ABSTRACT

When controlling shareholders reduce their equity stakes and increase float - the share of equity available to the public - the effect on governance, private benefit extraction, and investment is theoretically ambiguous. A smaller stake misaligns the controller's incentives with firm value, but a higher float may strengthen monitoring and deepen liquidity, lowering the cost of capital. This paper studies an Indian policy capping controllers’ stakes at 75%, using a difference-in-differences design. Ownership shifts to institutional and non-institutional investors, and trading increases. Consistent with monitoring and liquidity effects dominating misalignment, board governance strengthens, related-party expenses decline, and investment rates rise.