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Large Shareholder Entrenchment and Performance: Empirical Evidence from Canada

Authors

  • Yves Bozec,

    1. The authors are both from HEC Montréal. Financial support from the Chair in Governance and Forensic Accounting – HEC Montréal and the Social Sciences and Humanities Research Council of Canada is gratefully acknowledged.
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  • Claude Laurin

    Corresponding author
    1. The authors are both from HEC Montréal. Financial support from the Chair in Governance and Forensic Accounting – HEC Montréal and the Social Sciences and Humanities Research Council of Canada is gratefully acknowledged.
      * Address for correspondence: Yves Bozec, HEC Montréal, 3000 Chemin de la Côte-Ste-Catherine, Montréal, Quebéc, Canada, H3T 2A7. e-mail: yves.bozec@hec.ca
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* Address for correspondence: Yves Bozec, HEC Montréal, 3000 Chemin de la Côte-Ste-Catherine, Montréal, Quebéc, Canada, H3T 2A7. e-mail: yves.bozec@hec.ca

Abstract

Abstract:  Recent empirical evidence indicates that the largest publicly traded companies throughout the world have concentrated ownership. This is the case in Canada where voting rights are often concentrated in the hands of large shareholders, mostly wealthy families. Such concentrated ownership structures can generate specific agency problems, such as large shareholders expropriating wealth from minority shareholders. These costs are aggravated when large shareholders don't bear the full costs of their decisions because of the presence of mechanisms (dual class voting shares, pyramids) which lead to voting rights being greater than the cash flow rights (separation). We assess the impact of separation on various performance metrics while controlling for situations when the large shareholder has (1) the opportunity to expropriate (high free cash flows in the firm) and (2) the incentive to expropriate (low cash flow rights). We also control for when the large shareholder has the power to expropriate (high voting rights, outright control and insider management) and for the presence of family ownership. The results support our hypotheses and indicate that firm performance is lower when large shareholders have both the incentives and the opportunity to expropriate minority shareholders.

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