The separation of control and ownership ? the ability of a small group effectively to control a company though holding a minority of its cash flow rights ? is common throughout the world, but also is commonly decried. The control group, it is thought, will use its position to acquire pecuniary private benefits ? to take money ?
and this injures minority shareholders in two ways: there is less money and the controllers are not maximizing firm value. To the contrary, we argue here that pecuniary private benefits may compensate the control group for monitoring managers and otherwise exerting effort to implement projects. There is an optimal level of pecuniary private benefit consumption, we show, that maximizes the control group?s profits, induces constrained efficient controller effort levels and compensates public shareholders for funding the firm?s projects. This result assumes that a controlling group can credibly commit not to consume more than these efficient private benefit shares. When potential entrepreneurs cannot solve this credibility problem, some ex ante efficient firms fail to form because their potential principals cannot raise money. The ability of controllers to commit is increasing in the accuracy of judicial review of controlled transactions. Private contracting, we argue, would materially improve judicial accuracy. Our principal normative recommendation therefore is to demote corporate fiduciary law from mandatory to a set of defaults.
We investigate how state Universal Demand statutes (UD) affect recruitment and retention of outside directors. UDs require plaintiffs to obtain board support before a derivative suit can commence. This requirement significantly increases the...Read more
We find that ownership changes much less over time in private firms than in public firms. The average largest shareholder in private (public) Norwegian firms keeps the same stake in 82% (14%) of two consecutive years. In private firms past...Read more
This paper examines the effect of disclosure regulation on the takeover market. We study the implementation of a recent European regulation that imposes tighter disclosure requirements regarding the financial and ownership information on public...Read more
We examine how negative liquidity shocks to households propagate to firms. We show that higher taxes on the home of private firms’ controlling shareholders are associated with higher dividend and salary payments from firms to shareholders and...Read more