Corporate Control and Multiple Large

Recent evidence on financial structures within firms suggests that concentrated ownership in the form of several large shareholders, rather than dispersed ownership, is the norm. This is puzzling given that often the stakes are too big for optimal diversification and too small to guarantee control. This paper attempts to provide an explanation. We consider a setting where multiple shareholders have endogenous conflicts of interest depending on the size of their stake. Such conflicts arise because larger shareholders tend to be less well diversified and would therefore prefer the firm to pursue more conservative investment policies, while dispersed shareholders prefer high risk, high return policies. A second blockholder (or more) can mitigate the conflict by shifting the voting outcome more towards the dispersed shareholders’ preferred investment policy and this raises the share price. Having a larger stake increases the ability to change decisions: however, it also changes the preferences of the shareholders, reducing the incentive to buy larger shares. The main contribution of the paper is to show the conditions under which blockholder equilibria exist when there are endogenous conflicts of interest. The model shows how different ownership structures affect firm value and IPO’s underpricing.