Family control, multiple institutional block-holders, and informed trading

Abstract

This paper investigates how large family shareholders and institutional block-holders jointly influence informed trading and firm valuation in the Hong Kong stock market. It combines market microstructure research with studies on the governance roles of multiple block-holders and finds that institutional block-holders rely on their relative controlling power vis-à-vis family owners to mitigate problems associated with informed trading. They also use their ownership rights to improve the structure of informed trading. However, these governance roles are predominantly exercised by pressure-resistant institutional block-holders. Informed trading reduces firm valuation, while an improvement in its structure increases valuation. Therefore, the governance roles of controlling families and pressure-resistant institutional block-holders may have different implications in terms of investors’ perceptions of private information risk.

Keywords:

• ownership structure
• family control
• institutional block-holders
• informed trading
• Hong Kong

JEL Classifications:

• D82
• G14
• G34

Notes

1. See Cap 485 Mandatory Provident Fund Schemes Ordinance Ord. No. 4 of 1998 and Mandatory provident fund schemes authority website http://www.mpfa.org.hk for more information about the Mandatory Provident Fund Schemes in Hong Kong.