Corporate Blockholders and Financial Leverage

This research investigates the relationship between corporate block ownership and firm financial leverage. Corporate blockholders, which are nonfinancial firms who hold more than five percent equity in a target industrial firm, can affect the target firm’s policies through their business relationships, monitoring, or expropriations. I find that corporate block ownership is negatively related to the target firm’s financial leverage. In addition, corporate blockholders often obtain board seats of the target firm, indicating an active involvement of corporate blockholders in governance activities. Further analysis indicates that the negative relationship between corporate blocks and leverage becomes stronger when corporate blockholders have greater board representation on the target firm, when the firm has higher agency costs, and when there is no product market relationship between corporate blockholders and the target firm. Overall, my findings suggest that corporate blockholders play an important monitoring role and can substitute for other monitoring mechanisms including leverage and institutional investors.