Shareholders' coalitions and control contestability: The case of Italian voting trust agreements

Abstract

Since ownership structures characterized by the presence of multiple large shareholders are extremely common around the world, the effects of having such a controlling structure are receiving increasing attention in literature. More than one third of Italian listed companies are controlled by coalitions of shareholders bound together by agreements called "voting trusts" which represent an interesting opportunity to study the consequences of having multiple large shareholders who share the control of firms. We perform an event-study on voting trust announcements (2004-2006), showing significant abnormal returns in both the event day and the following day. The sign of this cumulative reaction is negative for announcements of new/renewed trusts and positive in the cases of trust terminations. These findings are consistent with the "entrenchment effect" hypothesis linking the ownership structure and the firm value. As a general result, the presence of multiple large shareholders tied within a voting trust, by curbing the company's contestability is reflected in a lower valuation of the firm.