Shareholder Homogeneity and Firm Value: The Disciplining Role of Non-Controlling Shareholders

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Abstract
We study how the shareholding structure of a firm affects its stock price and profitability. We argue that the degree of shareholder homogeneity affects firm value. Homogeneous shareholders act as a disciplining device on managers, inducing them to be more transparent and to engage less in value destroying activities. This leads to higher firm profitability, higher stock price and lower volatility. Shareholder homogeneity represents an alternative and indirect source of corporate governance based on the stock market. We test this hypothesis by using a dataset containing information on all the shareholders for each firm in Sweden from 1995 to 2001. We construct two proxies for shareholder homogeneity: the first is based on the age cohort of the shareholders, and the second on their degree of college interaction. For each firm, we measure the degree of homogeneity of all shareholders. Using this proxy, we show that greater homogeneity increases firm profitability and returns, and reduces analysts' forecasting errors and dispersion, and stock volatility.

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