Governance by One-Lot Shares

Abstract

How to protect public investors from expropriation by controlling shareholders in firms with concentrated ownership structures continues to be a challenge for many markets including the U.S. In this paper, we examine the effect of having a token minority activist shareholder on improving investor protection, exploiting a recent, novel policy experiment in China. The experiment, conducted by the China Securities Regulatory Commission, created an institutional investor which holds 100 shares in pilot portfolio firms incorporated in three designated regions and exercises oversight in the capacity of a not-for-profit quasi-official shareholder. We find that relative to control firms, independent directors of the pilot firms are more likely to cast dissenting votes during the pilot. Improved monitoring by independent directors and activism by the token shareholder result in a reduction in tunneling related-party transactions and earnings management and an increase in the quality of mergers and acquisitions. Overall, our results shed light on a new mechanism for enhancing the protection of minority shareholders.