Information Asymmetry and Internal Monitoring: Which Blockholders Monitor Managers More Effectively?

This paper studies the impact of information asymmetry between blockholders and managers on firm performance. The ability of blockholders to effectively monitor managers depend on how informed they are about the firm’s business. Same-industry (SI) blockholders – blockholders that operate firms in the same line of business are likely to be more informed than blockholders outside the industry, and thus better monitors. Consistent with this argument, this paper finds that firms with SI blocks tend to have higher Tobin’s Qs and lower corporate payouts and managerial equity ownership than other firms, ceteris paribus. In addition, using acquisition data, this paper finds that acquirers with SI blocks, having higher Tobin’s Qs, tend not to over-pay targets, resulting in lower target returns and higher buyer returns. Finally, using block trade data, this paper finds it is that SI blockholders increase firm values, not that high-value firms attract SI blockholders. 1 I am most grateful to John Matsusaka, Micah Officer, Jano Zabojnik, and K.R. Subramanyam for their invaluable insights and continuous support. All errors are my own. USC FBE FINANCE SEMINAR presented by Jianfei Sun FRIDAY, October 21, 2005 10:30 am – 12:00 pm, Room: JKP-104