Devin J. Reilly
University of Pennsylvania
Department of Economics
Institutional Affiliation: University of Pennsylvania
NBER Working Papers and Publications
|August 2014||Governance and Comovement Under Common Ownership|
with Alex Edmans, Doron Levit: w20420
This paper studies the corporate governance and asset pricing implications of investors owning blocks in multiple firms. Common wisdom is that multi-firm ownership weakens governance because the blockholder is spread too thinly. We show that this need not be the case. In a single-firm benchmark, the blockholder governs through exit, selling her stake if the firm underperforms. With multiple firms, the blockholder may sell even a value-maximizing firm, to disguise her exit from another underperforming firm as being motivated by a portfolio-wide liquidity shock. This reduces the manager's effort incentives and weakens governance. On the other hand, governance can be stronger, because selling one firm and not the other is a powerful signal of underperformance. Common ownership leads to firms'...