Control Motivations and Firm Growth

Abstract

This paper investigates how the control motivations of large shareholders affect firm growth through their influence on financing decisions. We use family blockholding as our laboratory since these blockholders have strong preferences to keep a tight grip on firm control. Using data on a large panel of European private firms, we estimate a structural model of firm control, financing decisions, and managerial effort in a setting with corporate taxation, costly bankruptcy, adverse selection, and agency issues to explain why firms with a control-motivated blockholder grow less compared to firms without such type of shareholders. The structural model allows us to disentangle control motivations from other frictions of importance. Our estimates indicate that family blockholders’ reluctance to issue equity and dilute control explains 66% of the growth differential between firms with control-motivated blockholders and those without in our sample.