The Effect of Large Controlling Shareholder’s Presence and Board of Directors on Firm Value

Abstract

This study investigates the effect of large controlling shareholder’s presence and board of directors on firm value.The empirical results, based on a unique database of French firms, show a positive effect of cash-flow rights held by the largest controlling shareholders suggesting that an increase in cash-flow ownership makes the controlling shareholder’s interest more closely aligned with other shareholders and incited to create value.Our results also reveal that the wedge between voting and cash-flow rights of controlling shareholders have a negative effect on firm value.Finally, our empirical evidence shows a positive but not significant effect of the board structure on firm value. In fact, efficient boards should have a majority of independent directors able to monitor and advice managers since the more directors are independent the more they are likely to provide a valuable contribution to firm valuation. However, if a board appoints busy directors, controlling and advisory capabilities on managers’ decisions will be limited since there is no sufficient time. We should therefore expect to see resource diversion and decreased firm value.