5. Conclusions
We find that firms with MLS typically have greater investment efficiency than firms with a single large shareholder. This finding remains strong after a battery of robustness tests (e.g., controlling for industry, firm and year fixed effects, difference-in-differences tests around an exogenous shock on ownership and a Heckman’s two-step approach). Data from China with rich ownership details, high time-series variations and a split-share structure reform allow these robustness tests to address the endogeneity concerns that plague most corporate governance studies.
We also find that investment efficiency is enhanced by the relative power of large shareholders vs. the largest one (as measured by their number and the ratio of their holdings to the largest holding). This governance role of MLS on the controlling shareholder is more likely through “voice” rather than “exit.” The enhanced investment efficiency of firms with MLS appears to have been due to their monitoring of the controlling shareholder and lowering potential overinvestment, but not due to their better access to financial resources. Furthermore, we find that MLS monitor the largest shareholder less in firms with “Big 4” auditors, state ownership, better regional market development and weak information asymmetry. The impact of MLS on investment efficiency is more prominent for firms with a separation between voting rights and cash flow rights of the controlling shareholder. That is, the more pronounced the agency problem and information asymmetry, the more important the governance role of MLS.
