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

• DOI: http://doi.org/10.1111/eufm.12086
• Published date: 01 September 2016
• Date: 01 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

E-mail: sabri.boubaker@get-mail.fr

Pascal Nguyen

NEOMA Business School, Rouen, France

E-mail: pascal.nguyen@neoma-bs.fr

Wael Rouatbi

Paris School of Business, Paris, France

E-mail: w.rouatbi@psbedu.paris

Abstract

We investigate the role of multiple large shareholders (MLS) in corporate risk-

taking. Using a sample of publicly listed French family firms over the period

20032012, 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 firms that are more susceptible to agency conflicts. 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

eon,

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

responsibility.

European Financial Management, Vol. 22, No. 4, 2016, 697–745

doi: 10.1111/eufm.12086

© 2016 John Wiley & Sons, Ltd.

the important governance role played by MLS in family firms and may explain why

MLS are associated with higher firm 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 firms 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 firm’s ownership structure. La Porta

et al. (1999) calculate that 25% of the firms in their multi-country sample have

multiple large shareholders (MLS). Claessens et al. (2000) find that 32.2% of firms in

Asia have more than one large shareholder, while Faccio and Lang (2002) reveal that

39% of firms 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 firm’s 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 benefits 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 firm valuation.

Similarly, Attig et al. (2008) find that the presence of MLS helps decrease a firm’s

cost of equity.

Our purpose is to investigate the role of MLS in corporate risk-taking. This issue is

critical since insufficient risk-taking is likely to result in lower firm 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-

diversified 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 firm on to the next generation (Anderson and Reeb, 2003;

Burkart et al., 2003). This suggests that family firms will be biased toward conservative

strategies. Shleifer and Vishny (1986) underline that risk avoidance is one of the most

significant costs that large undiversified shareholders can impose on a firm. In this

context, the presence of MLS is expected to positively influence a firm’s risk-taking

behaviour. Other blockholders, with significant wealth at stake, have similar reasons to

monitor the firm, but fewer opportunities to extract private benefits. Hence, their main

concern should be the firm’s value creation activities, especially when they are families

or financial institutions. Accordingly, the presence of MLS should help alleviate the

negative influence 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 firms,

which implies that the influence of MLS will be more significant.

Using a large sample of publicly listed French firms over the period 20032012, we

show that the presence of an LCS is associated with significantly lower risk-taking. This

result is driven by family owners, who lack adequate diversification and have strong

incentives to protect their private benefits of control (Anderson and Reeb, 2003; Faccio

et al., 2011; John et al., 2008). Furthermore, we find that the greater the excess of their

control rights over their cash-flow rights (excess control), the lower the firm’s risk-

taking. Given their prevalence, we focus on family-controlled firms to analyse the

influence 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 firm’s expected performance rather than by the average

squared deviation from the firm’s 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 firm performance. Last but not least, a shock

affecting a firm’s 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 firm.

Our findings are robust to a number of sensitivity checks. The positive influence 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 firm-level control variables (e.g., an indicator of

group affiliation) and after matching firms based on their propensity to have multiple

blockholders. Furthermore, we show that the presence of MLS is more effective when

the firm’s internal governance is weak. More precisely, MLS appear to deter firms from

reducing risk when larger and less independent boards allow greater deviation from

optimal risk-taking. Finally, we find that blockholder identity matters. In particular, the

presence of a second largest shareholder is associated with higher risk when he/she is a

financial institution or another family.

This study makes three contrib utions to the literature. Fir st, we extend Mishra’s

(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 firms i n our sample originate

from an economy with sophisti cated financial 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 benefits is

restrained. Faccio et al. (2001) show that European firms pay higher div idends, which

is consistent with blockholder mo nitoring, whereas Asian firms 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) find

that MLS help decrease a firm’s 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 benefits is

more constrained.

© 2016 John Wiley & Sons, Ltd.

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