IDEAS home Printed from https://ideas.repec.org/a/wsi/qjfxxx/v08y2018i03ns201013921850012x.html
   My bibliography  Save this article

Corporate Financial and Investment Policies in the Presence of a Blockholder on the Board

Author

Listed:
  • Anup Agrawal

    (University of Alabama, Culverhouse College of Business, Tuscaloosa, AL 35487-0224, USA)

  • Tareque Nasser

    (2097 BB, 1301 Lovers Lane, College of Business Administration, Kansas State University, Manhattan, KS 66506, USA)

Abstract

We examine the relation between the presence of an independent director who is a blockholder (IDB) and corporate policies, risk-taking, and market valuation. After accounting for endogeneity, firms with an IDB have significantly (1) lower levels of cash holdings, payout and research and development (R&D) expenditures, (2) higher levels of capital expenditures, and (3) lower risk. The market appears to value IDB presence and the associated decrease in dividend yield. About 75% of the IDBs in our sample are individual investors, who drive most of our results. Our findings suggest that IDB presence plays a valuable role in shaping some corporate policies and allocating corporate resources.

Suggested Citation

  • Anup Agrawal & Tareque Nasser, 2018. "Corporate Financial and Investment Policies in the Presence of a Blockholder on the Board," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 8(03), pages 1-59, September.
    • Handle: RePEc:wsi:qjfxxx:v:08:y:2018:i:03:n:s201013921850012x
    DOI: 10.1142/S201013921850012X
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S201013921850012X
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1142/S201013921850012X?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Clifford G. Holderness, 2003. "A survey of blockholders and corporate control," Economic Policy Review, Federal Reserve Bank of New York, vol. 9(Apr), pages 51-64.
    2. Becker, Bo & Cronqvist, Henrik & Fahlenbrach, Rüdiger, 2011. "Estimating the Effects of Large Shareholders Using a Geographic Instrument," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(4), pages 907-942, August.
    3. Thomas W. Bates & Kathleen M. Kahle & René M. Stulz, 2009. "Why Do U.S. Firms Hold So Much More Cash than They Used To?," Journal of Finance, American Finance Association, vol. 64(5), pages 1985-2021, October.
    4. Gustavo Grullon & Roni Michaely, 2002. "Dividends, Share Repurchases, and the Substitution Hypothesis," Journal of Finance, American Finance Association, vol. 57(4), pages 1649-1684, August.
    5. Smith, Richard J & Blundell, Richard W, 1986. "An Exogeneity Test for a Simultaneous Equation Tobit Model with an Application to Labor Supply," Econometrica, Econometric Society, vol. 54(3), pages 679-685, May.
    6. repec:bla:jfinan:v:53:y:1998:i:1:p:131-162 is not listed on IDEAS
    7. Stulz, ReneM., 1990. "Managerial discretion and optimal financing policies," Journal of Financial Economics, Elsevier, vol. 26(1), pages 3-27, July.
    8. Mara Faccio & Maria-Teresa Marchica & Roberto Mura, 2011. "Large Shareholder Diversification and Corporate Risk-Taking," The Review of Financial Studies, Society for Financial Studies, vol. 24(11), pages 3601-3641.
    9. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    10. Joshua D. Angrist & Jörn-Steffen Pischke, 2009. "Mostly Harmless Econometrics: An Empiricist's Companion," Economics Books, Princeton University Press, edition 1, number 8769.
    11. Low, Angie, 2009. "Managerial risk-taking behavior and equity-based compensation," Journal of Financial Economics, Elsevier, vol. 92(3), pages 470-490, June.
    12. Opler, Tim & Pinkowitz, Lee & Stulz, Rene & Williamson, Rohan, 1999. "The determinants and implications of corporate cash holdings," Journal of Financial Economics, Elsevier, vol. 52(1), pages 3-46, April.
    13. Dittmar, Amy & Mahrt-Smith, Jan, 2007. "Corporate governance and the value of cash holdings," Journal of Financial Economics, Elsevier, vol. 83(3), pages 599-634, March.
    14. Edward I. Altman, 1968. "The Prediction Of Corporate Bankruptcy: A Discriminant Analysis," Journal of Finance, American Finance Association, vol. 23(1), pages 193-194, March.
    15. Becht, Marco & Bolton, Patrick & Röell, Ailsa, 2007. "Corporate Law and Governance," Handbook of Law and Economics, in: A. Mitchell Polinsky & Steven Shavell (ed.), Handbook of Law and Economics, edition 1, volume 2, chapter 12, pages 829-943, Elsevier.
    16. Rafael La Porta & Florencio Lopez‐de‐Silanes & Andrei Shleifer & Robert W. Vishny, 2000. "Agency Problems and Dividend Policies around the World," Journal of Finance, American Finance Association, vol. 55(1), pages 1-33, February.
    17. Lerner, Josh, 1995. "Venture Capitalists and the Oversight of Private Firms," Journal of Finance, American Finance Association, vol. 50(1), pages 301-318, March.
    18. Paul Gompers & Joy Ishii & Andrew Metrick, 2003. "Corporate Governance and Equity Prices," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(1), pages 107-156.
    19. Richard M. Cyert & Sok-Hyon Kang & Praveen Kumar, 2002. "Corporate Governance, Takeovers, and Top-Management Compensation: Theory and Evidence," Management Science, INFORMS, vol. 48(4), pages 453-469, April.
    20. Agrawal, Anup & Knoeber, Charles R., 1996. "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(3), pages 377-397, September.
    21. Agrawal, Anup & Mandelker, Gershon N, 1987. "Managerial Incentives and Corporate Investment and Financing Decision s," Journal of Finance, American Finance Association, vol. 42(4), pages 823-837, September.
    22. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    23. Core, John & Guay, Wayne, 1999. "The use of equity grants to manage optimal equity incentive levels," Journal of Accounting and Economics, Elsevier, vol. 28(2), pages 151-184, December.
    24. Michael Faulkender & Rong Wang, 2006. "Corporate Financial Policy and the Value of Cash," Journal of Finance, American Finance Association, vol. 61(4), pages 1957-1990, August.
    25. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
    26. Easterbrook, Frank H, 1984. "Two Agency-Cost Explanations of Dividends," American Economic Review, American Economic Association, vol. 74(4), pages 650-659, September.
    27. Henrik Cronqvist & Rüdiger Fahlenbrach, 2009. "Large Shareholders and Corporate Policies," The Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 3941-3976, October.
    28. Marianne Bertrand & Sendhil Mullainathan, 2001. "Are CEOs Rewarded for Luck? The Ones Without Principals Are," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(3), pages 901-932.
    29. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    30. Anup Agrawal & Charles R. Knoeber, "undated". "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders (Revision of 29-94)," Rodney L. White Center for Financial Research Working Papers 8-96, Wharton School Rodney L. White Center for Financial Research.
    31. Marianne Bertrand & Sendhil Mullainathan, 2003. "Enjoying the Quiet Life? Corporate Governance and Managerial Preferences," Journal of Political Economy, University of Chicago Press, vol. 111(5), pages 1043-1075, October.
    32. MacKie-Mason, Jeffrey K, 1990. "Do Taxes Affect Corporate Financing Decisions?," Journal of Finance, American Finance Association, vol. 45(5), pages 1471-1493, December.
    33. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 461-488, June.
    34. Eugene F. Fama, 2002. "Testing Trade-Off and Pecking Order Predictions About Dividends and Debt," The Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 1-33, March.
    35. Jagannathan, Murali & Stephens, Clifford P. & Weisbach, Michael S., 2000. "Financial flexibility and the choice between dividends and stock repurchases," Journal of Financial Economics, Elsevier, vol. 57(3), pages 355-384, September.
    36. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    37. Randall Morck, 2008. "Behavioral finance in corporate governance: economics and ethics of the devil’s advocate," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 12(2), pages 179-200, May.
    38. Marianne Bertrand & Antoinette Schoar, 2003. "Managing with Style: The Effect of Managers on Firm Policies," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(4), pages 1169-1208.
    39. Jarrad Harford & Sattar A. Mansi & William F. Maxwell, 2012. "Corporate Governance and Firm Cash Holdings in the U.S," Springer Books, in: Sabri Boubaker & Bang Dang Nguyen & Duc Khuong Nguyen (ed.), Corporate Governance, edition 127, pages 107-138, Springer.
    40. Adhikari, Binay Kumar & Agrawal, Anup, 2016. "Religion, gambling attitudes and corporate innovation," Journal of Corporate Finance, Elsevier, vol. 37(C), pages 229-248.
    41. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
    42. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    43. Slovin, Myron B & Sushka, Marie E, 1993. "Ownership Concentration, Corporate Control Activity, and Firm Value: Evidence from the Death of Inside Blockholders," Journal of Finance, American Finance Association, vol. 48(4), pages 1293-1321, September.
    44. Steven Huddart, 1993. "The Effect of a Large Shareholder on Corporate Value," Management Science, INFORMS, vol. 39(11), pages 1407-1421, November.
    45. Ronald W. Masulis & Cong Wang & Fei Xie, 2009. "Agency Problems at Dual‐Class Companies," Journal of Finance, American Finance Association, vol. 64(4), pages 1697-1727, August.
    46. Rivers, Douglas & Vuong, Quang H., 1988. "Limited information estimators and exogeneity tests for simultaneous probit models," Journal of Econometrics, Elsevier, vol. 39(3), pages 347-366, November.
    47. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-264, April.
    48. John Core & Wayne Guay, 2002. "Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility," Journal of Accounting Research, Wiley Blackwell, vol. 40(3), pages 613-630, June.
    49. Anderson, Ronald C & Reeb, David M, 2003. "Founding-Family Ownership, Corporate Diversification, and Firm Leverage," Journal of Law and Economics, University of Chicago Press, vol. 46(2), pages 653-684, October.
    50. Joshua D. Coval & Tobias J. Moskowitz, 1999. "Home Bias at Home: Local Equity Preference in Domestic Portfolios," Journal of Finance, American Finance Association, vol. 54(6), pages 2045-2073, December.
    51. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    52. Aggarwal, Rajesh K. & Samwick, Andrew A., 2006. "Empire-builders and shirkers: Investment, firm performance, and managerial incentives," Journal of Corporate Finance, Elsevier, vol. 12(3), pages 489-515, June.
    53. Anup Agrawal & Charles R. Knoeber, "undated". "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders (Revision of 29-94)," Rodney L. White Center for Financial Research Working Papers 08-96, Wharton School Rodney L. White Center for Financial Research.
    54. John, Kose & Knyazeva, Anzhela & Knyazeva, Diana, 2015. "Governance and Payout Precommitment," Journal of Corporate Finance, Elsevier, vol. 33(C), pages 101-117.
    55. Grullon, Gustavo & Paye, Bradley & Underwood, Shane & Weston, James P., 2011. "Has the Propensity to Pay Out Declined?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(1), pages 1-24, February.
    56. DeAngelo, Harry & DeAngelo, Linda, 1985. "Managerial ownership of voting rights : A study of public corporations with dual classes of common stock," Journal of Financial Economics, Elsevier, vol. 14(1), pages 33-69, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Nguyen, Quynh & Kim, Maria H. & Ali, Searat, 2024. "Corporate governance and earnings management: Evidence from Vietnamese listed firms," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 775-801.
    2. Fabio La Rosa & Sergio Paternostro & Francesca Bernini, 2023. "Corporate and regional governance antecedents of the Legality Rating of private Italian companies," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 27(1), pages 297-329, March.
    3. Anup Agrawal & Tareque Nasser, 2019. "Blockholders on Boards and CEO Compensation, Turnover and Firm Valuation," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 9(03), pages 1-67, September.
    4. Marquardt, Blair B. & Sanchez, Juan Manuel, 2022. "Blockholder board representation and debt contracting," Journal of Banking & Finance, Elsevier, vol. 142(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Anup Agrawal & Tareque Nasser, 2019. "Blockholders on Boards and CEO Compensation, Turnover and Firm Valuation," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 9(03), pages 1-67, September.
    2. Becker, Bo & Cronqvist, Henrik & Fahlenbrach, Rüdiger, 2011. "Estimating the Effects of Large Shareholders Using a Geographic Instrument," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(4), pages 907-942, August.
    3. Golbe, Devra L. & Nyman, Ingmar, 2013. "How do share repurchases affect ownership concentration?," Journal of Corporate Finance, Elsevier, vol. 20(C), pages 22-40.
    4. James, Hui & Benson, Bradley W. & Wu, Chen (Ken), 2017. "Does CEO ownership affect payout policy? Evidence from using CEO scaled wealth-performance sensitivity," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 328-345.
    5. Hussein Abedi Shamsabadi & Byung-Seong Min & Richard Chung, 2016. "Corporate governance and dividend strategy: lessons from Australia," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 12(5), pages 583-610, October.
    6. Armstrong, Christopher S. & Guay, Wayne R. & Weber, Joseph P., 2010. "The role of information and financial reporting in corporate governance and debt contracting," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 179-234, December.
    7. Feng, Harry & Rao, Ramesh P., 2018. "Cash holdings and CEO risk incentive compensation: Effect of CEO risk aversion," International Review of Financial Analysis, Elsevier, vol. 60(C), pages 162-176.
    8. Boubaker, Sabri & Derouiche, Imen & Lasfer, Meziane, 2015. "Geographic location, excess control rights, and cash holdings," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 24-37.
    9. Franzoni, Francesco, 2009. "Underinvestment vs. overinvestment: Evidence from price reactions to pension contributions," Journal of Financial Economics, Elsevier, vol. 92(3), pages 491-518, June.
    10. Podolski, Edward J. & Truong, Cameron & Veeraraghavan, Madhu, 2016. "Cash holdings and bond returns around takeovers," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 1-11.
    11. Cave, Joshua & Lancheros, Sandra, 2024. "Local peer influence on dividend payout decisions," Journal of Banking & Finance, Elsevier, vol. 164(C).
    12. Audrey Wenhsin Hsu & Sophia Hsintsai Liu, 2018. "Parent-subsidiary investment layers and the value of corporate cash holdings," Review of Quantitative Finance and Accounting, Springer, vol. 51(3), pages 651-681, October.
    13. Pascal Nguyen & Nahid Rahman, 2020. "Institutional ownership, cross‐shareholdings and corporate cash reserves in Japan," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(S1), pages 1175-1207, April.
    14. Alimov, Azizjon, 2014. "Product market competition and the value of corporate cash: Evidence from trade liberalization," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 122-139.
    15. Kusnadi, Yuanto, 2011. "Do corporate governance mechanisms matter for cash holdings and firm value?," Pacific-Basin Finance Journal, Elsevier, vol. 19(5), pages 554-570, November.
    16. Chowdhury, Rajib & Doukas, John A. & Park, Jong Chool, 2021. "Stakeholder orientation and the value of cash holdings: Evidence from a natural experiment," Journal of Corporate Finance, Elsevier, vol. 69(C).
    17. Liu, Yixin & Mauer, David C., 2011. "Corporate cash holdings and CEO compensation incentives," Journal of Financial Economics, Elsevier, vol. 102(1), pages 183-198, October.
    18. Paul Tanyi & David B. Smith & Xiaoyan Cheng, 2021. "Does firm payout policy affect shareholders’ dissatisfaction with directors?," Review of Quantitative Finance and Accounting, Springer, vol. 57(1), pages 279-320, July.
    19. Amess, Kevin & Banerji, Sanjay & Lampousis, Athanasios, 2015. "Corporate cash holdings: Causes and consequences," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 421-433.
    20. Drobetz, Wolfgang & von Meyerinck, Felix & Oesch, David & Schmid, Markus, 2014. "Board Industry Experience, Firm Value, and Investment Behavior," Working Papers on Finance 1401, University of St. Gallen, School of Finance, revised Dec 2015.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:qjfxxx:v:08:y:2018:i:03:n:s201013921850012x. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscinet.com/qjf/qjf.shtml .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.