In our paper Ownership Structure, Voting and Risk, forthcoming in the Review of Financial Studies, we investigate the interaction between the ownership structure of publicly traded firms and their risk profiles. In particular, we show how the potential for conflict of interest between shareholders on risk decisions may cause the emergence of activist mid-sized investors. In turn, ownership structure affects the risk decisions that firms make.
It is natural to believe that the choice of shares to hold in a company is a trade off between diversification and control: large size comes with control at the cost of diversification. Many firms, however, have mid-sized shareholders who are neither well diversified nor have control. For example, in the United States (where it is widely agreed that regulation helps dispersed ownership), 67% of public firms have more than one shareholder with a stake larger than 5%, while only 13% are widely held and 20% have only one blockholder (Dlugosz et al., 2006). In Europe (where concentrated ownership is the norm), in eight out of the nine largest stock markets of the European Union, the median size of the second largest voting block in large publicly listed companies exceeds five percent (data from the European Corporate Governance Network). Why do such mid-sized shareholders emerge?