Large Shareholders Impact Companies' Profitability, Policies

Sep 05, 2006

Corporations can't choose their shareholders, but some might wish they could. A new 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.

“Large shareholders come with different sets of skills and preferences when they invest in a company. And with the power these shareholders wield, their skills and preferences can have significant effects on corporate profitability,” said Henrik Cronqvist, co-author of the study and assistant professor of finance at Ohio State University's Fisher College of Business.

“This is the first study that has been able to show that individual shareholders matter, not only for corporate policies, but for firm performance as well,” Cronqvist said.

Cronqvist conducted the study with Rudiger Fahlenbrach, assistant professor of finance at Ohio State . Their results are available as a working paper at the Social Science Research Newtwork.

The researchers constructed a data set in which they were able to track all large shareholders – those that hold more than 5 percent of a company's stock – for large U.S. public corporations (essentially the Standard & Poor 1,500) from 1996 to 2001. In all, they identified and followed 1,642 large shareholders.

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 said.

“But we show that individual shareholders make unique impacts, probably because of their different views and preferences concerning corporate policies.”

The results showed 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. But some large shareholders – including banks and trusts – seemed to have little impact on firm policies. Mutual funds, insurance companies, and money managers fell in the middle in terms of influence.

The results also showed that large shareholders had a wide range of effects on corporate profitability, as measured by return on assets (ROA).

The researchers ranked shareholder effects on ROA from worst (at the 0 percentile) to best (100 th percentile). The shareholder at the 25 th percentile was associated with 3 percentage points lower-than-average return in the companies in which it invested. The shareholder at the 75 th 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, return on assets was higher in companies with shareholders associated with higher pay for CEOs, suggesting that, in general, higher CEO compensation was a good deal for corporations in this sample, Cronqvist said.

But ROA was lower 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 compensation.

“This result supports the idea that some shareholders play a role in shaping pay schemes to spur growth in the company,” Cronqvist said.

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 said. “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. And these differences have real-world effects on companies' bottom lines.

“We found that the differences in shareholders' opinions, skills and preferences play a significant role in explaining corporate policies and even performance measures,” Fahlenbrach said.

Source: Ohio State University

Explore further: Can science eliminate extreme poverty?

add to favorites email to friend print save as pdf

Related Stories

Ikea buys wind farm in Illinois

Apr 15, 2014

These days, Ikea is assembling more than just furniture. About 150 miles south of Chicago in Vermilion County, Ill., the home goods giant is building a wind farm large enough to ensure that its stores will never have to buy ...

Twitter founders, CEO to keep shares after 'lockup'

Apr 14, 2014

Twitter co-founders Jack Dorsey and Evan Williams and chief executive Dick Costolo have no short-term plans to sell their shares in the social network, according to documents released Monday.

Exxon: Highly unlikely world limits fossil fuels

Apr 01, 2014

On the same day the world's scientists issued their latest report on climate change and the risks it poses to society, America's biggest oil and gas company said the world's climate policies are "highly unlikely" to stop ...

Jesse Jackson targets tech's lack of diversity

Mar 20, 2014

The Rev. Jesse Jackson is bringing a strategy borrowed from the traditional civil rights era playbook to the age of social media and a booming tech industry known for its disruptive innovation.

US telecoms push back on proposed NSA plan

Mar 03, 2014

When Apple, Google, Microsoft and other tech giants united in outrage last summer over the National Security Agency's unfettered spying, telecommunications giants such as AT&T, Verizon and Sprint —whose customers are also ...

Recommended for you

Can science eliminate extreme poverty?

Apr 16, 2014

Science has often come to the rescue when it comes to the world's big problems, be it the Green Revolution that helped avoid mass starvation or the small pox vaccine that eradicated the disease. There is ...

Japan stem cell body splashes cash on luxury furniture

Apr 14, 2014

A publicly-funded research institute in Japan, already embattled after accusing one of its own stem cell scientists of faking data, has spent tens of thousands of dollars on designer Italian furniture, reportedly to use up ...

User comments : 0

More news stories

Newlyweds, be careful what you wish for

A statistical analysis of the gift "fulfillments" at several hundred online wedding gift registries suggests that wedding guests are caught between a rock and a hard place when it comes to buying an appropriate gift for the ...

Can new understanding avert tragedy?

As a boy growing up in Syracuse, NY, Sol Hsiang ran an experiment for a school project testing whether plants grow better sprinkled with water vs orange juice. Today, 20 years later, he applies complex statistical ...

Roman dig 'transforms understanding' of ancient port

(Phys.org) —Researchers from the universities of Cambridge and Southampton have discovered a new section of the boundary wall of the ancient Roman port of Ostia, proving the city was much larger than previously ...

Crowd-sourcing Britain's Bronze Age

A new joint project by the British Museum and the UCL Institute of Archaeology is seeking online contributions from members of the public to enhance a major British Bronze Age archive and artefact collection.

Hackathon team's GoogolPlex gives Siri extra powers

(Phys.org) —Four freshmen at the University of Pennsylvania have taken Apple's personal assistant Siri to behave as a graduate-level executive assistant which, when asked, is capable of adjusting the temperature ...

Better thermal-imaging lens from waste sulfur

Sulfur left over from refining fossil fuels can be transformed into cheap, lightweight, plastic lenses for infrared devices, including night-vision goggles, a University of Arizona-led international team ...