Controlling shareholders and the board of directors: A cross -country study

Orlin Valentinov Dimitrov, Purdue University

Abstract

For a sample of 771 firms from 13 countries, this paper classifies directors as “controlled” and “independent”, based on whether they appear to be associated with the major shareholder. A lower fraction of controlled directors and independence of the board chairman increase company value in cross-sectional regressions. These two variables are also associated with increased dividend payout ratios. Thus, representation of minority investors on the board of directors appears to help prevent investor expropriation and have a beneficial effect on corporate value. These findings suggest that entrepreneurs at the IPO stage have an incentive to commit to a strong board of directors, so as to sell their equity at a higher price. Using three different measures of the quality of protection of investor rights, we find that firms in countries with weak protection of minorities have a significantly higher fraction of controlled directors and chairmen of the board than firms in other countries. Instead of maintaining a stronger board of directors, controlling shareholders in countries with less protective legal regimes appear to use the board to strengthen their grip on the company and to facilitate the extraction of private rents of control. Our findings are consistent with the Outcome agency view of La Porta et al. (1999b), which predicts that Common Law countries will have firms with more independent directors because investors there have the power to influence board composition after the adoption of the articles of incorporation.

Degree

Ph.D.

Advisors

McConnell, Purdue University.

Subject Area

Management

COinS