Bennedsen, Mo en; Wol enzon, Daniel
Wo king Pape
An Economic Analysis o In es o P o ec ion in
Co po a ions Wi h Concen a ed Owne ship
Wo king pape , No. 15-2000
P o ided in Coope a ion wi h:
Depa men o Economics, Copenhagen Business School (CBS)
Sugges ed Ci a ion: Bennedsen, Mo en; Wol enzon, Daniel (2000) : An Economic Analysis o
In es o P o ec ion in Co po a ions Wi h Concen a ed Owne ship, Wo king pape , No. 15-2000,
Copenhagen Business School (CBS), Depa men o Economics, F ede iksbe g,
h ps://hdl.handle.ne /10398/7551
This Ve sion is a ailable a :
h ps://hdl.handle.ne /10419/208437
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Ins i u o Na ionaløkonomi
Handelshøjskolen i Københa n
Wo king pape 15-2000
AN ECONOMIC ANALYSIS OF INVESTOR
PROTECTION IN CORPORATIONS WITH
CONCENTRATED OWNERSHIP
Mo en Bennedsen Daniel Wol enzon
Depa men o Economics - Copenhagen Business School
Solbje g Plads 3, DK-2000 F ede iksbe g
An Economic Analysis o In es o
P o ec ion in Co po a ions Wi h
Concen a ed Owne ship
Mo en Bennedsen
¤
& Daniel Wol enzon.
¤¤
Decembe 2000.
Abs ac
We p o ide a heo e ical analysis o he ela ionship be ween in es o p o ec-
ion and he pe o mance o co po a ions wi h concen a ed owne ship. We
p esen an incomple e con ac ing model o a co po a ion wi h concen a ed
owne ship and apply i o analyze wo ypes o in es o p o ec ion. Fi s ,
we analyze he cos and bene¯ s o imposing supe -majo i y equi emen s on
ce ain impo an policy issues in he co po a ion. Second, we analyze why
i can be in he in e es o he co po a ion o impose es ic ions on he ee
ans e abili y o sha es.
¤
Copenhagen Business School, CEBR and CIE.
Co esponding add ess: Depa men o
Economics, CBS, Solbje g Plads 3, DK 2000 F. Email: [email protected]. Phone:
(
+45
)
38
15 26 07. Fax:
(
+45
)
38 15 25 76.
¤¤
Michigan Business School and Chicago Business School.
1 In oduc ion
A cen al issue in he co po a e go e nance li e a u e du ing he las wen y
yea s has been he connec ion be ween he deg ee o agency p oblems and he
pe o mance o co po a ions. The size o an agency p oblem is closely ela ed
o he abili y o owne s o p o ec hei in es men . In pa icula , his has
been emphasized in he so called incomple e con ac ing li e a u e (e.g. Ha
1995), which ocuses on he consequences o agen s no being able o w i e
comple e con ac s on all possible u u e con ingencies. Ob iously, in a wo ld
o incomple e con ac s i is impo an o unde s and how in es o s' sha e
holdings can be p o ec ed ei he h ough a co po a ion's cha e o h ough
he legal sys em and how such in es o p o ec ion a®ec s he pe o mance o
a co po a ion. This is he opic o he p esen pape .
A ecen empi ical li e a u e has s udied his issue in a global con ex
(
see
La Po a, Lopez-de-Silanes and Shlei e 1998 and La Po a, Lopez-de-Silanes,
Shlei e and Vishny 1998). They ha e shown a ious impo an ac s abou
owne ship s uc u es and p o ec ion o in es o s a ound he wo ld. Fi s ,
concen a ed owne ship is common all a ound he wo ld and is domina ing
ou side he Anglo-Saxian wo ld. Second, he e is e idence o he eal agency
p oblem in many ¯ ms a e be ween di®e en classes o sha eholde s and no
be ween he managemen eam and he g oup o owne s as he adi ional
co po a e go e nance li e a u e has ocused on. Thi d, he deg ee o p o ec-
ion o sha eholde s in gene al and mino i y sha eholde s in pa icula a ies
a lo ac oss coun ies. Finally, he deg ee o sha eholde s p o ec ion has eal
implica ions o di idend policy and owne ship s uc u e.
All hese ea u es ¯ s badly wi h he adi ional model in co po a e go -
e nance o a public aded ¯ m wi h dispe sed and weak owne s ha a e
exploi ed by a powe ul and sel in e es ed managemen eam. Ins ead, i
may seem mo e app op ia e o analyze how di®e en classes o sha eholde s
o m and how some g oups o sha eholde s seize con ol o e he co po a ion
and exploi o he g oups o sha eholde s
(
Shlei e and Vishny 1997).
In he p esen pape we begin o analyze he link be ween p o ec ion o
1
sha e holding and he pe o mance o co po a ions wi h concen a ed owne -
ship. In pa icula , we a e in e es ed in analyzing how p o ec ion o mino i y
sha eholde s can a®ec he e±ciency and he dis ibu ion o en in a co -
po a ion. Ob iously, in es o p o ec ion can be deli e ed in a la ge numbe
o ways. To s uc u e he analysis we ha e chosen o ocus on wo opics:
Imposing supe -majo i y equi emen s on cen al policy issues in he in he
co po a ion and allowing o ee ans e abili y o sha es in a co po a ion.
We ha e picked hese wo opics because hey seem o be e y impo an no
only acco ding o he global ac s men ioned abo e, bu also in he co po a e
law li e a u e
(
see Cla k 1986, O'Neal ??, o Eas e b ook and Fischel 1991).
To ou knowledge, his pape is he ¯ s o mal economic analysis o hese
issues.
In Sec ion 2 we se up an incomple e con ac ing model o a co po a ion
wi h concen a ed owne ship. I is a simple model whe e he owne s o a
co po a ion hi e a sel in e es ed manage o un he ¯ m. The manage can
be chosen among he owne s o be an ou side manage wi h no owne ship
s ake in he ¯ m. The owne s can ¯ e he manage i a majo i y
(
which
size can be s ipula ed in he co po a e cha e o by co po a e law) wishes
o do so. Associa ed wi h he manage 's ac ions is a dis ibu ion o p i a e
bene¯ s o he manage and he owne s. Di®e en ac ions a e suppo ed by
di®e en g oups o owne s. Thus, ou model endogenize he o ma ion o
a ious classes o owne s. The manage 's need o be backed by a majo i y
o he owne s gi es ise o a con°ic be ween he majo i y and he mino i y
sha eholde s and he ou come o his con°ic is a®ec ed by how sha eholde s
a e p o ec ed.
In Sec ion 3 and 4 we apply he model o analyze he cos and bene¯ s
o p o iding p o ec ion o mino i y sha eholde s h ough changing he size
o he majo i y necessa y o ¯ e he manage . Allowing g oups o mino i y
sha eholde s a e o igh o ¯ e he manage , na u ally limi s he amoun
exploi a ion hese mino i y sha eholde s can be exposed o. Legal schola s
ha e long a gued ha he e is a ade-o® be ween p o ec ing mino i y sha e-
holde s' in es men and he °exibili y he managemen need o un he ¯ m
2

e±cien ly. Fo ins ance, Eas e b ook and Fischel no ice ha D a e s o he
o ganizing documen s o a closely held co po a ion canno a oid a ade-o®.
On he one hand, hey mus p o ide some p o ec ion o mino i y in es o s
o ensu e ha hey ecei e an adequa e e u n on he mino i y sha eholde 's
in es men i he en u e succeeds. On he o he hand, hey canno gi e
he mino i y oo many igh s, o he mino i y migh exe cise hei igh s
in oppo unis ic ashion o di e e u ns." (Eas e b ook and Fischel 1991,
p.238.).
In Sec ion 3 we show ha imposing supe -majo i y equi emen s imp o es
e±ciency when he manage can ake non-con ac ible ac ions and he e a e
comple e in o ma ion abou he ac ions aken by he manage . The in ui ion
is ha wi h a supe -majo i y equi emen , he manage mus ha e suppo
om mo e sha eholde s han unde a simple majo i y ule. This limi s he
manage 's oppo uni ies o pu suing p ojec s ha a e no in he in e es o
all he owne s. We also a gue ha none o he owne s should objec o such
an supe -majo i y in he ce ain y case.
We hen, in Sec ion 4, in oduce unce ain y abou he alue o he co -
po a ion which gi e ise o a ade-o® be ween p o ec ion o mino i y sha e-
holde s and he likelihood o cos ly deadlocks, de¯ned as si ua ions whe e
owne s decide o eplace he manage . We show ha unce ain y can inc ease
he payo® o he majo i y sha eholde s in he absence o a supe -majo i y
ule. Hence, p o iding e o igh s o a g oup o mino i y sha eholde s may
be esis ed by he managemen and he exis ing majo i y sha eholde s bo h
because i may dec ease e±ciency and because i dec eases he en heses
agen s can ob ain om he ¯ m. In sho , we es ablish he ade-o® desc ibed
in he legal li e a u e, bu only in he case o unce ain y.
Sec ion 5 analyzes he consequences o es ic ing sha eholde s igh o
esale hei sha es. F om a ¯ s glance i could be a gued ha allowing ex-
ploi ed mino i y sha eholde s o op ou o he co po a ion limi s he amoun
hese sha eholde s can be exploi ed and, hus, inc eases e±ciency. Howe e ,
his a gumen is °awed, because he balance o powe in he co po a ion,
i.e. he dis ibu ion o majo i y and mino i y sha eholde s, is endogenous.
3
Fo ins ance, we show, ha allowing sha eholde s o sell cash °ow wi hou
selling o es al e s he balance o powe in he co po a ion, such ha he new
g oup o majo i y sha eholde s has a endency o concen a e o es bu no
cash °ows. This dec ease e±ciency in he co po a ion h ough inc easing he
amoun o sha e holding ha can be exploi ed. This a gumen explains why
mos close co po a ions ha e ules es ic ing he ans e abili y o sha es.
Cla k (1986), e e ing o close co po a ions, obse es: Sha eholde s :::
will usually wan o es ic he ans e abili y o hei sha es. ::: Some-
imes he con inuing sha eholde s will wan he exi ing sha eholde o sell o
he co po a ion, a he han o any o hemsel es, in o de o p ese e he
exis ing balance o powe '
(
Cla k
(
1986) p. 763, emphasis added).
Conclusions a e d awn in Sec ion 6 and all p oo s a e delega ed o he
appendix.
2 The Model
An en ep eneu
(
also deno ed he ini ial owne o he ounde ) seeks ¯nance
o se up a ¯ m ha a a u u e da e yields a po en ial cash °ow o size .
She sells cash °ow igh s, c,and o es, , o a numbe o ou side in es o s.
The iming o he model is as ollows,
Da e 1 Fi m es ablished a cos °<1. Founde sells owne ship s akes
i
;c
i
g,
i2I= 1; :::; Ig,whe eIis he se o new owne s. De¯ne =
i
g
i
2
I
and c= c
i
g
i
2
I
.
Da e 2 A manage , m, is hi ed. The manage can be one o he owne s o an
ou side manage wi h no owne ship s ake in he ¯ m. De¯ne I
¡
m
=
In mg
(
=Ii he manage is no an owne ) and I
m
=I
¡
m
[ mg
as he se o owne s and managemen . Ha ing a manage is necessa y
o c ea e any alue in he ¯ m. The manage picks a non-con ac ible
ac ion a2A. Associa ed wi h his ac ion is a ec o o p i a e bene¯ s,
b
(
a)
i
g
I
m
, o he manage and each o he owne s. The e is a p i a e
e®o cos o he manage o choosing ac ion aequal o
(
P
i
2
I
m
b
(
a)
i
)
2
.
4
P i a ebene¯ sa e ecei edby heagen sa da e3i andonlyi he
manage is s ill p esen in he co po a ion.
Da e 2 1/2 The manage can be eplaced wi h an al e na i e manage a any poin
a e da e 2. The al e na i e manage canno do any hing excep om
canceling he ac ion chosen by he p e ious managemen . I cos s k ,
0·k<1, o eplace he manage and he decision has o be backed
by a majo i y, which size is s ipula ed in he co po a e cha e , o he
owne s.
Da e 3 I he manage is no eplaced, hen he ex pos alue o he ¯ m, gi en
ac ion a,is
(
1¡P
i
2
I
m
b
(
a)
i
) . The ex pos alue is paid ou in di idend
o all owne s. In addi ion, he owne s and he manage ecei e hei
p i a e bene¯ , b
(
a)
i
; i 2I
m
.
I he manage is eplaced, he ex pos alue o he ¯ m is
(
1¡k)
which is paid ou in di idend o he owne s.
Assump ion 1.
Assume Ais so la ge ha any non-nega i e dis ibu ion o p i a e bene¯ s is
easible, i.e. he manage chooses b2R
#
I
m
+
.
Assump ion 1 implies we can supp ess he ac ion, a, and ins ead assume
he manage chooses a dis ibu ion o non-con ac ible p i a e bene¯ s. De-
¯ne he agg ega e le el o di e sion as ¹
b´P
i
2
I
m
b
i
.
How is he manage selec ed? We can dis inguish be ween a leas h ee
ypes o ¯ ms:
(
a) Some ¯ ms will need a p o essional manage wi h some
speci¯c skills he in es o s do no possess, i.e. hese ¯ ms hi e an ou side
manage .
(
b) In many ¯ ms he ounde will keep on ope a ing he ¯ m
a e ha ing sold he bulk o he ¯ m o ou side owne s.
(
c) In o he ¯ ms,
he new owne s will go oge he and pick a manage among hem sel . The
ocus in he p esen analysis is on how in es o p o ec ion a®ec s e±ciency in
5
co po a ions and no on how managemen is elec ed.
1
We he e o e simply
assume ha he manage is in place a da e 2. The e a e many quali¯ed
agen s who a e able o manage he ¯ m implying ha he ese a ion wage
is compe ed down o ze o. I he manage is ¯ ed she ecei es also ze o u ili y
om unning he ¯ m, bu she keeps any owne ship s ake she possesses.
3 In es o p o ec ion when ¯ m alue is ce -
ain
In his sec ion, we cha ac e ize he equilib ium o he model when he ¯ m
alue, , is ce ain and known o all agen s. We a e in e es ed in he conse-
quences o ha ing di®e en majo i y equi emen s on he amoun o di e sion
in he model, on he dis ibu ion o p i a e en among owne s and manage ,
on e±ciency and on he p obabili y o ha ing a dead-lock, de¯ned as a si u-
a ion whe e he manage is eplaced.
Le ºbe he amoun o o es necessa y o eplace he manage . Fo
ins ance º= 50 pc . is a simple majo i y ule and º= 10 pc . means ha any
g oup o sha eholde s ha possess a leas 10 pc . o he ou s anding o es
can ¯ e he managemen . Fo any se A2I
m
,deno ec
(
A)=P
i
2
A
c
(
A)and
(A)=P
i
2
A
(A) as he amoun o cash °ow ( espec i e o es) ha g oup
Apossesses. De¯ne 5( ;º)as he amilyo s ong coali ions o owne s, i.e.
he amily o se s o owne s which suppo is su±cien o keep he manage
in place, i.e. P
i
2
A
[
m
g
i
>1¡ºpc . 8A25
(
;º):A s ong coali ion
is hus an elemen o 5
(
;º). Fu he mo e, le 4
(
;º)´ A25
(
;º):
1
This is analyzed in ou ela ed wo k on close co po a ions
(
see Bennedsen and Wol en-
zon 1998
)
. The model p esen ed he e can be hough o as an incomple e con ac ing e -
sion o ou p e ious model o a close co po a ion. The incomple e con ac ing amewo k
is mo e sui able o analyze he opic o in es o p o ec ion and in addi ion i a oids some
o he assump ions o ou p e ious model: ¯ s , he ac ion aken by a single manage
is a
non-con ac ible
ac ion who canno be in°uenced by anyone. Second, he e is no
boa d in he model, only owne s and a manage , hence, he pa icula p ocedu e o selec
he boa d
(
o ing ules, numbe o boa d membe s, e c. e c.
)
is no an issue. Finally,
he e is no imposed any exogenous dis ibu ion ule o he di e ed cash °ow among he
sha eholde s.
6
Á
i
(¯
i
;±)2 i e; keepgis owne i's o e on eplacemen o he manage .
The co ec equilib ium o use is a pe ec Baysian equilib ium, de¯ned
as
De¯ni ion 2
(
Equilib ium
)
.
¯( );±( )g; ¹
i
(¯
i
;±)g
i
2
I
¡
m
; Á
i
(¯
i
;±)g
i
2
I
¡
m
gis an equilib ium i and only
i
1) ¯( );±( )gmaximizes he manage 's expec ed u ili y gi en
¹
i
(
¯
i
;±)g
i
2
I
¡
m
; Á
i
(
¯
i
;±)g
i
2
I
¡
m
g.
2
)
Á
i
(
¯
i
;±)maximizes owne i's expec ed u ili y gi en
¯
i
;±g;¹
i
(
¯
i
;±); Á
j
g
j
2
I
¡
m
n
i
g
g.
3
)
¹
i
(
¯
i
;±)is upda ed acco ding o Bayes ule o all i.
We analyze he model o he p e ious sec ion unde some simpli ying
assump ions.
Assump ion 2.
1
)
The eisnodeadweigh losso di e sion.
2
)
The manage is an ou side weal h cons ained manage .
3
)
Owne ship is dis ibu ed acco ding o a one-sha e-one- o e assump ion.
Pa 1) simpli¯es exposi ion. No ice, he e a e s ill wo kinds o e±ciency
cos le in he model, namely he en le o he weal h cons ained manage
and he eplacemen cos when he manage is ¯ ed. Pa 2) educes no a ion
in he ollowing. Pa 3) makes li e easie and can be mo i a ed by he
op imali y o one-sha e-one- o e in he case whe e he e is no ¯ ing cos and
an ou side manage .
We say ha he equilib ium is a sepa a ing equilib ium i i sa is¯es
De¯ni ion 2, all agen s s a egies a e pu e and i ei he ±
(
)6=±
(
)o
¯
i
(
)6=¯
i
(
) o somei2I. I all agen s s a egies a e pu e and ±
(
)=±
(
)
and ¯
i
(
)=¯
i
(
) o all i2I, hen he equilib ium de¯ned in De¯ni ion 2
is deno ed a pooling equilib ium. Fu he mo e, o analy ical con enience,
we sol e o a symme ic equilib ium, whe e all owne s in a gi en class a e
13

ea ed equal, i.e. all majo i y owne s ( espec i e all mino i y owne s) ecei e
hesameamoun o p i a ebene¯ s.
Lemma 1. The ollowing cons ain s a e necessa y condi ions o a sym-
me ic pooling equilib ium:
(1) M(¯;±)24( ;º);
(2) ¯
i
=08i2InM(¯;±);
(
3) ¯
i
+±c
i
¸
(
1¡k)E
1
(
¯
i
;±)c
i
8i2M
(
¯;±);
(
4) X
i
2
I
¯
i
+±·
(
1¡k) ;
(
5) ¯
m
(
)= ¡X
i
2
I
¯
i
¡±¸0:
Theo em 2.
1
)
·
2
¡
(
1
¡
k
)
c
(
M
¤
)
(
1
¡
k
)
c
(
M
¤
)
is a necessa y and su±cien condi ion o he exis ence
o a pooling equilib ium.
2
)
Necessa y condi ions o he exis ence o a sepa a ing equilib ium wi hou
dead-locks a e,
(
a)P
i
2
I
¯
i
(
)+±
(
)=P
i
2
I
¯
i
(
)+±
(
);
(
b) <
2
¡
(
1
¡
k
)
c
(
M
¤
)
(
1
¡
k
)
c
(
M
¤
)
:
The heo em shows ha he se o sepa a ing equilib ia wi hou dead-
locks is small and a p obe subse o he se o pooling equilib ia. The
sepa a ing equilib ia wi hou deadlocks a e suppo ed by he owne s always
belie e ha he s a e is good whene e he manage does no ake he equi-
lib ium ac ion and he manage in equilib ium is indi®e en be ween he wo
ac ions. Thus, we do no wan o pu o much emphasize on hese equilib ia.
We p oceed by cha ac e izing he se o symme ic pooling equilib ia.
Lemma 1 ells us ha such equilib ia does no ha e deadlocks.
The bes symme ic equilib ium o he majo i y owne s a e he one whe e
condi ion
(
5) in Lemma 2 binds, i.e. whe e he e is ze o en le o he
manage in he bad s a e o he wo ld.
14
Co olla y 1. The majo i y owne s' p e e ed equilib ium is gi en by,
±=0;
¯
i
=08i2InM
¤
;
¯
i
=min 1
c(M
¤
) ;(1¡k) g8i2M
¤
;
¯
m
( )=½max 0; (1 ¡(1 ¡k)c(M
¤
)) gi = ;
max ¡ ;(1¡(1 ¡k)c(M
¤
)) gi = ;
¹
i
(
¯
i
;±)=1
28i2I:
The bes equilib ia o he manage is he ones whe e he majo i y owne
is indi®e en be ween ¯ ing he manage o no , i.e. whe e condi ion
(
3) in
Lemma 2 binds.
Co olla y 2. The manage 's p e e ed equilib ium is gi en by,
±=0;
¯
i
=08i2InM
¤
;
¯
i
=
(
1¡k)E
1
(
¯
i
;±)8i2M
¤
;
¯
m
(
)= ¡
(
1¡k)c
(
M
¤
)E
1
(
¯
i
;±):
¹
i
(¯
i
;±)=1
28i2I:
We ha e d awn hese solu ions in Figu e 2. The ho izon al axis measu es
he di®e ence in he alue o he ¯ m in he wo s a es o he wo ld, which
e°ec s he deg ee o unce ain y in his model. The e ical axis shows
he pe sha e uni amoun o en o each majo i y owne . Since di idends
a e ze o in he absence o any dead weigh loss o di e sion, ¯
i
measu es
he e u npe sha e omajo i yowne i.
2
The a ea be ween he solid line
and he dashed line cons i u e he se o symme ic pooling equilib ia in he
model.
2
No ice, his is whe e he one-sha e-one- o e assump ion simpli¯es he exposi ion. Al-
e na i ely, we could ha e de¯ned symme ic ea men o majo i y owne s as he same
amoun o p i a e bene¯ pe uni o cash °ow.
15
Dead-locks
Bes eq. o maj. owne s
Bes eq. o
manage .
A
A’
B
C
C’ D’ D
_
_
((1/c(M*)) _
(1-k) _
(1/c(M*)(1-k)) _ ((2-c(M*)(1-k))/c(M*)(1-k)) _
_i, i in M*
Figu e 2: Amoun o p i a e bene¯ o majo i y owne s in he bes and
wo s symme ic pooling equilib ium.
The solid line pic u es he equilib ium p e e ed by he majo i y owne s.
The amoun o en o each owne depends on he amoun o unce ain y. I
is less han C he manage pays ou (1 ¡k) in each s a e o he wo ld
implying ha he majo i y owne s oge he ecei e (M
¤
)(1 ¡k) .The
manage he sel ecei es ¡
(
M
¤
)
(
1¡k) in he good s a e and ¡
(
M
¤
)
(
1¡
k) in he bad s a e. In his case, he majo i y owne s' e u n is as i he e
was only a good s a e in he wo ld. Thus, he manage pays all he cos o
ha ing p i a e in o ma ion, she would be s ic ly be e o® i he s a e o
hewo ldwasobse able,sinceshewould henbeable opaylessp i a e
bene¯ ou o he majo i y owne s in he bad s a e o he wo ld. Unce ain y
imp o es e±ciency in his equilib ium, since i educes he en he manage
can ex ac o he sel in he bad s a e o he wo ld.
A poin C, ¡c
(
M
¤
)
(
1¡k) = 0. Thus he weal h cons ained manage
16
canno pay mo e ou in he bad s a e o he wo ld. A his poin he maxi-
mum en pe sha e in a symme ic equilib ium is achie ed. Fo 2
(
C; D)
he manage pays ou o he majo i y owne s in bo h s a es o he wo ld.
This lea es he manage wi h mo e en in he good s a e o he ¯ m.
A poin Downe i's expec ed alue o he ¯ m is su±cien ly high in
equilib ium, such ha she expec s o bene¯ om ¯ ing he manage . Hence,
i >Da symme ic pooling equilib ium is no sus ainable anymo e. Ins ead
one o wo ypes o dead-lock occu s: ei he he e exis s a mixed s a egy
equilib ium whe e he manage is ¯ ed wi h some posi i e p obabili y; o ,
he e is no equilib ium a all. In he ¯ s case he ¯ m's alue dec eases
because he expec ed ¯ ing cos is s ic ly posi i e. In he second case we ha e
he decision acuum o en desc ibed in he legal li e a u e
(
see o example
Eas e b ook and Fischel 1991).
3
ThedashedlineinFigu e2 ep esen s hemanage 'sp e e edequilib ium.
In his equilib ium he majo i y owne 's pe sha e p i a e bene¯ is kep down
o whe e she is indi®e en be ween ¯ ing he manage o no . Again, his
equilib ium is sus ainable up o poin D, whe e he manage pays ou all he
¯ m's aluein hebads a eo hewo ld.Theexpec edamoun o en le
o he manage is equal o he en a ained by he manage i he s a e o
he wo ld was obse able and equal o
1
2
+
1
2
. Unce ain y, he e o e, does
no imp o e no dec ease e±ciency in his equilib ium.
In sum, i he e is a limi ed amoun o unce ain y, i.e. <D, unce ain y
as such is no bad o e±ciency eason, because i may o ce he manage
wi h p i a e in o ma ion o pay ou mo e di idend in he bad s a e o he
wo ld. Howe e , i he e is signi¯can unce ain y, i.e. >D,i gi e ise o
cos ly dead-locks in he ¯ m. In his case unce ain y can dec ease e±ciency.
Figu e 2 p o ides an in e es ing insigh in o wha happens when he in-
es o p o ec ion inc eases h ough equi emen s o supe majo i y by in-
c easing º. This is illus a ed by he a ows in he ¯gu e. An inc ease in º
inc eases he amoun o cash °ow in e nalized by any g oup o owne s wi h
3
In he nex i e a ion o he pape we in en o p o ide a cha ac e iza ion o he mixed
s a egy equilib ia.
17
he leas cash °ow p ope y and his has wo e®ec s on he se o equilib ia.
Fi s , i lowe s he maximum en pe sha e a majo i y owne ecei es.
This happens because he maximum en is a ained when he manage pays
ou all he ¯ m's en in he bad s a e o he wo ld and his alue is no a -
ec ed by he o ing ule. Howe e , since he e a e now mo e sha es included
in he majo i y, each sha e ecei es less en . This e®ec is ep esen ed by he
shi in he solid line om poin A o poin A
0
. When he e is li le unce -
ain y, i.e. when <C
0
, hen inc easing he majo i y equi emen s inc eases
e±ciency wi hou lowe ing any owne 's en e en in he bes equilib ia o
he owne s. The e o e, in he limi when he unce ain y disappea s, we ge
he same insigh as in he p e ious sec ion, namely ha equi ing supe -
majo i ies o e managemen eplacemen inc eases wel a e and inc eases he
e u n o a g oup o p e ious mino i y sha eholde s' e u n, wi hou lowe -
ing he e u n o any o he g oup o sha eholde s. I is wo h emphasizing,
howe e , ha he mo emen om C o C
0
implies ha he maximum le el
o each owne is a ained a a lowe le el o unce ain y.
The second e®ec is he educ ion in he se o equilib ia wi hou dead-
locks. This is ep esen ed by he shi om poin D o D
0
. A pooling equi-
lib ium equi es ha he majo i y owne s a e o e -compensa ed in he bad
s a e such ha he equilib ium compensa ion is la ge han hey expec o
ecei e by ¯ ing he manage . Hence, in he bad s a e, he manage uses
some o he en she exploi s om he mino i y sha eholde and dis ibu e
his o he majo i y sha eholde s. When he e is an inc ease in he size o
he cash °ow hold by any se o owne s possessing he minimum cash °ow
p ope y, he e is less sha e holding le o exploi and, he e o e, less en o
dis ibu e among a la ge g oup o majo i y sha eholde s. Thus, he esou ce
cons ain in he bad s a e is mo e binding implying ha dead-locks occu
o a lowe le el o unce ain y. In hese cases, an inc ease in he majo -
i y equi emen lowe s wel a e, since we mo e om an equilib ium wi hou
dead-locks o a si ua ion whe e ei he he manage is ¯ ed wi h a ce ain
p obabili y o he e exis s no equilib ium.
F om he ounde 's pe spec i e, he bene¯ o inc easing ºdepends on
18

which equilib ium he ¯ m ends up in. I he e is li le unce ain y abou he
¯ m alue, he e is no cos o imposing a supe -majo i y om he ounde 's
pe spec i e. Howe e , he bene¯ may also be limi ed i he agen s end up
in he p e e ed equilib ium o he owne s in he case o a simple majo i y.
When he e is signi¯can unce ain y he e is an inc eased cos h ough he
inc eased likelihood o a cos ly dead-lock.
I we compa e hese e®ec s o he si ua ion wi hou unce ain y, i is wo h
emphasizing ha inc easing ºimp o es wel a e o su e in he absence o
unce ain y, bu ha he e may be a adeo® be ween he inc eased likelihood
o a cos ly deadlock and he dec eased amoun o di e sion in he case wi h
unce ain y. Fu he mo e, an inc ease in he majo i y equi emen is agains
he manage 's in e es , because she has less oppo uni y o di e ing cash
°ow o he sel . Mo e su p isingly i may o en also be agains he in e es
o he exis ing majo i y owne s, pa ly because i inc eases hei chances o
incu ing cos ly dead-locks cos , pa ly because i dec eases he bene¯ hey
mayha eex ac ed om hemanage e enin heabsenceo dead-locks.
5 T ans e abili y o sha es
Close co po a ions a e cha ac e ized by ha ing concen a ed owne ship and
ha owne s equen ly choose o es ic he ans e abili y o sha es. Legal
schola s a gue ha es ic ing he ans e abili y o sha es can be a e®ec i e
way o p ese e he balance o powe in a co po a ion
(
see hequo e om
Cla k
(
1986) in he in oduc ion).
In ou model, ee ans e abili y o sha es is cos ly. The eason is ha ,
by ading sha es o imp o e he balance o powe in hei a o , sha eholde s
endupwi hamajo i ycoali ion ha concen a es o esbu no cash°ows.
F om Theo em 1 we know ha his educes e±ciency in he co po a ion.
The e o e, i is in he in e es o he ini ial owne o es ic he ans e abili y
o sha es. We p o ide an example ha illus a es his poin . Fo simplici y
we assume ha he eplacemen cos is ze o and he manage is an weal h
cons ained ou side manage .
19
Conside he ollowing owne ship s uc u e:
Vo es CashFlow
I
1
40% 40%
I
2
35% 35%
I
3
25% 25%
F om Theo em 1, he manage chooses sha eholde s 2 and 3 as he majo i y
coali ion and di e s 40 pc . o he cash °ow in he ¯ m. Hence, o he
ini ial owne , he sum o he dead-weigh cos and he cos o lea ing en o
he u u e manage is 0:4.
Now, i sha es a e adable be o e he manage chooses his ac ion, sha e-
holde 1 can sell
(
o e en gi e away o ee) one ou h o he sha es o an
ou side in es o . The new owne ship s uc u e becomes:
Vo es CashFlow
I
1
30
%
30
%
I
2
35
%
35
%
I
3
25
%
25
%
I
4
10
%
10
%
No ice ha he balance o powe in he co po a ion has been al e ed and ha
now he majo i y coali ion is o med by sha eholde s 1 and 3 wi h a cash °ow
sha e o 55 pc . The manage now di e s 45 pc . o he esou ces in he
co po a ion. Sha eholde 1 is s ic ly be e o®, since she has changed s a us
om being an exploi ed mino i y sha eholde o be an exploi ing majo i y
sha eholde . Hence, ee ans e abili y allows he owne s o dispose cash
°ows. By doing his hey become mo e a ac i e pa ne s o pa icipa e
in he majo i y coali ion. The sum o he dead-weigh cos and he cos o
lea ing en o he u u emanage isnowinc eased o0:45. Hence, he abili y
o sha eholde 1 o sell he cash °ow is bad o he ini ial owne . The e o e,
as legal schola s sugges , a es ic ion on ee ans e abili y is in he in e es
o he ini ial owne since i p ese es he balance o powe in he ¯ m.
Ob iously, we need o conside he equilib ium beha io o he h ee
sha eholde s, bu we conjec u e ha his will only make ma e s wo se. In
he case whe e he e a e no es ic ions on how cash °ow can be sold, i is
20
no ha d o cons uc an example whe e he only equilib ium is one whe e all
owne s sell all hei cash °ow implying ha he manage di e s e e y hing.
In a mo e ealis ic case whe e cash °ow only can be sold bundled o o es
acco ding o a one-sha e-one- o e ule, he lowe bound o he cash °ow
possessed by any majo i y coali ion is 50 pc .
6 Conclusion
The dis ibu ion o owne ship de e mines he alloca ion o powe in a co -
po a ion, i.e. de e mines how di®e en classes o owne s o m. Fu he mo e,
concen a ion o owne ship c ea es a con°ic be ween con olling owne s and
managemen on one side and non-con olling owne s on he o he side. In he
p esence o his con°ic we ha e s udied how a ious o ms o in es o p o-
ec ion a®ec he pe o mance o a co po a ion wi h concen a ed owne ship
and he e u n di®e en classes o owne s ecei e on hei in es men .
21
Appendix
P oo o Theo em 1
P oo .
Fi s we p o e he ollowing necessa y condi ions o
b;d
g
;
Á
i
g
i
2
I
¡
m
g
is
a subgame pe ec equilib ium:
Lemma 2.
1
)
M
(
b;d
)
2
S
(
;º
)
, i.e. he manage is no ¯ ed ex-pos .
2
)
b
i
=0
8
i
2
I
n
M
(
b;d
)
:
3
)
i
2
M
(
b;d
)
)
b
i
=max
0
;
(
1
¡
k
¡
d
)
c
i
g
4
)
M
(
b;d
)
)
=
A g
min
A
2
S
(
;º
)
c
(
A
)
´
M
¤
, i.e. he selec ed majo i y has he
minimum cash °ow p ope y.
P oo .
Pa 1
)
The maximum u ili y he manage can a ain by being ¯ ed is
c
m
.
By choosing
b
m
=
k
and
d
=1
¡
k
he manage is no ¯ ed, since
M
(
b;d
)
=
I
¡
m
,
and he manage 's u ili y is
k
+
c
m
(
1
¡
k
)
¸
c
m
.
Pa 2
)
Assume no , i.e. he e exis s an
i
s. .
b
i
+
c
i
d<
(
1
¡
k
)
c
i
and
b
i
>
0.
By choosing
b
, he manage is no eplaced, since i is a solu ion. Conside ac ion
b
0
;d
0
gi en by
b
0
j
=
b
j
8
j
2
I
¡
m
n
i
g
,
b
0
i
= 0 and
b
0
m
=
b
m
+
b
i
. No ice
d
0
=
d
and
M
(
b
0
;d
0
)
=
M
(
b;d
)
, hence he manage is no eplaced when choosing
b
0
.
Fu he mo e, he manage is s ic ly be e o®. A con adic ion.
Pa 3
)
.I
d>
1
¡
k
hen
c
i
d>
(
1
¡
k
)
c
i
implying ha
i
2
M
(
b;d
)
e en i
b
i
=0.
Thus, by he same a gumen as in Pa 2,
b
i
>
0 is ne e a solu ion. Assume
d<
1
¡
k
and
b
i
>
(
1
¡
k
¡
d
)
c
m
o some
i
2
M
(
b;d
)
. Then he manage can
de ia e by choosing
(
b
0
;d
0
)
whe e
b
0
j
=
b
j
8
j
2
I
¡
m
n
i
g
,
b
0
i
=
(
1
¡
k
¡
d
)
c
m
and
b
0
m
=
b
m
+
b
i
¡
b
0
i
>b
m
.
Pa 4
)
. Assume no , i.e.
c
(
M
(
b;d
)
)
>c
(
M
¤
)
. Conside ac ion
(
b
0
;d
0
)
gi en
by
d
0
=
d
,
b
0
i
= max
0
;
(
1
¡
k
¡
d
)
c
i
g8
i
2
M
¤
,
b
0
i
=0
8
i
2
I
¡
m
n
M
¤
,and
b
0
m
=
b
m
¡
P
i
2
I
¡
m
b
0
i
+
P
i
2
I
¡
m
b
i
=
b
m
+
(
1
¡
k
¡
d
)
(
c
(
M
(
b;d
)
¡
c
(
M
¤
)
)
>b
m
whe e we ha e used ha
(
b;d
)
sa is¯es Pa 3
)
. Hence, he manage is s ic ly
be e o® by de ia ing, a con adic ion.
Using Lemma 1, we se up he manage 's p oblem as,
max
b;d
g
(
b
m
¡
1
2¹
b
2
+
c
m
d
)
s. .
(
1
)
b
i
=0
8
i
2
I
¡
m
n
M
¤
(
2
)
b
i
=max
0
;
(
1
¡
k
¡
d
)
c
i
g8
i
2
M
(
b;d
)
(
3
)
M
(
b;d
)
=
M
¤
(
4
)
0
·
d
=1
¡
¹
b
22