Unveiling the role of multiple blockholders: Evidence from closely held firms

Research Question/IssueThis paper disentangles how the modes of ownership distribution among multiple blockholders and their heterogeneity shape principal-principal conflicts and, in turn, affect firm performance. The paper offers empirical evidence from a panel of Italian closely held firms over the period 2009-2014. Research Findings/InsightsWe explore the principal-principal conflicts among blockholders across two distinct control structures. When a single blockholder controls the firm, principal-principal conflicts are shaped by the trade-off between the alignment effect and the monitoring effect. In this scenario, we find that the relationship between the two largest blockholders' ownership concentration and firm performance is U-shaped. Furthermore, we show that heterogeneity across the two largest blockholder types has a negative effect on performance. In the absence of a controlling blockholder, firm control is usually obtained by forming coalitions, and principal-principal conflicts involve the blockholders inside the controlling coalition and the other shareholders. We find that the ownership distribution and heterogeneity across blockholder types are negatively related to the size of controlling coalitions, and in turn, the size of controlling coalitions is positively correlated with firm performance. Theoretical/Academic ImplicationsWe contribute to principal-principal segment of agency theory by showing that the presence of a controlling blockholder is a key variable that alters the relationship between blockholders' ownership concentration and corporate performance, as well as the relationship between heterogeneity across the largest blockholders and firm performance. Practitioner/Policy ImplicationsOur findings across control structures in which multiple blockholders are present suggest that blockholders take different roles depending on the control structure in which they are involved. The implications of these findings relate to the design of the ownership structure of a firm.