Multiple Large Shareholders and Corporate Risk‐taking: Evidence from French Family Firms

Published date01 September 2016
Date01 September 2016
Multiple Large Shareholders and
Corporate Risk-taking: Evidence
from French Family Firms
Sabri Boubaker
Champagne School of Management, Groupe ESC Troyes en Champagne, 217, Av. Pierre Brossolette,
CS 20710, 10002 Troyes CEDEX, France; IRG, Universit
e Paris Est, Cr
eteil, France
Pascal Nguyen
NEOMA Business School, Rouen, France
Wael Rouatbi
Paris School of Business, Paris, France
We investigate the role of multiple large shareholders (MLS) in corporate risk-
taking. Using a sample of publicly listed French family rms over the period
20032012, we show that the presence, number and voting power of MLS are
associated with higher risk-taking. Our results suggest that MLS help restrain the
propensity of family owners to undertake low-risk investments. This effect is much
stronger in rms that are more susceptible to agency conicts. The results highlight
We thank Yakov Amihud, Narjess Boubakri, Jerry Bowman, John Doukas (Editor), Sadok El
Ghoul, Angelica Gonzalez, Omrane Guedhami, Elaine Hutson, Pierre-Guillaume M
Samir Saadi, Walid Saffar, Christoph Schneider, Ewa Sletten, Ariane Szafarz and two
anonymous referees for their helpful comments and suggestions on earlier versions of
the paper. We are grateful for the comments made by seminar participants at Centre Emile
Bernheim (Solvay Brussels School of Economics and Management), CREM Finance
(IRG, IAE de Rennes), CRCGM (University of Auvergne), Institut de Recherche en Gestion
(University of Paris Est), European Financial Management Association (EFMA), Barcelona,
Spain (2012), Multinational Finance Society (MFS), Krakow, Poland (2012), Financial
Markets and Corporate Governance Conference, Melbourne, Australia (2012), 5th Annual
Research Symposium in Business and Economics, American University of Sharjah, UAE
(2013), 8th Portuguese Finance Network Conference, Vilamoura, Portugal (2014) and Paris
Financial Management Conference, Paris, France (2015). All errors are our own
European Financial Management, Vol. 22, No. 4, 2016, 697745
doi: 10.1111/eufm.12086
© 2016 John Wiley & Sons, Ltd.
the important governance role played by MLS in family rms and may explain why
MLS are associated with higher rm performance.
Keywords: risk-taking, ownership structure, family fir ms, private benefits of
control, contestability, corporate governance
JEL classification: G30, G32, G34
1. Introduction
A large body of literature shows that the ownership of publicly listed rms tends to be
concentrated in the hands of a few large shareholders (Faccio and Lang, 2002;
Holderness, 2009; La Porta et al., 1999). Besides the largest controlling shareholder
(LCS), other blockholders are often present in a rms ownership structure. La Porta
et al. (1999) calculate that 25% of the rms in their multi-country sample have
multiple large shareholders (MLS). Claessens et al. (2000) nd that 32.2% of rms in
Asia have more than one large shareholder, while Faccio and Lang (2002) reveal that
39% of rms in Europe have at least two large shareholders. These blockholders play
an important governance role. They monitor the LCS (Bolton and von Thadden, 1998;
Pagano and Roëll, 1998), compete for the rms control (Bloch and Hege, 2001), or
form large controlling coalitions that are better aligned with the interests of minority
shareholders (Bennedsen and Wolfenzon, 2000). On the negative side, blockholders
may collude to share divisible private benets of control (Zwiebel, 1995) or trade on
private information (Kahn and Winton, 1998). However, the balance of evidence
suggests that the presence, number, and voting power of MLS have a positive impact
on corporate governance. Maury and Pajuste (2005), Laeven and Levine (2008) and
Attig et al. (2009) show that MLS are associated with higher rm valuation.
Similarly, Attig et al. (2008) nd that the presence of MLS helps decrease a rms
cost of equity.
Our purpose is to investigate the role of MLS in corporate risk-taking. This issue is
critical since insufcient risk-taking is likely to result in lower rm value (Low, 2009).
Moreover, corporate risk-taking has been linked to long-term economic growth (Barro,
1991; DeLong and Summers, 1991). We hypothesise that the LCS has strong incentives
to shun risk, particularly in the case of family owners, because the LCS tends to be under-
diversied and may gain more from diverting corporate resources than from pursuing
risky investments. For family owners, retaining control is another sensitive issue because
families endeavour to pass the rm on to the next generation (Anderson and Reeb, 2003;
Burkart et al., 2003). This suggests that family rms will be biased toward conservative
strategies. Shleifer and Vishny (1986) underline that risk avoidance is one of the most
signicant costs that large undiversied shareholders can impose on a rm. In this
context, the presence of MLS is expected to positively inuence a rms risk-taking
behaviour. Other blockholders, with signicant wealth at stake, have similar reasons to
monitor the rm, but fewer opportunities to extract private benets. Hence, their main
concern should be the rms value creation activities, especially when they are families
or nancial institutions. Accordingly, the presence of MLS should help alleviate the
negative inuence of the LCS and result in higher risk-taking. Finally, we argue that the
© 2016 John Wiley & Sons, Ltd.
698 Sabri Boubaker, Pascal Nguyen and Wael Rouatbi
incentives of the LCS to decrease risk-taking are stronger in poorly-governed rms,
which implies that the inuence of MLS will be more signicant.
Using a large sample of publicly listed French rms over the period 20032012, we
show that the presence of an LCS is associated with signicantly lower risk-taking. This
result is driven by family owners, who lack adequate diversication and have strong
incentives to protect their private benets of control (Anderson and Reeb, 2003; Faccio
et al., 2011; John et al., 2008). Furthermore, we nd that the greater the excess of their
control rights over their cash-ow rights (excess control), the lower the rms risk-
taking. Given their prevalence, we focus on family-controlled rms to analyse the
inuence of MLS. Our main result is that MLS are associated with higher risk-taking.
Consistent with Adams et al. (2005), we measure risk-taking at each point in time by the
absolute deviation from the rms expected performance rather than by the average
squared deviation from the rms average performance over the whole period. This
approach preserves the panel structure of the data instead of forcing the panel to collapse
into a single cross-section. In addition, it provides a more accurate measure of risk, since
it takes into account predictable changes in rm performance. Last but not least, a shock
affecting a rms performance at a given time is not carried over to the whole sample
period. Accordingly, the relationship between ownership structure and risk-taking can
be evaluated over several quasi-independent periods instead of depending on a single
observation per rm.
Our ndings are robust to a number of sensitivity checks. The positive inuence of
MLS remains unchanged whether we use lagged MLS variables, different proxies for
MLS (e.g., the Shapley value), or different measures of risk-taking (e.g., return on assets
volatility and research and development (R&D) intensity). Our core evidence remains
unchanged when we include additional rm-level control variables (e.g., an indicator of
group afliation) and after matching rms based on their propensity to have multiple
blockholders. Furthermore, we show that the presence of MLS is more effective when
the rms internal governance is weak. More precisely, MLS appear to deter rms from
reducing risk when larger and less independent boards allow greater deviation from
optimal risk-taking. Finally, we nd that blockholder identity matters. In particular, the
presence of a second largest shareholder is associated with higher risk when he/she is a
nancial institution or another family.
This study makes three contrib utions to the literature. Fir st, we extend Mishras
(2011) analysis of emerging ma rkets by showing that MLS are asso ciated with higher
risk-taking in a developed eco nomy. Indeed, the French rms i n our sample originate
from an economy with sophisti cated nancial institutio ns and effective legal syste ms
(Djankov et al., 2008; La Porta et al., 1998). Estimates of control premiums by Dyck
and Zingales (2004) suggest th at, in France, the extraction of private benets is
restrained. Faccio et al. (2001) show that European rms pay higher div idends, which
is consistent with blockholder mo nitoring, whereas Asian rms pay low er dividends,
implying collusion among blockholders. This suggeststhat the effect of MLS might be
different in a European coun try. Consistent with this arg ument, Attig et al. (2008) nd
that MLS help decrease a rms cost of eq uity in Asia, but not in Europe. La Por ta
et al. (1999) and Claessens et al. (2002) underscore the fact that, i n Asia, poor
corporate disclosure and w eak enforcement of the rul e of law greatly facilitat e the
expropriation of minority shar eholders. However, our resu lts indicate that MLS are
able to play a positive role in a context where the ex traction of private benets is
more constrained.
© 2016 John Wiley & Sons, Ltd.
Multiple Large Shareholders and Corporate Risk-taking 699

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