Two essays on the governance role of blockholders who sit on the board of directors
Marquardt, Blair B.
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I study the strategic and monitoring roles of blockholders who sit on the board of directors. Blockholders – shareholders who own a large percent of a firm – are theorized to induce discipline on management and are prevalent in the modern U.S. market. However, little is known about the circumstances that lead blockholders to take the additional step of becoming a board member. A blockholder with a seat on the board is in a unique position; he or she has a strong incentive to monitor due to his or her large financial stake in the firm and a strong ability to monitor via direct access to management. In Chapter II, I study the characteristics and economic determinants of blockholder-directors. I find that blockholders join the board under predictable conditions, including firm performance and entrenched leadership. Blockholder-directors participate less in monitoring committees and more in strategic committees than other board members, implying they serve as strategic advisors. They are paid slightly less than other directors, consistent with their lower demand for financial incentives. In Chapter III, I study the effect of blockholder-directors on their respective firms’ bank loan interest rates, covenant count, and collateral requirements. Theory suggests that blockholder-directors can simultaneously mitigate owner-manager conflicts and exacerbate shareholder-debtholder conflicts. My results are consistent with the owner-manager conflict dominating. The cost of debt and covenant count decrease in the presence of a blockholder-director, particularly an outside blockholder-director, consistent with debtholders viewing blockholder-directors as reducing a firm’s risk. Together, these research papers provide insight into the impact of a fundamental group of shareholders on the board and on the firm.