnoy, F.; and Thomas, R.. “Hedge Fund Activism, Corporate Governance, and Firm Performance.” Journal of Finance, 63 (2008), 17291775.
Brickley, J. A.; Lease, R. C.; and Smith, C. W.. “Ownership Structure and Voting on Antitakeover Amendments.” Journal of Financial Economics, 20 (1988), 267291.
Butz, D. A.How Do Large Minority Shareholders Wield Control?Managerial and Decision Economics, 15 (1994), 291298.
Chen, X.; Harford, J.; and Li, K.. “Monitoring: Which Institutions Matter?Journal of Financial Economics, 86 (2007), 279305.
Chordia, T.; Sarkar, A.; and Subrahmanyam, A.. “An Empirical Analysis of Stock and Bond Market Liquidity.” Review of Financial Studies, 18 (2005), 85129.
Clifford, C. P.Value Creation or Destruction? Hedge Funds as Shareholder Activists.” Journal of Corporate Finance, 14 (2008), 323336.
Coffee, J. C.Liquidity versus Control: The Institutional Investor as Corporate Monitor.” Columbia Law Review, 91 (1991), 12771368.
Core, J. E.; Holthausen, R. W.; and Larcker, D. F.. “Corporate Governance, Chief Executive Officer Compensation, and Firm Performance.” Journal of Financial Economics, 51 (1999), 371406.
Cornett, M. M.; Marcus, A. J.; Saunders, A.; and Tehranian, H.. “The Impact of Institutional Ownership on Corporate Operating Performance.” Journal of Banking and Finance, 31 (2007), 17711794.
Cronqvist, H., and Fahlenbrach, R.. “Large Shareholders and Corporate Policies.” Review of Financial Studies, 22 (2009), 39413976.
Cronqvist, H., and Fahlenbrach, R.. “CEO Contract Design: How Do Strong Principals Do It?Journal of Financial Economics, 108 (2013), 659674.
Dasgupta, A., and Piacentino, G.. “The Wall Street Walk When Blockholders Compete for Flows.” Journal of Finance, 70 (2015), 28532896.
Deli, D. N.Mutual Fund Advisory Contracts: An Empirical Investigation.” Journal of Finance, 57 (2002), 109133.
Demsetz, H., and Lehn, K.. “The Structure of Corporate Ownership: Causes and Consequences.” Journal of Political Economy, 93 (1985), 11551177.
Demsetz, H., and Villalonga, B.. “Ownership Structure and Corporate Performance.” Journal of Corporate Finance, 7 (2001), 209233.
Denis, D. J.; Denis, D. K.; and Sarin, A.. “Ownership Structure and Top Executive Turnover.” Journal of Financial Economics, 45 (1997), 193221.
Dlugosz, J.; Fahlenbrach, R.; Gompers, P.; and Metrick, A.. “Large Blocks of Stock: Prevalence, Size, and Measurement.” Journal of Corporate Finance, 12 (2006), 594618.
Edmans, A.Blockholder Trading, Market Efficiency, and Managerial Myopia.” Journal of Finance, 64 (2009), 24812513.
Edmans, A.Blockholders and Corporate Governance.” Annual Review of Financial Economics, 6 (2014), 2350.
Edmans, A.; Fang, V. W.; and Zur, E.. “The Effect of Liquidity on Governance.” Review of Financial Studies, 26 (2013), 14431482.
Edmans, A., and Manso, G.. “Governance through Trading and Intervention: A Theory of Multiple Blockholders.” Review of Financial Studies, 24 (2011), 23952428.
Fich, E.; Harford, J.; and Tran, A.. “Motivated Monitors: The Importance of Institutional Investors’ Portfolio Weights.” Journal of Financial Economics, 118 (2015), 2148.
Gabaix, X., and Landier, A.. “Why Has CEO Pay Increased So Much?Quarterly Journal of Economics, 123 (2008), 49100.
Gantchev, N., and Jotikasthira, C.. “Hedge Fund Activists: Do They Take Cues from Institutional Exit?” Working Paper, University of North Carolina (2014).
Gillan, S. L., and Starks, L. T.. “A Survey of Shareholder Activism: Motivation and Empirical Evidence.” Contemporary Finance Digest, 2 (1998), 1034.
Gillan, S. L., and Starks, L. T.. “Corporate Governance Proposals and Shareholder Activism: The Role of Institutional Investors.” Journal of Financial Economics, 57 (2000), 275305.
Goetzmann, W. N.; Ingersoll, J. E.; and Ross, S. A.. “High-Water Marks and Hedge Fund Management Contracts.” Journal of Finance, 58 (2003), 16851718.
Golec, J. H.Empirical Tests of a Principal–Agent Model of the Investor–Investment Advisor Relationship.” Journal of Financial and Quantitative Analysis, 27 (1992), 8195.
Gompers, P., and Lerner, J.. “An Analysis of Compensation in the U.S. Venture Capital Partnership.” Journal of Financial Economics, 51 (1999), 344.
Gordon, L. A., and Pound, J.. “ESOPs and Corporate Control.” Journal of Financial Economics, 27 (1990), 525555.
Goyenko, R. Y.; Holden, C. W.; and Trzcinka, C. A.. “Do Liquidity Measures Measure Liquidity?Journal of Financial Economics, 92 (2009), 153181.
Greenwood, R., and Schor, M.. “Investor Activism and Takeovers.” Journal of Financial Economics, 92 (2009), 362375.
Hartzell, J. C., and Starks, L. T.. “Institutional Investors and Executive Compensation.” Journal of Finance, 58 (2003), 23512374.
Himmelberg, C. P.; Hubbard, R. G.; and Palia, D.. “Understanding the Determinants of Managerial Ownership and the Link between Ownership and Performance.” Journal of Financial Economics, 53 (1999), 353384.
Holderness, C. G., and Sheehan, D. P.. “The Role of Majority Shareholders in Publicly Held Corporations: An Exploratory Analysis.” Journal of Financial Economics, 20 (1988), 317346.
Holmstrom, B., and Tirole, J.. “Market Liquidity and Performance Monitoring.” Journal of Political Economy, 101 (1993), 678709.
Jensen, M. C.Agency Cost of Free Cash Flow, Corporate Finance, and Takeovers.” American Economic Review, 76 (1986), 323329.
Jensen, M. C.Takeovers: Their Causes and Consequences.” Journal of Economic Perspectives, 2 (1988), 2148.
Jensen, M. C., and Murphy, K. J.. “Performance Pay and Top-Management Incentives.” Journal of Political Economy, 98 (1990), 225264.
Kahn, C., and Winton, A.. “Ownership Structure, Speculation, and Shareholder Intervention.” Journal of Finance, 53 (1998), 99129.
Karpoff, J.Corporate Finance and Corporate Control: An Empirical Research Agenda.” Journal of Institutional and Theoretical Economics, 155 (1999), 239246.
Klein, A., and Zur, E.. “Entrepreneurial Shareholder Activism: Hedge Funds and Other Private Investors.” Journal of Finance, 64 (2009), 187230.
Lazear, E.Salaries and Piece Rates.” Journal of Business, 59 (1986), 405431.
Levit, D.“Soft Shareholder Activism.” Working Paper, University of Pennsylvania (2014).
Maug, E.Large Shareholders as Monitors: Is There a Trade-Off between Liquidity and Control?Journal of Finance, 53 (1998), 6598.
McConnell, J. J., and Servaes, H.. “Additional Evidence on Equity Ownership and Corporate Value.” Journal of Financial Economics, 27 (1990), 595612.
Metrick, A., and Yasuda, A.. “The Economics of Private Equity Funds.” Review of Financial Studies, 23 (2010), 23032341.
Mikkelson, W. H., and Ruback, R. S.. “An Empirical Analysis of the Interfirm Equity Investment Process.” Journal of Financial Economics, 14 (1985), 523553.
Morck, R.; Shleifer, A.; and Vishny, R. W.. “Management Ownership and Market Valuation: An Empirical Analysis.” Journal of Financial Economics, 20 (1988), 293315.
Murphy, K. J.Executive Compensation.” In Handbook of Labor Economics, Vol. 3, Ashenfelter, O. and Card, D., eds. Amsterdam: Elsevier (1999).
Parrino, R.; Sias, R. W.; and Starks, L. T.. “Voting with Their Feet: Institutional Ownership Changes around Forced CEO Turnover.” Journal of Financial Economics, 68 (2003), 346.
Rogers, W.Regression Standard Errors in Clustered Samples.” Stata Technical Bulletin, 13 (1993), 1923.
Rose, N. L., and Wolfram, C.. “Regulating Executive Pay: Using the Tax Code to Influence Chief Executive Officer Compensation.” Journal of Labor Economics, 20 (2002), S138S175.
Shleifer, A., and Vishny, R. W.. “Large Shareholders and Corporate Control.” Journal of Political Economy, 94 (1986), 461488.
Shome, D., and Singh, S.. “Firm Value and External Blockholdings.” Financial Management, 24 (1995), 314.
Smith, C., and Watts, R.. “The Investment Opportunity Set and Corporate Financing, Dividend, and Compensation Policies.” Journal of Financial Economics, 32 (1992), 263292.
Strickland, D.; Wiles, K.; and Zenner, M.. “A Requiem for the USA: Is Small Shareholder Monitoring Effective?Journal of Financial Economics, 40 (1996), 319338.
Subrahmanyam, A., and Titman, S.. “Feedback from Stock Prices to Cash Flows.” Journal of Finance, 56 (2001), 23892413.
Wahal, S.Pension Fund Activism and Firm Performance.” Journal of Financial and Quantitative Analysis, 31 (1996), 123.
White, H.A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity.” Econometrica, 48 (1980), 817830.

Blockholder Heterogeneity, CEO Compensation, and Firm Performance

  • Christopher P. Clifford and Laura Lindsey

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed