Ambiguity, Disagreement, and Corporate Control

Ambiguity, Disagreement, and Corporate Control

David Dicks, Paolo Fulghieri

Series number :

Serial Number: 

Date posted :

January 01 2012

Last revised :

December 18 2013
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  • Corporate governance • 
  • Ambiguity Aversion • 
  • disagreement

We show that ambiguity aversion generates endogenous disagreement between a firm?s insider and outside shareholders. Outsiders are well-diversified, but the insider holds only equity of the firm, leading to endogenous difference of opinion.

We show that the strength of the corporate governance system depends on both firm characteristics and the composition of the outsiders' overall portfolio. A strong governance system is optimal when the value of the firm?s assets in place, relative to the growth opportunity, is sufficiently small or is sufficiently large, suggesting a corporate governance life cycle. In addition, more diversified outsiders (such as generalist mutual funds) prefer stronger governance, while outsiders with a portfolio heavily invested in the same asset class as the firm (such as venture capitalists or private equity investors) are more willing to tolerate a weak governance system, where the portfolio companies' insiders have more leeway in determining corporate policies. Finally, we find that ambiguity aversion introduces a direct link between the strength of the corporate governance system and firm transparency, whereby firms with weaker governance should also optimally be more opaque.


Real name:
David Dicks