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“Does Fed policy affect blockholder behavior in U.S. publicly
traded firms?”
AUTHORS Halil D. Kaya, Nancy L. Lumpkin-Sowers
ARTICLE INFO
Halil D. Kaya and Nancy L. Lumpkin-Sowers (2017). Does Fed
policy affect blockholder behavior in U.S. publicly traded
firms?. Investment Management and Financial Innovations,
14(1-1), 153-159. doi:10.21511/imfi.14(1-1).2017.01
DOI http://dx.doi.org/10.21511/imfi.14(1-1).2017.01
RELEASED ON Tuesday, 25 April 2017
RECEIVED ON Monday, 13 February 2017
ACCEPTED ON Wednesday, 05 April 2017
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JOURNAL "Investment Management and Financial Innovations"
ISSN PRINT 1810-4967
ISSN ONLINE 1812-9358
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© The author(s) 2017. This publication is an open access article.
businessperspectives.org
Investment Management and Financial Innovations, Volume 14, Issue 1, 2017
Halil D. Kaya (USA), Nancy L. Lumpkin-Sowers (USA)
Does Fed policy affect blockholder behavior in U.S. publicly traded
firms?
Abstract
This paper documents the empirical relationship between ownership concentration and monetary policy to fill out the
picture for when ownership concentration is likely to change within U.S. publicly traded firms. The sample is drawn
from the Dlugosz et al. (2006) data set for firms between 1996 and 2001. The authors explore the patterns between the
Federal Reserve’s policy position and ownership concentration rather than asserting causal direction between the two.
This empirical paper tests alternative theories on blockholder activism by examining whether “voice” or “exit” is more
dominant under contractionary monetary policy. Using the series of same direction changes in the Federal Funds Rate
to establish time periods as a proxy for monetary policy in the U.S., nonparametric tests show that there are more
blockholders per firm, the sum of their blockholdings in percentage terms is higher, and the total percentage held by the
blockholder in U.S. firms is greater under contractionary policy periods. This supports an active theory of blockholder
behavior in corporate governance.
Keywords: monetary policy, blockholder, ownership, Federal Reserve.
JEL Classification: G30, G32, G34, G38.
Received on: 13th of February, 2017.
Accepted on: 5th of April, 2017.
Introduction©
Do general macroeconomic conditions affect
ownership concentration in U.S. firms? Recent
literature on corporate governance makes it clear
that the presence of a large stockholder, where large
includes any block holding with a 5% ownership
stake, can influence firm decision making (Clifford
and Lindsey, 2016; Edmans and Manso, 2011), but
the catalyst for blockholder activism is less fully
considered. Specifically, when the Federal Reserve
tightens monetary policy, indicating a check on the
heat in the economy, do blockholders view this as a
signal to vote with their feet and sell their shares?
Alternatively, do they bolster their positions in the
company, taking advantage of lower prices in the
market overall, thereby seeking a bigger role as an
owner?
In theoretical terms, we are really testing whether
the investor with blockholder status assumes an
active monitoring role or a more passive one
through exit. Our presumption is that the
blockholder is likely to be a more informed investor
and will recognize quickly the first signs of trouble
in the economy. The blockholder’s reaction to
government policy signals is more open to debate,
however. There seem to be considerable amounts of
© Halil D. Kaya Nancy L., Lumpkin-Sowers, 2017.
Halil D. Kaya, Ph.D., Associate Professor of Finance, Northeastern
State University, USA.
Nancy L. Lumpkin-Sowers, Ph.D. CFA, Associate Professor of
Finance, Berea College, USA.
This is an Open Access article, distributed under the terms of the
Creative Commons Attribution-NonCommercial 4.0 International
license, which permits re-use, distribution, and reproduction, provided
the materials aren’t used for commercial purposes and the original work
is properly cited.
literature on both sides of this monitoring issue to
support each alternative. On the one hand, Clifford
and Lindsey (2016) show that certain types of
blockholders will take a very active role in
governing. They find that active blockholders are
associated with firms that link CEO pay to
performance more and that have stronger operating
results. On the other hand, Edmans (2009)
demonstrates that blockholders may be able to
achieve the results they want from management
effectively through the threat of exit. This may be
enough to curb the agency problem in a number of
situations. Thus, seeing whether the blockholder
increases or decreases her ownership concentration
based on signals on economic conditions from the
government may help us to better understand
whether the active or passive role is more dominant
among U.S. publicly traded firms.
Patterns in the data employed in this study (Dlugosz
et al., 2006) suggest to us that blockholders are
assuming a more active position when the Federal
Reserve places a check on an overheating economy.
Using the series of same direction changes in the
Federal Funds Rate to establish time periods as a
proxy for monetary policy in the U.S.,
nonparametric tests show that there are more
blockholders per firm, the sum of their
blockholdings in percentage terms is higher, and the
total percentage held by the blockholder in U.S.
firms is greater under contractionary policy periods.
This might suggest more active engagement among
blockholders as economic conditions tighten.
The government is an important actor in our
financial markets, because it often sets the
foundation for expected business conditions. By
identifying the patterns in block holdings given
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Investment Management and Financial Innovations, Volume 14, Issue 1, 2017
changes in government policy, the small investor
may better understand whether the blockholder is
serving as an active monitor of a firm. This will make
the corporate governance mechanism at work more
clear, but it also may provide a signal of firm value. If
the blockholder increases the holdings as tighter
economic conditions are identified, then, this is likely
to convey an active commitment to the prospects for
the firm.
The paper proceeds as follows: section 1
summarizes the theoretical findings underpinning
this empirical examination. Section 2 outlines three
testable hypotheses that emerge from the theory.
Section 3 examines the pattern of results in our data
and the last section provides a synopsis of our
findings and elaborates on the next steps in this
investigation.
1. Literature review
Our problem here considers the role of the
blockholder, whether it be passive or active, against
the backdrop of changing market conditions, so that
we are really drawing from what has emerged as three
distinct areas of the literature on corporate
governance.
1.1. Blockholders and government policy. At
first, the literature investigated whether the presence
of the blockholder was significant in U.S.
corporations at all, particularly for insiders, and
looked for its presence across different points in
time (see the following for early contributions:
Mikkelson and Partch, 1989; McConnell and
Servaes, 1990; Holderness et al., 1999; La Porta et
al., 1997, 1998, 1999, 2000, 2002). The underlying
presumption was always that U.S. publicly traded
firms were understood to be diffuse, while those
outside the U.S. and England were believed to
operate with much more insider concentration levels
(for good examples, see: Becht and DeLong, 2005;
Denis and McConnell, 2003, Franks et al., 2008, La
Porta et al., 1999).
There is not a great deal in the literature that
juxtaposes blockholder behavior against the
backdrop of changing government policy or altered
macroeconomic conditions. Morck, Wolfenzon and
Yeung (2005) examine the connections between
ownership concentration, resource allocation, and
economic growth. The argue that, outside the
United States and the United Kingdom, familial
control through pyramids, firm crossholdings, and
powerful voting rights leads to a situation where
control rights do not correlate with invested capital.
This leads to the classic agency problem, the
misallocation of resources, and slower economic
growth for the economy overall. Here the causation
runs from control, which is greater than investment,
to slower growth. Government policy, however, is not
explicitly identified as a causal factor that might
impact ownership concentation and blockholder
behavior.
1.2. Blockholder as passive monitor. More recent
papers examine the idea of passive monitoring
through exit or even just the threat of exit. The free
rider problem and institutional barriers to
shareholder activism can constrain a large
shareholder from investing expensive resources in
active ways (Edmans, 2009). When a blockholder is
aware that the manager is engaging in very risky
projects or holding back from value-enhancing
activities within the firm, the best path might simply
be to sell the holding rather than endure public
scrutiny that would come from formal shareholder
proposals or by making votes transparent. Admati
and Pfleiderer (2009) explore this threat in
something they call the “Wall Street Walk,” finding
that blockholder threats to sell their stake reduces
agency costs where the project or activity would
reduce shareholder value, but may increase agency
costs in situations where the targeted activity, if
done, would be value-enhancing. This builds on
literature from Bhide (1993) and Coffee (1993),
which both argue that such behavior hinders good
corporate governance, but Palmiter (2002), in
looking at mutual fund voting practices, recognized
that the “threat to exit” was a mechanism of control.
Block ownership behavior can move market prices
after all and it might be easier for managers to hear
the shareholder at the onset.
Edmans and Manso (2011) argue that firms that
have a larger number of blockholders will see
coordination problems naturally emerge between them
and this means that control through trading behavior
becomes an effective alternative to active monitoring
of managerial efforts. Further, thinking through the
choice of “voice” or “exit” as agency control
mechanisms suggests not only substitution, but also
complementarity, especially the more liquid the
market (Edmans, Fang and Zur, 2013). Bharath,
Jayarman and Nagar (2013) distinguish between the
threat of exit and acutal exit, finding that the threat of
exit is less strong when the market is less liquid.
1.3. Blockholder activism amid blockholder
heterogeneity. In a literature review of investor
activism, Denes et al. (2016) argue that shareholder
activism works when it is associated with block
ownership. Cronqvist and Fahlenbrach (2009) point
out that not all blockholders are the same or have
the same motivations. It is important to distinguish
between the different types of blockholders,
external versus internal, affiliated versus business
pressure insensitive, recognizing that blockholder
heterogeneity is likely to lead to different
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Investment Management and Financial Innovations, Volume 14, Issue 1, 2017
behavioral motivations. Clifford and Lindsey (2016)
concur that it is difficult to see a measurable impact
due to the blockholder when considering all
blockholders as a group. By separating blockholders
into active and non-active types, they find that
active blockholder types do have an effect on CEO
compensation and firm performance. Activism is
important for firm performance.
2. Hypotheses
There is room in the literature for investigating
ownership concentration across time and across
perceived market conditions within the United States.
The way in which block ownership proportions
change across expansionary and contractionary
monetary policy conditions adds one more piece to the
greater puzzle of what constitutes good corporate
governance. The range of findings, as well as the lack
of focus on when blockholder prevalence grows or
recedes leaves the empirical question of its magnitude,
given the economic environment, still unanswered.
There are three hypotheses that might explain
blockholder motivation under changing monetary
policy.
Hypothesis 1: Blockholders decrease their stake in
the corporation by voting with their feet during
contractionary policy times.
Under this hypothesis, the better informed
blockholder will find it easiest to sell their stakes
when it looks like the economy might slow down,
and firm profits might be compromised. The
informed blockholder is looking for greener
pastures under this scenario.
Hypothesis 2: Blockholders increase their
ownership stake as a means to control the expected
downward slide in profitability when the Federal
Reserve signals contractionary monetary policy.
Here, the role of the investor holding blocks of
stock is much more active. An increase in control
would indicate the need for the firm to tighten its
corporate governance belt and provide a check for
management as they move into leaner times.
Hypothesis 3: Blockholders do not change their
concentration of ownership under changing
monetary policy.
Either the blockholder does not react to changing
monetary policy or cannot react to changes in
monetary policy, because her role is a passive one.
Perhaps the holding is part of an index strategy
under this scenario.
It seems reasonable that any of these motivations
might dominate blockholder reactions to a change in
monetary policy. The choice becomes an empirical
question that theory alone is not able to answer.
3. Empirical results
Dlugosz et al. (2006) create a standardized data set
on blockholders in the United States between 1996
and 2001, by removing the classic mistakes and
biases regularly found in the Compact Disclosure
reports. We use the Dlugosz et al. (2006) dataset to
identify the prevalence and percentage of
blockholding among U.S. publicly traded firms. The
sample includes 7,649 blockholder observations
across 1,913 publicly traded US companies across a
six year period.
To capture monetary policy conditions for the U.S.
economy, we looked for changes in the Federal
Funds Rate to create periods of expansionary and
contractionary monetary policy. Table 1 shows five
distinct periods of time for when the Federal Funds
Rate was either decreasing or increasing. Starting in
January 1996, we looked for the month when the
Federal Funds Rate would change course, either
moving up after a series of months when it had been
falling or shifting down after a period where it had
last increased.
Table 1. Series of consecutive, same-direction
changes in the Fed Funds Rate
Series Increasing/Decreasing Month/Year of first
rate change
Monthly
observations in
series
1
D
01/96
14
2
I
03/97
18
3
D
09/98
9
4
I
06/99
19
5
D
01/01
12
Our first monetary policy period is an expansionary
one, lasting from January 1996 to March 1997, for a
total period of 14 months. During this time, the
Federal Funds Rate never increased. Then, in March
1997, the Federal Reserve increased the Rate and did
not decrease it again until September 1998. This was a
period of contraction. Through this process, we
identified periods of expansion and contraction over
six years. The number of months included in each
period of time varies depending on the policy
decision.
Table 2 shows our sample blockholder observations
over the 1996-2001 period. Panel A shows the
number of blockholders present among the 1,913
companies in our sample over the six-year time
period, while Panel B breaks down the blockholding
sample by percentage ownership over the five
monetary policy periods established in Table 1
above.
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Investment Management and Financial Innovations, Volume 14, Issue 1, 2017
Table 2. Sample firms
Panel A: Annual
1996
1997
1998
1999
2000
2001
All
All
1,130
1,046
1,510
1,387
1,336
1,240
7,649
Panel B: Across monetary policy periods
Exp. policy
Cont. policy
All
All
3,662
3,987
7,649
<5%
487
476
963
5%-10%
481
471
952
10%-15%
424
430
854
15%-25%
739
901
1,640
25%-50%
1,192
1,326
2,518
>50%
339
383
722
Panel A redistributes the 7,649 blockholder
observations by year for the 1,913 firms in the six
year sample. An even split of the observations
would have been 1,274 per year, so you can see
that the observations peaked in 1998 and fell
away a bit from there. For Panel B, the first row
shows the way that the sample of total ownership
concentration is split between expansionary and
contractionary policy periods. Approximately half
of the firm-year observations are within each
policy period as shown by the row title “All”. The
rows below that show the number of blockholder
observations given the ownership concentration
percentage within the firms. The third row shows
the number of blockholder observations for firms
with a total blockholder concentration between
5% and 10%. The last row shows the number of
blockholder observations in firm observations
where total block ownership exceeds 50%.
Table 3 shows the average number of owners with
blockholdings exceeding 5% across expansionary
and contractionary policy period. The first row in
the table (denoted “All”) provides the mean and
median number of blockholders on a per firm basis
across the expansionary and the contractionary
monetary policy periods. You can see that the mean
number of blockholders rises in the contractionary
policy periods to 2.41 from the expansionary periods
at 2.32, but the median number of blockholders
remains constant at two blockholders per firm.
Table 3. Number of blockholders across monetary
policy periods
Exp. policy
Cont. policy
All
Mean
Med.
Mean
Med.
Mean
Med.
All
2.32
2.00
2.41
2.00
2.37
2.00
<5%
0.00
0.00
0.00
0.00
0.00
0.00
5%-10%
1.00
1.00
1.00
1.00
1.00
1.00
10%-15%
1.65
2.00
1.65
2.00
1.65
2.00
15%-25%
2.36
2.00
2.37
2.00
2.37
2.00
25%-50%
3.51
4.00
3.52
4.00
3.52
4.00
> 50%
4.11
4.00
4.20
4.00
4.16
4.00
The rows below “All” detail the average number of
blockholders given a range of ownership
concentration across expansionary and
contractionary monetary policy period. By
definition the average number of blockholders
with a percentage ownership below 5% is zero.
As the ownership concentration range increases,
so do the mean and the median values. For firms
with total block ownership between 5 and 10%,
the average number of blockholders for that firm-
year is one in both the expansionary and
contractionary monetary policy periods. There is
a similar pattern for firms with total block
ownership between 10% and 15%. At higher
levels of ownership concentration, however, the
average number of blockholders is a little higher
during contractionary periods. For instance, for
firms with a total block ownership between 15%
and 25%, the mean number of blockholders rises a
bit from 2.36 blockholders during expansionary
monetary policy periods to 2.37 under
contractionary policy.
Table 4 shows that the average sum of
blockholdings (%) by ownership concentration
levels and across policy periods. For the entire
sample, the average total blockholding percentage
for firms during monetary policy expansion was
23.6% and during monetary policy contraction it
was 24.34%. For firms with no block ownership,
obviously, the sum total of blockholdings in
percentage terms is zero.
Table 4. Sum of blockholdings (%) across
monetary policy periods
Exp. policy
Cont. policy
All
Mean
Med.
Mean
Med.
Mean
Med.
All
23.60
20.73
24.34
21.70
23.99
21.10
<5%
0.00
0.00
0.00
0.00
0.00
0.00
5%-10%
7.00
6.71
7.01
6.72
7.00
6.71
10%-15%
12.70
12.80
12.61
12.60
12.65
12.70
15%-25%
19.79
19.93
19.90
19.90
19.85
19.90
25%-50%
35.20
34.30
35.08
34.38
35.14
34.30
>50%
62.26
59.43
62.29
59.40
62.27
59.40
By looking at the details for each ownership range,
it is clear that the mean sum of blockholding will lie
within the ownership range as categorized.
Table 5 shows the average ownership percentage
held by the blockholders across all firm
observations. So, for all block ownership
observations, the percentage held by the average
blockholder was 12.63% under expansionary
monetary policy and 12.89% under contractionary
monetary policy.
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Investment Management and Financial Innovations, Volume 14, Issue 1, 2017
Table 5. The percentage held by the blockholders
across monetary policy periods
Exp. policy
Cont. policy
All
Mean
Med.
Mean
Med.
Mean
Med.
All
12.63
10.13
12.89
10.30
12.77
10.21
<5%
0.04
0.00
0.06
0.00
0.05
0.00
5%-10%
7.00
6.71
7.01
6.72
7.00
6.71
10%-15%
8.96
8.20
8.88
8.20
8.92
8.20
15%-25%
10.86
10.11
10.88
10.20
10.87
10.17
25%-50%
16.20
13.70
16.06
13.60
16.13
13.70
>50%
34.64
29.60
34.28
28.40
34.45
29.05
Under the breakdown of total block ownership, in
the range of no blockholders (< 5%), the average
shareholder holds 0.04% in expansionary periods
and 0.06% in contractionary periods. For the firms
with total blockholder ownership between 5% and
10%, the average percentage holding in this group
is 7% during expansionary monetary policy and
7.01% during contractionary. Where the total
ownership of blockholders is >50%, the average
blockholder only holds 34.64% during expansionary
monetary policy and 34.28% under contractionary.
In Table 6, a Wilcoxon test is employed in order to
compare the number of blockholders across
monetary policy periods. For the sample overall
(i.e., row 1), we see a higher concentration (at the
1.35% level) of blockholders per firm during the
contractionary periods for monetary policy. A
statistically significant difference of 2.41
blockholders in the contractionary period compared
to 2.32 in the expansionary period demonstrates
more blockholders when the Federal Reserve
signals tougher economic times. Though a large
change in the sample firms across the five-year
period would create autocorrelation in the estimates,
leading to an exaggeration in p-values, we found
that there are not many firms going in and out of the
sample. So, we concluded that this concern would
not materially affect our results.
Table 6. Comparison of blockholders’ investments
across monetary policy periods
Exp. policy Cont. policy
Wilcoxon
p-value
Number of blockholders
2.32
2.41
0.0135
Sum of blockholdings (%)
23.60
24.34
0.0331
Percentage held by the
blockholders
12.63 12.89 0.0714
Also notable, for the whole sample, is that
ownership concentration increases and is
statistically significantly different (at 3.31% level)
during the contractionary period, as compared to the
expansionary monetary policy period. Blockholders
owned 24.34% of their respective firms during
contractionary monetary policy periods, but only
23.6% in the expansionary period.
Table 6 also compares the percentage held by the
average blockholder across the expansionary and
the contractionary periods. Our tests show that, over
the entire sample, the blockholdings consisted of
similar portions across monetary policy periods. The
typical blockholder owned on average 12.89% of his
firm in the contractionary period versus 12.63% in the
expansionary period (at 7.14% p-value).
Conclusion
When the Federal Reserve signals that the economy
is overheating by increasing the Federal Funds Rate,
it is expected that large shareholders may begin to
worry sooner than the average investor. Large
shareholders have greater incentives to be aware
of market conditions and trends and might be
considered to be generally more informed
investors.
We expected to find a discernable difference across
policy periods in blockholder behavior, but we were
less clear as to which monitoring role would have
the strongest impact. One conjecture was that when
the government signaled that the economy was
overheating and went as far to raise the Federal
Funds Rate in that belief, that large shareholders
would exit the stock at a high point to find better
investment opportunities.
Empirically, there are statistically significant signs
that the blockholder takes on a bigger role when the
Federal Reserve signals a contractionary policy.
This suggests support for the blockholder as an
active monitor, no matter his type. Blockholders
increase their ownership stake, which also
increases their control, perhaps as a means to
prevent a slide in the firm’s performance. This
would be a defensive reaction to prevailing
market indicators. At the same time,
contractionary periods may also provide
opportune times to increase ownership and
control because the cost of doing so would be
relatively lower when compared to expansionary
policy periods. A deeper look here at blockholder
type may help us to discern between these
motivations.
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