Governing Multiple Firms

Alex Edmans
LBS, CEPR, and ECGI;

Doron Levit
Wharton;

Devin Reilly
UPenn

April 20, 2016

Abstract

We study the e¤ect of an investor owning multiple …rms on governance through both
voice and exit, and by both equityholders and debtholders. Under common ownership, an informed investor has ‡exibility over which assets to retain and which to sell, and sells low-quality assets …rst. This increases adverse selection and thus price informativeness. In an exit model, the manager’s incentives to work are stronger since the price impact of investor selling is greater. In a voice model, the investor’s incentives to monitor are stronger since “cutting-and-running” is less pro…table. Our results contrast with conventional wisdom that common ownership always weakens governance by spreading an investor too thinly.

Keywords: Corporate governance, banks, blockholders, monitoring, intervention, exit,trading.

JEL Classification: D72, D82, D83, G34