Controller-Induced Depression – Possible but Not Expected
White paper, 2024
A persistent question in finance litigation is whether the presence of a controlling stockholder in a publicly traded company necessarily causes a depression of its stock price. In particular, the issue has arisen in several cases in both the Delaware Chancery Court and Delaware Supreme Court. Much of the evidence from those opinions seems to indicate that minority shares of such companies trade at a discount, although others introduce at least some ambiguity into this evaluation.
In a research paper published by Analysis Group affiliate David Denis, Managing Principal Gaurav Jetley, Manager Hailey Nguyen, and a coauthor assess the economic evidence for the idea that a controlling stockholder exerts a negative effect on the stock price of a controlled firm. They first review the academic literature, which provides no consensus for this phenomenon; it indicates, instead, that controlling shareholders can have both positive and negative consequences for minority shareholders.
Second, they update the empirical evidence on this topic by studying a sample of firms in the S&P 1500 as of 2010 and 2020, testing whether controlled firms differ as to operating, valuation, and financial metrics from a matched set of non-controlled firms. They find no significant differences in firm performance between the two groups and conclude that there is “no empirical basis to presume that, all else equal, the mere presence of a controlling shareholder systematically causes the stock price of a company to be depressed and thus precludes the stock price from being a reliable indicator of firm value.”
Dr. Nguyen will present the paper at the ALEA 2025 Annual Meeting, hosted by the American Law and Economics Association. Read more about the event here.