Clifford G. Holderness

The role of majority shareholders in publicly held corporations: An exploratory analysis

We analyze 114 NYSE- or AMEX-listed corporations with majority shareholders. Majority shareholders are approximately equally divided between corporations and individuals and are typically both directors and officers. When majority blocks trade, stock prices increase and there is substantial management turnover. Although majority shareholders are typically paid larger salaries than officers in diffusely held firms, the difference is small and of marginal significance. Investment policies, the frequency of corporate-control transactions, accounting return, and Tobins Q are similar for majority-owned and diffusely held firms. Differences in these dimensions do emerge, however, between firms with corporate and individual majority shareholders.

Private benefits from control of public corporations

We analyze the pricing of 63 block trades between 1978 and 1982 involving at least 5% of the common stock of NYSE or Amex corporations. These blocks are typically priced at substantial premiums to the post-announcement exchange price. We argue that the premiums, which average 20%, reflect private benefits that accrue exclusively to the blockholder because of his voting power. The premiums paid by both individual and corporate block purchasers increase with firm size, fractional ownership, and firm performance. Individuals pay larger premiums for firms with greater leverage, lower stock-return variance, and large cash holdings.

Were the Good Old Days That Good? Changes in Managerial Stock Ownership Since the Great Depression

We document that ownership by officers and directors of publicly-traded firms is on average higher today than earlier in the century. Managerial ownership rises from 13 percent for the universe of exchange-listed corporations in 1935, the earliest year for which such data exist, to 21 percent in 1995. We examine in detail the robustness of the increase and explore hypotheses to explain it. Higher managerial ownership has not substituted for alternative corporate governance mechanisms. Lower volatility and greater hedging opportunities associated with the development of financial markets appear to be important factors explaining the increase in managerial ownership.

Private benefits from block ownership and discounts on closed-end funds

The greater the managerial stock ownership in closed-end funds, the larger are the discounts to net asset value. The average discount for funds with blockholders is 14%, whereas the average discount for funds without blockholders is only 4%. This relation is robust over time and to various model specifications that control for other factors that affect discounts. We argue that blockholders receive private benefits that do not accrue to other shareholders and that they veto open-ending proposals to preserve these benefits. We support this argument by documenting a range of potential private benefits received by blockholders in closed-end funds.

Private Placements and Managerial Entrenchment

Our evidence suggests that private placements of large-percentage blocks of common stock are often made to passive investors, helping management solidify their control of the firm. The purchasers’ passivity is documented though the rarity of their involvement in firm affairs, the absence of public conflict with management, and the paucity of post-placement acquisitions. Stock returns turn negative as the passivity and entrenchment is revealed; discounts to the purchasers appear to be compensation for the consequences of helping to entrench management. These conclusions conflict with the conventional wisdom that active purchasers of private placements provide valuable monitoring and certification services. ∗ Barclay is from the University of Rochester (barclay@simon.rochester.edu); Holderness is from Boston College (holderne@bc.edu); and Sheehan is from Pennsylvania State University (dps6@psu.edu). For their comments we thank Vladimir Atanasov, Gordon Hanka, Linda Miles, Jeffrey Pontiff, James Seward, and Karen Wruck. We thank Leslie DeSantis, Weihong Song, and Duncan Zhengs for research assistance. This research has been supported by a Research Incentive Grant from Boston College, which we gratefully acknowledge.

The Law and Large-Block Trades

Although these issues have been analyzed by legal scholars since Andrew Berle and Gardiner Means in 1932, no systematic empirical evidence has been collected. We investigate the validity of this belief, as well as broader implications of the law on large-block trades, by analyzing 106 trades of at least 5% of common stock of exchange-listed firms between 1978 and 1982. We find that, when block sellers receive premium, stock prices typically increase but not to the price per share received by the blockholders. We argue that this tension is resolved by assigning a different set of rights and obligations to large-block shareholders when they act as managers.

Liability insurers as corporate monitors

Corporate directors and officers are being personally sued with increasing frequency for a broad array of alleged offenses, ranging from breach of the commonlaw duty of loyalty to shareholders, to violations of federal securities laws, to “looting” the corporate treasury, to violations of federal security laws, to even the “failure to exercise reasonable care in the selection of a depository bank.“’ According to one report, such suits increased fourfold from 1984 to 1985 alone.2 Although this rate of increase has apparently moderated, the liability of corporate officials remains controversial.3 Most public corporations have responded by purchasing directors’ and officers’ liability insurance (“liability insurance”), which covers the expenses of individual directors and officers as well as the corporation’s expenses incurred under indemnification agreements. Proponents of liability insurance point out that it reduces the cost of compensating risk-averse directors and officers and encourages

Monitoring an owner: The case of Turner broadcasting☆

Abstract Turner Broadcasting illustrates how organizational mechanisms can be adapted to prevent a majority owner from imposing costs on minority shareholders through inept management or opportunistic behavior. These mechanisms involve issuing preferred stock with unusual features, concentrating its ownership among a small group of investors, allowing the new preferred shareholders to elect several directors, and requiring supramajority approval of major management decisions by a reconstituted board of directors. The alienability of the preferred stock is restricted to help insure that its ownership stays concentrated and in the hands of those with the specific knowledge and incentives to be effective monitors.

Joint ownership and alienability

Most legal traditions view individual ownership as paradigmatic. Yet most property is jointly owned. This paper analyzes how joint ownership affects alienability by focusing on two fundamental issues raised by joint ownership—the nature of the class of those who may benefit from a joint asset and the nature of the process for making decisions about such an asset. I identify four possible ways to resolve these issues. These possibilities coincide with the four general approaches by which joint property has been held over time and across legal traditions. This four-fold categorization and the different effect each has on alienability is used to analyze a broad array of laws and practices, ranging from Hindu inheritance law to the Uniform Partnership Act to the growing shareholder democracy movement.

A Legal Foundation for Exchange

THE connection among law, exchange, and human welfare has been recognized at least from the time of Adam Smith.1 Voluntary exchanges obviously play a central role, if not the central role, in a market economy by allowing goods and services to be transferred from lowerto highervalue uses. The existence and frequency of exchange does not depend, however, solely on the desires of the trading partners. In addition, the law can either lower the costs that private parties must bear in exchanging goods and services, or raise these costs so that in the extreme case no exchanges can take place at all. The most prominent legal foundation for exchange is the judicial enforcement of contractual promises. But there are additional legal prerequisites for exchange that are less obvious but of equal importance. This paper explores one of those additional prerequisites by analyzing how the assignment of rights and obligations by courts or legislatures can either facilitate or hamper exchange.2 This legal foundation for exchange is illustrated in a broad range of common-law and (to a lesser extent) statutory contexts. The assignment of legal rights takes place at two separate times. First