Is there shareholder expropriation in the U.S.?
An analysis of publicly traded subsidiaries
Vladimir Atanasov
Assistant Professor
Economics & Finance
Faculty Profile
Co-authors Audra Boone (University of Kansas), David Haushalter (Pennsylvania State University)
The value of controlling shareholders has been widely debated. On the one hand, a large shareholder can help ameliorate the standard owner-manager agency problem by providing valuable monitoring activities. On the other hand, controlling shareholders can extract private benefits at the expense of minority (non-controlling) shareholders. Whether the existence of a controlling shareholder increases or reduces firm value has been the subject of many studies and remains an open question.
In this paper the authors examine the risk of minority shareholder expropriation in U.S. publicly-traded subsidiaries. The degree of agency problems in a parent-subsidiary relationship can be particularly high, because parent managers control both the parent corporation and the subsidiary, but their wealth is likely to be tied directly only to parent firm performance. By engaging in tunneling or other wealth expropriating activities, parent managers can increase parent firm valuation, and consequently their personal wealth, at the expense of subsidiary performance. Such transfer of value from the subsidiary to the parent is most effective when the parent controls less than 50% of subsidiary stock and does not consolidate the subsidiary on its books.
The authors examine the performance of 264 subsidiaries created via equity carve-outs between 1985 and 2000. They find that subsidiaries in which parent companies retain a significant minority stake perform poorly. Operating performance is poorest among minority-owned subsidiaries in which there is an overlap of executives between the parent and subsidiary. They also find a significant
decrease in operating performance for subsidiaries when their ownership structure changes from being majority- to being minority-owned by their parent. In addition to underperforming operations, minority-owned subsidiaries have poor stock returns and lower Tobin’s q. In contrast, neither majority-owned nor fully-divested subsidiaries have any abnormal performance.
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