Conflicts of Interest or Aligned Incentives? Blockholder Ownership, Dividends and Firm Value in the US and the EU

Abstract

This paper examines the relationship between blockholder ownership, dividend policy and firm value in the largest EU and US companies during 1988–1998. Large owners may benefit other shareholders by effectively controlling company managers, but may also differ from minority investors by a preference for retained earnings, from which they derive private benefits of control. This paper analyses these effects in a non-technical way using simple correlation analysis. The level of blockholder ownership in continental Europe is found to be much higher than in the US/UK, whereas firm value is somewhat lower. A negative association is found between blockholder ownership and firm value in continental Europe, which indicates that the level of blockholder ownership is excessive from a minority shareholder viewpoint. Moreover, although blockholder ownership levels in Europe are not generally associated with lower dividends, increases in blockholder ownership are found to be associated with decreasing dividends, and the stock market appears to respond more favourably to increasing dividends in companies with a high level of blockholder ownership. In the US/UK, higher blockholder ownership is generally associated with lower dividends, which are again negatively correlated with firm value. In both the EU and the US, the results therefore point to conflicts of interest between large blockholders and minority investors, but more strongly so in Europe.