CORPORATE CONTROL AND FIRM PERFORMANCE: DOES THE TYPE OF OWNERS MATTER?July 20, 2011
Within agency theory, ownership structures determine the distribution of corporate control that lead to the nature of agency conflict specific to the firm (Barca & Becht 2001). In the dispersed firm, agency problems stem from the divergence of interest between those of managers and those of owners, where the free riding problem associated with diffused shareholders has been quoted as leading to a weak monitoring. Shleifer and Vishny (1986) argue that large shareholders might serve as a governance mechanism as a significant ownership provides the holders with the incentive and power to vote against management actions. Accordingly, it is asserted that blockholder facilitates disciplinary action and creates the condition necessary for effective corporate governance (Smith & Walter 2006). Empirical works claim that the presence of a blockholder may mitigate the agency problem as this type of owner has the incentive to monitor and the power to discipline management (Clyde 1997; Jones, Lee & Tompkins 1997; Jiambalvo, Rajgopal & Venkatachalam 2002). Moreover, Maug (1998) argues that monitoring by large shareholders is also associated with the capital gain associated with their private information from monitoring actions, where such benefit is theoretically supported since the trade-off between liquidity and control does not exist.