Blockholder Representation on the Board: Theory and Evidence

Abstract

We present a model that helps explain why only few blockholders seek board representation despite little direct costs. In the model, inefficiently few blockholders take a board seat because it signals adverse information to outside investors, lowering trading profits. However, once taken, board seats commit blockholders to stay invested and monitor management. In light of our results, negative stock returns to appointments of blockholder-directors need not reflect rent extraction but are in line with blockholders improving performance. We present evidence consistent with our model’s predictions using German data, which mitigates endogeneity concerns and provides considerable variation in blockholders.