Minority Directors and Firm Value in a Principal-Principal Agency Relationship: Evidence from Italy

Moscariello Nicola, Pizzo Michele

The purpose of this study is to provide empirical evidence on the impact of minority directors on firm value (as proxied by the Tobins’ Q) in a high ownership concentration setting. Minority directors might represent an effective and efficient mechanism to alleviate principal-principal conflicts, reduce agency costs associated to the risk of self-dealing transactions and increase firm value. However, minority directors might negatively impact firm value by creating frictions within the board, increasing shareholder short-termism and limiting the ex-ante incentives of the controlling shareholders to undertake idionsyncratic investments. We find a significant negative relationship between minority directors and firm value. This association is only partially mitigated for firms characterized by lower information asymmetry. Our results shed new light on the drawbacks related to the representativeness of minority shareholders on the board, particularly in case of high uncertainty about firm’s future performance.

Key-Words: Governance e controlli interni, board, minority directors, principal-principal conflicts, ownership structure, idionsyncratic investments, firm value