Large Block Shareholders, Institutional Investors, Boards of Directors and Bank Value in the Nineteenth Century
Share prices of modern corporations are influenced by the size and structure of boards of directors, large individual and institutional investors, and shareholder voting rights, among other governance features. It is not clear whether the same features mattered historically, given recent research suggesting that the principal concern in the nineteenth century was neither managerial self-dealing nor majority shareholder expropriation that might reduce the returns to common shareholders. Rather, at many nineteenth-century corporations, common shareholders were also customers and shareholding offered preferential access to the firms' goods and services. Using modern empirical tools in a study of banks, this study finds evidence supporting the shareholder-as-customer model. Bank values responded positively to the presence of large-block individual shareholders (those more concerned with access to loans) and negatively to large-block institutional investors (those more concerned with dividend returns than access). Moreover, firm value declined as directors consumed larger fractions of a bank's loans, which reduced the bank's ability to extend credit to other shareholders.
I thank Henry Hansmann and Mariana Parglender for sharing an early draft of their 2012 working paper. Eric Hilt and Danielle Zanzalari offered helpful comments on an earlier draft. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.