Multiple blockholders and governance through voice: evidence from blockholder board representation

ABSTRACT

This study examines the efficacy of governance through voice in an emerging market where managers have limited financial incentives to heed stock price feedback and align their actions with shareholder interests. Using hand-collected data on blockholders serving on corporate boards for all non-financial firms publicly listed in Malaysia from 2002 to 2019, we uncover a U-shaped relationship between blockholder board representation and firm value. Below a certain threshold, blockholder board representation is negatively associated with firm value, reflecting market concerns over these directors’ ability to mitigate agency problems. However, once blockholder presence on the board exceeds this threshold, we observe a positive impact on firm value. This improvement is attributed to the enhanced governance through voice provided by active blockholder-directors.

KEYWORDS:

• Multiple blockholders
• blockholder board representation
• blockholder-director
• governance through voice
• Malaysia

JEL CLASSIFICATION:

• G30
• G32
• G34

Acknowledgements

We would like to thank two anonymous referees of the journal for their constructive comments that have improved the manuscript significantly. This manuscript is the Ph.D. research of the first author, who received financial support from the University of Malaya for her graduate study. The publication is partially funded by the Faculty of Business and Economics, Universiti Malaya Special Publication Fund.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Supplementary material

Supplemental data for this article can be accessed online at https://doi.org/10.1080/13504851.2024.2364013.

Notes

¹ Early theoretical models emphasize principal-principal conflicts, illustrating how multiple blockholders with moderate stakes can serve as effective monitors of the controlling shareholder. This monitoring helps prevent the expropriation of corporate resources to the detriment of minority shareholders (Bennedsen and Wolfenzon 2000; Bloch and Hege 2003).

² The distinction between governance through trading and governance through exit lies in the mechanisms they utilize. Governance through trading leverages the informational content of trades, reflected in stock price informativeness, to exert influence. In contrast, governance through exit relies on the act or threat of selling shares as a signal to managers.

³ In a related conceptual study, Wang (2016) discusses the impact of outside blockholders’ voting power on firm value. Notably, our focus is on blockholders sitting on corporate boards themselves to monitor, whereas Wang (2016) describes blockholders appointing their representatives to the board to pursue private benefits of control.

⁴ Additional results are provided in the ‘Online Supplementary Materials’.

⁵ Our preliminary analysis does not include governance through exit due to the unavailability of data on blockholders’ share sales volume. Additionally, we are unable to examine the channel of managerial sensitivity to stock prices, as data constraints prevent the construction of wealth-performance sensitivity (WPS) and pay-performance sensitivity (PPS) measures.

Additional information

Funding

The work was supported by the Universiti Malaya Special Publication Fund and Universiti Malaya Student Financial Aid.