Governing Multiple Firms

Abstract

Conventional wisdom is that, when an investor owns multiple firms, governance is weaker because she is spread too thinly. We show that common ownership can strengthen governance; moreover, the channel through which it does so applies to both voice and exit, and equityholders and debtholders. Under common ownership, an informed investor has flexibility over which assets to retain and which to sell, and sells low-quality assets first. This increases adverse selection and thus price informativeness. In a voice model, the investor's incentives to monitor are stronger since cutting-and-running is less profitable. In an exit model, the manager's incentives to work are stronger since the price impact of investor selling is greater.

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