The impact of controlling shareholders on firms' choices of governance provisions

Zhonghui Wang, Purdue University


Building upon extensive review of prior research of blockholders and corporate governance rules, I first theoretically explore why and how controlling blockholders defend and enhance their voting power by influencing the adoption of certain shareholder voting rules, either directly or through their managerial delegates and/or board representatives, so that those controlling blockholders can protect their private benefits of control in the invested firms.^ Next, I define and investigate one of the non-pecuniary private benefits that the controlling blockholder can obtain, which is blockholder's private benefit of control or the exclusive opportunity and ability to influence and control the invested firm. Using a large merged data set, I find that controlling blockholders oppose the existing cumulative voting rule which weakens their influence on their invested firms, even though the rule benefits those firms. Furthermore, I find that controlling blockholders with weaker voting power support eliminating the cumulative voting rule more strongly than those with more voting power, and secure more blockholder's private benefits of control, despite the negative effect of this elimination on firm value. These results suggest that controlling blockholders may pursue their private benefits of control even if what they do yields conflict of interest among shareholders and is a cost to firm value.^ Then, I explore the potential conflict of interest between large and small shareholders, or principal-principal conflict, in the context of antitakeover defense. Utilizing a merged dataset of 493 US firms in 1998 and 2000, I theoretically argue and empirically demonstrate that principal-principal conflict exists when firms choose to opt out of the protection of the control share acquisition laws. I find that controlling shareholders influence independent directors to the extent that independent directors act in favor of controlling but not small shareholders. Consequently, I argue that independent directors do not fulfill their fiduciary duties to all shareholders when they support opting out of the control share acquisition laws.^




Thomas H. Brush, Purdue University.

Subject Area

Business Administration, General|Business Administration, Management

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