Role of Minority Shareholders in Private Corporations

Evidence on the role of minority shareholders in private corporations is very limited. Using hand collected data on private corporations, I document evidence of excessive monitoring (or excessive influence) by minority shareholders in private corporations. I define excessive monitoring as the actual pressure by minority shareholders to influence firm decisions or the expectation of minority pressure by majority shareholders, thereby impacting efficient firm outcomes. I draw on a landmark judgment by the Texas Supreme Court in June 2014, which significantly curtailed minority shareholders’ influence in private firms. The judgment provides a natural experiment to examine how the reduced influence, brought on by the judgment, impacted the effectiveness of monitoring by minority shareholders and thereby impacted firm performance. My tests document improved firm performance after the ruling. This finding suggests that the influence that the minority shareholders had prior to the judgment, facilitated excessive monitoring of the majority shareholders. The reduced influence of minority, brought on by the judgment, provided the managers more freedom to run the firm efficiently. Further, by showing an increase in investments after the ruling, I document investments as a potential channel of monitoring by minority shareholders. The finding suggests risk aversion on the part of minority shareholders, who prefer to block risky but potentially value enhancing investments. In additional tests, I find that the impact of the ruling is more pronounced in companies with a higher likelihood of excessive monitoring by minority shareholders, e.g. poorly performing firms and small firms. This additional evidence corroborates my broad finding of over monitoring by minority shareholders.