The Direction of Causality Between Blockholder Ownership and Firm Value: US and EU Evidence

We examine the causal relationship between blockholder ownership (measured by the fraction of shares controlled by large shareholders) and firm value (measured as the simple Tobin's Q) of the largest EU and US companies. Using Granger causality tests we find no significant causal effects either way in the US/UK, but in continental Europe we find a negative effect of blockholder ownership on firm value and a negative effect of firm value on blockholder ownership. Consistent with an overall non-linear relationship, as hypothesised by Morck, Shleifer and Vishny (1988) and Stultz (1988), the negative effect of blockholder ownership on firm value performance is found to be significant only for companies with high initial levels of blockholder ownership (> 10%), but insignificant for companies with low initial levels. Consistent with lower protection of minority investors and larger private benefits of control (Shleifer and Vishny, 1997) the causal relationships are only significant in continental Europe, even for high initial levels of blockholder ownership.