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Agency Costs of Controlling Minority Shareholders

Published online by Cambridge University Press:  06 April 2009

Henrik Cronqvist  and
Mattias Nilsson
Henrik Cronqvist
Affiliation:
henrik.cronqvist@gsb.uchicago.edu, Graduate School of Business, University of Chicago, 1101 E 58th St, Chicago, IL 60637;
Mattias Nilsson
Affiliation:
mattias.nilsson@sifr.org, Stockholm Institute for Financial Research, Saltmätargatan 19A, SE-113 59 Stockholm, Sweden.
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Abstract

This paper estimates the agency costs of controlling minority shareholders (CMSs), who have control of a firm's votes, while owning only a minority of the cash flow rights. Analyzing a panel of 309 listed Swedish firms during 1991–1997, for which we have complete and detailed data on ownership and corporate control instruments, we provide these results; families employ CMS structures, via dual-class shares and other corporate control instruments, about 1.5–2 times more often than other categories of owners (corporations, financial institutions). Estimated agency costs of controlling shareholders are 6%–25% of firm value (Tobin's q) for the median firm among the different categories of controlling owners, ceteris paribus. Family CMSs are associated with the largest discount on firm value. The source of the discount seems to be partly what such owners/firms do: return on assets is significantly lower for firms with concentrated vote control. It also seems as if the discount is related to what such owners/firms do not do. Family CMSs seem to hang on to the control too long from the non-controlling shareholders' perspective; e.g., firms with family CMSs are about 50% less likely to be taken over compared to other firms.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 38 , Issue 4 , December 2003 , pp. 695 - 719
Copyright
Copyright © School of Business Administration, University of Washington 2003

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