Large Shareholders Impact Profitability, Policies
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The study found that some large shareholders are associated with lower-than-average returns for the companies in which they invest, while other shareholders are linked to higher-than-average returns in their companies.
“This is the first study that has been able to show that individuals shareholders matter, not only for corporate policies, but for firm performance as well,” Cronqvist explained.
Cronqvist conducted the study with Rudiger Fahlenbrach, assistant professor of finance at Ohio State. The researchers constructed a data set in which they were able to track all large shareholders – those holding more than 5 percent of a company’s stock – for large U.S. public corporations, such as the Standard and Poor 1,500, for the years 1996 to 2001. In all, 1,642 large shareholders were identified.
The results indicate that some types of shareholders had more impact on corporate policies than others. As would be expected, activist shareholders, such as financier Warren Buffet, had strong effects on companies. In addition, pension funds, corporations and private equity firms mattered a lot in shaping corporate policies and their bottom lines. Some large shareholders, however, seemed to have little impact on firm policies. Shareholders having minimal impact include banks and trusts. Mutual funds, insurance companies and money managers fall somewhere in the middle in terms of influence.
The results also showed that large shareholders had a wide range of effects on corporate profitability measured by return on assets (ROA). Researchers ranked shareholder effects on ROA from worst or the 0 percentile, to best, the 100th percentile. The shareholder at the 25th percentile was associated with 3 percentage points lower-than-average return in companies in which it invested. The shareholder at the 75th percentile was associated with 7 percentage points higher-than-average return for its companies.
“That’s a range of 10 percentage points, which is quite large,” Fahlenbrach said.
The study was also able to link specific policies pushed by shareholders with profitability in the companies they invested in. For example, ROA was higher in companies with shareholders associated with higher pay for chief executive officers (CEOs), suggesting that, in general, higher CEO compensation was a good deal for corporations in this sample. ROA was lower, however, in firms with shareholders linked to diversifying acquisitions.
Results also showed how large shareholders pushed different corporate policies depending on the goals they had for the companies they invested in. For example, firms with shareholders who were associated with growth strategies, such as pursuing mergers and acquisitions, also seemed to pay their CEOs higher.
“This result supports the idea that some shareholders play a role in shaping pay schemes to spur growth in the company,” Cronqvist stated.
One question may be whether large shareholders really do shape policies in the companies they invest in, or if they simply invest in companies in which they share similar values and policy preferences. With their multi-year data set, the researchers were able to examine company policies before individual shareholders invested in them, to determine whether these shareholders had an impact.
“We found that changes in policies we noted happened after the shareholder comes in, and not in the years before,” Cronqvist explained. “That indicates the shareholders had something to do with the policy changes.”
Overall, the results show that large shareholders don’t all think and act alike, according to Fahlenbrach. These differences in thought and action have real-world effects on companies’ bottom lines.
“We found that the differences in shareholders’ opinions, skill and preferences play a significant role in explaining corporate policies and even performance measures,” Fahlenbrach concluded.
This is not the first study to examine the impact of large shareholders on corporations, Fahlenbrach said.
“But other studies have assumed, at least implicitly, that all large shareholders affect corporations in the same way, and to the same magnitude,” he added. “But we show that individual shareholders make unique impacts, probably because of their different views and preferences concerning corporate policies.”