Disentangling the Incentives and Entrenchment Effects of Large Shareholdings
Stijn Claessens, Simeon Djankov, Joseph P.H. Fan and Larry H.P. Lang
Journal of Finance 57, 2741-2771, 2002

The debate on the merits on large shareholdings centered on whether such ownership structure improves firm value through better monitoring of managers or reduces firm value through abusing their concentrated rights. The former is termed the incentive effects while the latter is termed the entrenchment effects. To disentangle these effects, the authors focus on the distinction between cash flow rights and control rights. Cash flow rights allow an investor to receive dividends while control rights allow an investor to make decisions via voting. When the control rights of an investor exceed his cash flow rights, he has incentives to make decisions that increase his benefits without any due increase in the firm's overall cash flows. Using a sample of 1301 publicly traded firms in eight Asian countries, the study finds that firm value increases with the cash flow ownership of the largest shareholder (consistent with the incentives effect) but decreases when his control rights exceed his cash flow ownership (consistent with the entrenchment effect).