The Value of Controlling Blockholders during the Global Financial Crisis

Speaker: Hannes Wagner, Università Bocconi

Organized by: Department of Finance

Abstract: We use the global financial crisis following the failure of Lehman Brothers in September 2008 as a natural experiment to analyze the relation between controlling blockholders and firm value in a sample of more than 8,600 firms from 40 countries. Since the crisis shocks a firm out of its equilibrium, it allows us to explicitly observe adjustments made in the valuation of firms that have different types of controlling blockholders. We find that around the world family control is associated with lower firm valuation following a financial shock. We interpret this finding as evidence that family incentives shift from beneficial investing to diverting resources. Consistent with this hypothesis, we find that the underperformance of family controlled firms obtains only for financially unconstrained firms. We also find that non-family and multiple blockholders are on net beneficial during a shock, particularly in firms that are financially constrained, indicating that a non-family blockholder may help alleviate constraints during a financial shock.