risk reduction benefiting a large shareholder

[ajsa]

Hi David,

Could you explain how risk reduction benefiting a large shareholder may decrease firm value as mentioned in this AIM?

thanks.

Describe those circumstances when risk reduction benefiting a large shareholder may increase or decrease firm value
A large shareholder can engage in monitoring. In monitoring the company, the large shareholder can evaluate management actions. Additionally, the large shareholder can influence incentives (e.g., bonus plans, stock options). Proactive monitoring can increase value.

 

[David Harper CFA FRM]

Hi ajsa,

I am so grateful for your precision this year ... another sloppy AIM ... this refers to Stulz Chapter 3 and he never says the large shareholder could *decrease* firm value. He only says (3.4.1.) that a large shareholder may increase firm value via (i) strategic board-level input (my paraphrase) and (ii) monitoring with threat of mgmt removal...although he is theoretical, in practice this tends to refer to private equity (and even PE LBOs) where the PE firm takes a large stake and therefore a board seat and, unlike diversified shareholders, does "have a seat at the table." (although also in practice this tends to associate with debt burden, and that could arguably decrease value, it is a separate point)

(I will note this AIM error to, for GARP's attention of course)

Thanks, David