The effect of large controlling shareholders on equity prices in France: monitoring or entrenchment?

The corporate governance literature has shown that firms with better governance exhibit higher abnormal returns. In this paper, we examine the effect of cash flow concentration and excess control on equity pricing in France, a country with relatively weak protection for investors. Using hand-collected data on publicly-listed French firms over the period from 2002 to 2011, we find that firms, in which controlling shareholders hold a major proportion of cash flow rights, have higher market performance. Cash flow concentration is a useful monitoring tool for firms to address agency problems. In contrast, a higher level of discrepancy between the control and cash-flow rights of the ultimate controlling shareholders is associated with lower market performance. Control-ownership wedge increases the incentive of the controlling shareholders to act corruptly or unethically. These findings support both incentives hypothesis arising from the cash flow concentration and the expropriation effects arising from the excess control rights. These findings have strong implications for market participants and portfolio investment.