What Determines the Fraction of Board Seats Controlled by the Dominant Shareholder in a Company?

In their 2008 paper, Dahya, Dimitrov, and McConnell find that corporate values are lower when a higher fraction of the firm’s board of directors is associated with the dominant shareholder, especially in countries with weak legal regimes. Our study presents a simple model that is consistent with these findings. The model, however, offers a number of additional testable implications regarding the determinants of the composition of the board of directors. It predicts that more directors will be associated with the dominant shareholder in countries with weaker shareholder protection, when the dominant shareholder holds less cash flow rights and more voting rights, when the firm has lower investment opportunities, and more free cash flow, i.e. smaller need for external funds. We use the Dahya et al. (2008) dataset to provide empirical support for each of these additional predictions