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We develop a new rationale for corporate spin-offs, and for the performance and value improvements following them, based on corporate control considerations. We consider a firm with multiple divisions, with incumbent management having different abilities for managing these divisions. If the incumbent loses control to a more able rival, it benefits all shareholders (including the incumbent) by increasing equity value, but involves the incumbent losing his private benefits of control. We show that a spin-off increases the incumbent's chance of losing control to such a rival. This, in turn, motivates the incumbent either to work harder at managing the firm (in order to avoid any loss of control), or to relinquish control of one of the firms resulting from the spin-off (either immediately following the spin-off, or subsequently in a control contest). We show that spin-offs will be associated with positive announcement effects and increases in long-term operating performance. Further, certain categories of spin-offs will exhibit long-term positive abnormal stock returns.

Concentrated ownership of large listed companies is widespread throughout the world, and Germany is typical in this respect. This paper proposes a method of distinguishing empirically between the beneficial and harmful effects of ownership concentration, and applies it to German data. The results show that, for most types of largest shareholder, the beneficial effects on minority shareholders of increased ownership (greater monitoring of management, and reduced incentives to exploit minority shareholders due to greater cash-flow rights) are at least as large as, and sometimes significantly larger than, the harmful effect (greater private benefits of control due to greater control rights).

We estimate private benefits of control in 39 countries using 393 controlling blocks sales. On average the value of control is 14 percent, but in some countries can be as low as ‐4 percent, in others as high a +65 percent. As predicted by theory, higher private benefits of control are associated with less developed capital markets, more concentrated ownership, and more privately negotiated privatizations. We also analyze what institutions are most important in curbing private benefits. We find evidence for both legal and extra-legal mechanisms. In a multivariate analysis, however, media pressure and tax enforcement seem to be the dominating factors. THE BENEFITS OF CONTROL OVER corporate resources play a central role in modern thinking about finance and corporate governance. From a modeling device (Grossman and Hart (1980)) the idea of private benefits of control has become a centerpiece of the recent literature in corporate finance, both theoretical and empirical. In fact, the main focus of the literature on investor protection and its role in the development of financial markets (La Porta, Lopez-de-Salines, and Shleifer (2000)) is on the amount of private benefits that controlling shareholders extract from companies they run. In spite of the importance of this concept, there are remarkably few estimates of how big these private benefits are, even fewer attempts to document empirically what determines their size, and no direct evidence of their impact on financial development. All of the evidence on this latter point is indirect, based on the (reasonable) assumption that better protection of minority shareholders is correlated with higher financial development via its curbing of private benefits of control (La Porta et al. (1997)). The lack of evidence is no accident. By their very nature, private benefits of control are difficult to observe and even more difficult to quantify in a reliable

Sweden has a high degree of separation of ownership from control through pyramids, dual-class shares, and cross-holdings. This increases the potential for private benefits of control. However, Sweden's extralegal institutions—tax compliance and newspaper circulation—are consistent with greater shareholder protection. Using data on Swedish mergers we find limited evidence of shareholder expropriation. Apparently, Sweden's extralegal institutions offset the drawback of weak corporate governance.

Swedish bankruptcy filing automatically terminates the employment of the chief executive officer (CEO) and triggers an auction of the firm. Critics of this system warn of excessive shareholder risk-shifting incentives prior to filing. We argue that private benefits of control induce managerial conservatism that may override shareholder risk-shifting incentives. By investing conservatively, the CEO increases the joint probability that the auction results in a going-concern sale and that the CEO is rehired. This uniquely implies that the rehiring probability is increasing in private control benefits, which our empirical results support. We also find that buyers in the auction screen on CEO quality. Overall, labor market discipline is dramatic, as filing CEOs suffer large income losses relative to CEOs of matched, non-bankrupt firms. Firms emerging from auction bankruptcy appear healthy as they typically go on to perform at par with industry rivals. JEL classification: G33; G34

This paper measures the value of corporate voting rights, specifically of the control block of votes, in a sample of 661 dual-class firms in 18 countries, in 1997. A consistent measure across countries is proposed. The measure is adjusted for takeover probability, block-holding costs, and dividend and liquidity differences between the share classes. The value of controlblock votes varies widely across countries. It is close to half of firm market value in South Korea, andclose to zero in Finland. The value of control-block votes is interpretedas a lower bound for actual private benefits of the controlling shareholder. The legal environment, law enforcement, investor protection, takeover regulations, andpower-concentrating corporate charter provisions explain 68% of the cross-country variation in the value of control-block votes.

This article analyzes whether publicly traded firms price differently from privately held firms in the product markets. Our empirical evidence shows that, in the U.S. newspaper industry, firms increase their prices when their ownership structure changes from private to public. The effects are robust and significant. A plausible explanation is that private owners enjoy more freedom than public managers to expand circulation and distort content, pursuing the consumption of nonpecuniary benefits of control. Additional evidence is consistent with this interpretation. Public newspapers show lower prices when insiders' ownership participation is higher. Moreover, private newspapers appear more likely than public newspapers to endorse a candidate during presidential campaigns. To my knowledge there are no previous studies comparing pricing by private and public companies. Copyright 2003, Oxford University Press.

This article disentangles the incentive and entrenchment effects of large ownership. Using data for 1,301 publicly traded corporations in eight East Asian economies, we find that firm value increases with the cash-flow ownership of the largest shareholder, consistent with a positive incentive effect. But firm value falls when the control rights of the largest shareholder exceed its cash-flow ownership, consistent with an entrenchment effect. Given that concentrated corporate ownership is predominant in most countries, these findings have relevance for corporate governance across the world.

We analyze the ultimate ownership and control of 5,232 corporations in 13 Western European countries. Typically firms are widely held (36.93%) or family controlled (44.29%). Widely held firms are more important in the UK and Ireland,family controlled firms in continental Europe. Financial and large firms are more likely widely held,while non-financial and small firms are more likely family controlled. State control is important for larger firms in certain countries. Dual class shares and pyramids enhance the control of the largest shareholders,but overall there are significant discrepancies between ownership and control in only a few countries. r 2002 Elsevier Science B.V. All rights reserved. JEL classification: G32

We present a model of the effects of legal protection of minority shareholders and of cash-f low ownership by a controlling shareholder on the valuation of firms. We then test this model using a sample of 539 large firms from 27 wealthy economies. Consistent with the model, we find evidence of higher valuation of firms in countries with better protection of minority shareholders and in firms with higher cashf low ownership by the controlling shareholder. RECENT RESEARCH SUGGESTS THAT THE EXTENT of legal protection of investors in a country is an important determinant of the development of its financial markets. Where laws are protective of outside investors and well enforced, investors are willing to finance firms, and financial markets are both broader and more valuable. In contrast, where laws are unprotective of investors, the development of financial markets is stunted. Moreover, systematic differences among countries in the structure of laws and their enforcement, such as the historical origin of their laws, account for the differences in financial development ~La Porta et al. ~1997, 1998!!. How does better protection of outside investors ~both shareholders and creditors! promote financial market development? When their rights are better protected by the law, outside investors are willing to pay more for financial assets such as equity and debt. They pay more because they recognize that, with better legal protection, more of the firm’s profits would come back to them as interest or dividends as opposed to being expropriated by the entrepreneur who controls the firm. By limiting expropriation, the law raises the price that securities fetch in the marketplace. In turn, this enables more entrepreneurs to finance their investments externally, leading to the expansion of financial markets. Although the ultimate benefit of legal investor protection for financial development has now been well documented, the effect of protection on valuation has received less attention. In this paper, we present a theoretical and empirical analysis of this effect.

Using a comprehensive set of cross-listings, we extend the bonding hypothesis by developing what we term as the relative bonding hypothesis. We hypothesize that firms seek the advantages of stronger investor protections by listing in countries whose governance is relatively better than its own. This means that firms can achieve bonding without listing in the U.S and that the governance advantages of bonding are not only for ADRs. We find that firms are more likely to choose a cross-listing destination if the host country has better governance than the home country, except those firms from countries whose managers enjoy greater private benefits of control. We also find that there is valuation premium even when cross-listing occurs outside of the U.S. The premia are even stronger if the host country has better governance than that of the home country. We conclude that although bonding might explain the existence of ADRs, relative bonding helps to explain the extensive cross-listing which occurs outside of the U.S.

International audience; The present study investigates the sources of shareholder wealth gains – as measured by cumulative abnormal returns and premiums – from going private transactions (GPTs). Using data for 314 GPTs from 18 Western European countries, we find that the announcements of GPTs generate a cumulative average abnormal return of about 22% and that pre-transaction shareholders on average receive a raw premium of about 36%. We further find that these shareholder wealth gains increase with the degree of separation of cash-flow and control rights of the pre-transaction ultimate owner and decrease with its ownership interests and with the presence of a second large shareholder. Taken together, these findings support the view that GPTs are expected to mitigate the inefficiencies induced by pre-transaction agency problems between controlling and minority shareholders. Thus, shareholder wealth gains from GPTs reflect the potential additional value that will be created under private ownership.

Spanish Abstract: En este trabajo analizamos la evolucion de la regulacion de cambios de control en Europa y estudiamos como el movimiento desde sistemas basados en la regla de mercado a sistemas con reglas de igualdad de oportunidades va de la mano de una caida en los beneficios privados del control. Estimamos los beneficios privados del control siguiendo la metodologia propuesta en Jurfest, Paredes y Riutort (2015) para una muestra de transacciones de cambio de control de empresas de 14 paises de Europa en el periodo 1985-2014 y encontramos que los beneficios privados del control han caido aproximadamente en un 4% del valor del patrimonio despues de la implementacion de reglas de igualdad de oportunidades.English Abstract: This paper studies the evolution of takeover regulation in Europe, and studies how the move from systems based on market rules towards equal opportunity goes hand an hand with a decrease in the private benefits of control. We estimate the private benefits of control following the methodology proposed in Jurfest, Paredes and Riutort (2015) for a sample of firms from 14 different European countries with a change in control in the 1985-2014 period. We find that after the implementation of an equal opportunity based regulation the private benefits of control are 4% lower as a fraction of the value of equity.

Using a dataset of European private firms, we undertake a dynamic empirical analysis of a private firm’s exit decision, previously modeled in the literature as a dichotomous, one-time choice between IPOs and acquisitions. We study how post-IPO considerations, such as the benefits arising from a potential post-IPO acquisition at a higher valuation, and the costs arising from a potential post-IPO delisting at a lower valuation, alter the initial exit trade-off between IPOs and acquisitions. Using a sequential logit model, we show that firms that are more viable against product market competition, characterized by larger private benefits of control, or lower information asymmetry, are more likely to choose an IPO over a direct acquisition as their initial exit mechanism. Post-IPO, firms that are more viable in the product market and are able to reduce information asymmetry to a greater extent using the IPO process are more likely to be acquired, while firms characterized by lower product market viability and higher residual information asymmetry are more likely to be delisted. We also quantify the valuation benefits and costs accruing to firms under alternative post-IPO scenarios. Overall, the results of our empirical analysis show how private firms may be able to incorporate the benefits and costs arising from post-IPO considerations into their initial exit decisions, and suggests how such incorporation may alter their initial exit choices.

Nordic corporate governance models have been subject to increasing interest in the international corporate governance debate. Concentrated ownership combined with reportedly low private benefits of control has been seen as a competitive model of governance. The low levels of private benefits in the Nordics have been explained as the result of the non-pecuniary nature of control benefits and social norms characteristic to the Nordic environment. However, the effects of the political environment on the corporate governance framework should not be underestimated. This paper sets out a political narrative of Nordic corporate governance, and considers the resulting regulatory implications.

Creeping acquisitions -- grabs of a company’s de facto control without the launch of a formal tender offer -- are an acquisition technique that presents many risks. Not only can stock prices be negatively affected in the short term (after the acquirer is satisfied by the stake it accumulates, the stock price is likely to drop below pre-acquisition values and the remaining shareholders are stuck with minority shares), but such acquisitions can also have long ranging consequences for the market for corporate control (too many acquisitions by suboptimal acquirers, as well as permanent loss of a company’s contestability status and therefore of any prospects to obtain a control premium), as well as in the governance of a company (de facto control can lead to the extraction of higher private benefits of control). Notwithstanding all such risks, EU corporate and M&A laws largely fail to address the issue, both at the European level and in individual member states. As a result, European public companies can easily become the target of a creeping acquisition, whereas poison pills and other defensive mechanisms have shielded U.S. companies quite effectively. This paper argues that a legislative overhaul of current regimes -- especially of the mandatory bid system -- to address creeping acquisitions may well be overreaching given the drawbacks of one-size-fits-all solutions and the risk of shutting down the market for corporate control or clamping down hedge fund activism. Instead, this paper recommends a lift on existing limitations to a company’s freedom to determine its preferred level of openness to creeping acquisitions (and takeovers more generally). European legislation should provide an optional regime whereby companies can select effective arrangements to thwart or limit creeping acquisitions.

This paper provides a legal and policy analysis of transactions between a corporation and one of its “related parties.” It first highlights the reasons why related party transactions (“RPTs”) are so common around the world. Next, it better identifies the phenomenon as a specific form of potentially abusive behaviour by dominant shareholders and managers, i.e. as an instrument for tunneling, asking why many jurisdictions provide for specific regulations on RPTs in addition to general rules or standards on tunneling. Then, it describes the main legal tools available to prevent corporate agents from diverting value from the corporation via RPTs. Further, it provides a (partially) critical assessment of the measures put forth by the European Commission to harmonize rules on RPTs within the EU, based on the previous analysis of individual legal tools. Finally, it shows that no regulation of RPTs (or tunneling) can succeed in preventing minority shareholder expropriation in the absence of sophisticated enforcement actors (specialized courts and/or active and committed securities regulators) and non-legal supporting institutions, like independent financial media and anti-tunneling social norms.

The value of vote hypothesis states that the value of differential voting rights reflects the value of private benefits of control enjoyed by controlling shareholders with superior voting rights at the expense of minority shareholders with lower voting rights. Although the extant evidence is generally consistent with this hypothesis, it is inconclusive, and based mainly on studies in developed economies. We first synthesize the evidence on this issue in the emerging economies. Next, we provide new insight on this subject with description and analysis of a proposed regulatory change for removal of the 10 % voting cap in the banking sector in India in 2005. We hypothesize that removal of the voting cap would increase the probability of a takeover and induce positive value gain for banks that the proposal relates to. Consistent with our prediction, we observe significant abnormal returns of 7.8 % for private Indian banks over the 2-day interval surrounding the announcement. Cross-sectional analyses further reveal that the valuation gain is inversely proportional to the bank’s foreign and insider ownership. This study makes important contributions to the growing literature on the valuation impact and efficiency gains of liberalization of foreign ownership restrictions in emerging markets.

This paper examines the effectiveness of six institutional quality measures, namely corruption control, effective government, political stability, regulatory quality, rule of law and voice and accountability, in inhibiting self-rewarding behaviour of boards in terms of their compensation as well as in influencing the likelihood of disclosure of individual executive salaries in IPO listings prospectuses. Using a unique and comprehensive dataset of 78 hand-collected IPO firms from across North Africa from 2000 to 2012 I find substantial evidence that government effectiveness and corruption control are important in inhibiting director self-reward and expropriation while political stability is more associated with increased likelihood of transparency in reporting of salaries. In addition firms from poor informational environments are more likely to initiate enhanced self-governance and transparency so as to overcome institutional deficiencies.

We model how a rent-protection motive drives the choice of flotation method in new equity issuance between two polar cases: rights issues and cash offers. Unexpected new blockholders would emerge in control-diluting cash offers and share in jealously guarded control benefits. But rights issues help the incumbent controlling shareholders avoid control dilution and safeguard their private benefits. Under asymmetric information about private benefits, the choice of flotation method can convey information about hidden private benefits and hence firm value. Our model can explain even a negative announcement effect of rights issues, and supports not just one but three important equilibriums.

Recent research has documented large differences among countries in ownership concentration in publicly traded firms, in the breadth and depth of capital markets, in dividend policies, and in the access of firms to external finance. A common element to the explanations of these differences is how well investors, both shareholders and creditors, are protected by law from expropriation by the managers and controlling shareholders of firms. We describe the differences in laws and the effectiveness of their enforcement across countries, discuss the possible origins of these differences, summarize their consequences, and assess potential strategies of corporate governance reform. We argue that the legal approach is a more fruitful way to understand corporate governance and its reform than the conventional distinction between bank-centered and market-centered financial systems.

We examine the separation of ownership and control for 2,980 corporations in nine East Asian countries. In all countries, voting rights frequently exceed cash-#ow rights via pyramid structures and cross-holdings. The separation of ownership and control is most pronounced among family-controlled "rms and small "rms. More than two-thirds of "rms are controlled by a single shareholder. Managers of closely held "rms tend to be relatives of the controlling shareholder’s family. Older "rms are generally family-controlled, dispelling the notion that ownership becomes dispersed over time. Finally, signi"cant corporate wealth in East Asia is concentrated among a few families. ( 2000 Elsevier Science S.A. All rights reserved. JEL classixcation: G32; L22

Empirical evidence suggests that the voting premium in the Korean securities market is strongly related to the structure of corporate ownership. We find that the premium attached to voting stock is positively and significantly associated with the control value of a block of shares held by minority shareholders. We also find that the premium is negatively related to both the fraction of shares that are voting shares and the market value of equity. Empirical results indicate that private benefits of control in Korea are worth about 10% of the value of equity.

This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common-law countries generally have the strongest, and Frenchcivil-law countries the weakest, legal protections of investors, with German- and Scandinavian-civil-law countries located in the middle. We also find that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights.

The paper develops a simple model of corporate ownership structure in which costs and benefits of ownership concentration are analyzed. The model cornpares the liquidity benefits obtained through dispersed corporate ownership with the benefits from efficient management control achieved by some degree of ownership concentration. The paper reexamines the free-rider problem in corporate control in the presence of liquidity trading, derives predictions for the trade and pricing of blocks, and provides criteria for the optimal choice of ownership structure. THE RECENT INCOMPLETE CONTRACTING approach in corporate finance has considerably improved our understanding of how small firms determine their capital structure. The basic setting considered in this line of research is one where a founder-manager seeks funding from one or several financiers. The main premise is that the founder-manager, in her dealings with the financiers, is primarily concerned with maintaining her private benefits of control. For small firms these are often quite large relative to the financial returns. Thus, for a small firm the problem of determining the financial structure often reduces to the problem of how to obtain fundingr while giving away as little control as possible to the financiers. Of course, most financiers insist on some form of protection, so that the final compromise reached in most financial contracts for small firms is one resembling a debt contract (or a venture capital contract), which protects the founder-manager's control as long as the firm is performing adequately.' This perspective for small firms does not extend naturally to large firms because the private benefits of control of the managers for large firms are likely to be small relative to the firm's monetary returns, so that protection of these benefits is not an overriding consideration. Moreover, large firms

Přispěvek se zaměřuje na diskusi možnosti prakticke aplikace výsledků empiricke studie soukromých výhod kontroly v podminkach CR. Nejprve strucně shrnuje nesporne teoreticke přinosy noveho pohledu na kontrolni premie a v druhe casti upozorňuje na některe metodologicke a aplikacni problemy výsledků studie a vysvětluje, proc v podstatě nejsou dostatecně zobecnitelne, aby mohly být voditkem pro stanoveni kontrolni premie v praxi.

We propose that dispersed outside ownership and the resulting managerial discretion come with costs but also with benefits. Even when tight control by shareholders is ex post efficient, it constitutes ex ante an expropriation threat that reduces managerial initiative and noncontractible investments. In addition, we show that equity implements state contingent control, a feature usually associated with debt. Finally, we demonstrate that monitoring, and hence ownership concentration, may conflict with performance-based incentive schemes.

This paper summarizes the conventional wisdom concerning differences between financial systems. It argues that many of them do not stand up to close scrutiny. Instead, it suggests that the main differences concern the concentration and nature of ownership. Systems with high concentrations of ownership (frequently in the hands of families and other companies) may encourage more direct monitoring and control, greater stability in decision-taking, and greater commitment to other stakeholders than systems with more dispersed ownership. On the other hand, they are more subject to the private benefits of control and less flexible in responding to external factors. Different systems may, therefore, be suited to different types of corporate activity. Instead of seeking to impose uniform forms of corporate governance, the paper concludes that regulation should be permissive in allowing companies to choose their preferred forms of ownership and control.

We analyze optimal schemes for privatization of state enterprises when foreign investors are potential buyers. The highest bidders may not be the best large shareholders for the state enterprise, since their bid may reflect only their high private benefit of control. The government finds itself facing a tradeoff between trying to obtain the highest possible payment (the "revenue" objective) and identifying the company that will operate better in the future (the "efficiency" objective). Therefore, ordinary auctions are not appropriate. Our optimal privatization schemes in many cases require the use of the number of shares sold as a crucial instrument to attract the most efficient investors.

Building upon the property rights theory, this paper develops a theoretical framework that shows that in emerging markets where large shareholders’ shares are non-transferable and the legal protection for property rights is weak, large shareholders’ dominance over the board of directors is endogenously determined by their pursuit of benefits of control. We use a natural experiment, the compulsory introduction of independent directors in August 2001 by the China Securities Regulatory Commission (CSRC), to empirically test the effect of large shareholders’ benefits of control on the dynamics of board structure adjustment. Consistent with our argument that large shareholders minimise monitoring from independent directors, who should comprise at least a third of board members according to the CSRC’s requirement, we make the following findings: (1) Firms with more large shareholders’ private benefits are more likely to decrease the number of non-independent directors to meet the requirement; (2) such firms are also more likely to delay compliance; and (3) descriptive statistics show that directors from the largest shareholder make up a higher proportion of a board after the adjustment, thus increasing the largest shareholder’s control over the board. The policy implication of this paper is that the corporate governance of Chinese listed firms is largely determined by large shareholders’ pursuit of private benefits. However, one rule does not fit all firms.

This paper undertakes a unique study of the determinants of corporate governance in the West African developing region and their impact on director compensation. A new measure of director total remuneration is constructed providing a conservative estimate of expropriation of private benefits of control. Using a hand-collected sample of 51 West African IPO firms from 2000 to 2011 we find evidence that increased presence of true independent nonexecutives that are unconnected to CEO or dominant insider groups within firm and nominally independent board level committees are highly associated with expropriation inferring that firm's with directors engaging in this behaviour are more likely to adopt measures indicative of governance best practice.

We investigate how high-profile accounting frauds affect peer firms' investment. We document that peers react to the fraudulent reports by increasing investment during fraud periods. We show that this finding is not driven by frauds that have a higher ex ante likelihood of detection or by an association between fraud and investment booms. In addition, we find that peers’ investments increase in fraudulent earnings overstatements, and in industries with higher investor sentiment, lower cost of capital and higher private benefits of control. We also find evidence consistent with equity analysts potentially facilitating the spillover effect.

This paper reviews the theoretical and empirical literature on the channels through which blockholders (large shareholders) engage in corporate governance. In classical models, blockholders exert governance through direct intervention in a firm’s operations, otherwise known as “voice.” These theories have motivated empirical research on the determinants and consequences of activism. More recent models show that blockholders can govern through an alternative mechanism known as “exit” — selling their shares if the manager underperforms. These theories give rise to new empirical studies on the two-way relationship between blockholders and financial markets, linking corporate finance with asset pricing. Blockholders may also worsen governance by extracting private benefits of control or pursuing objectives other than firm value maximization. I highlight the empirical challenges in identifying causal effects of and on blockholders as well as the typical strategies attempted to achieve identification. I close with directions for future research.

I exploit the staggered passage of adoption of the mandatory bid rule in the European Union to estimate its effect on value creation. In a sample of large block trades in seven European countries, I find that the adoption of the rule leads to an increase in the value of the target firm. I find evidence that this increase is due to a reduction in private benefits of control, and also due to higher quality of targets acquired after the rule change. I find that the rule change increases the acquisition probability and the volume of M&A activity.

Excess control rights by inside shareholders have been documented to hurt minority shareholders. This paper shows that such governance feature may benefit creditors. Using a sample of U.S. dual-class firms, I show that dual-class firms take less business and financial risk than similar single-class firms, consistent with controlling insiders’ emphasis on long-term survival to access ongoing private benefits of control. Such risk avoidance translates into lower borrowing costs for dual-class firms. Further, lenders seem to be able to use specific covenants to prevent potential expropriations by controlling insiders. Instrumental variables and difference-in-differences analyses support a causal interpretation.

This paper studies the two potentially contrasting effects on IPO pricing and post-IPO operating performance of family ties as well as social ties the top management has with board members. While family ties may solve manager–owner conflicts of interests, they may also give rise to minority-shareholder expropriation and/or private benefits of control. Similarly, social ties may either create value or lead to entrenchment and excessive managerial power. Using q-analysis to measure the strength of top manager ties to board members, we find that IPO performance is positively related to the strength of social ties, but negatively to the strength of family ties. We also find that, controlling for social ties, board independence affects both IPO pricing and post-IPO operating performance. Further, we show that the association between IPO performance and ties depends on whether they are with inside or outside directors.

This paper revisits the role of board size and composition in corporate governance, employing a measure of private benefits of control (PBC) as an indicator of governance problems in firms. We calculate PBC using the voting premium approach for a sample of dual class stock companies traded on the Russian stock exchange between 1998 and 2009. Using fixed-effects regressions, we find a quadratic relationship between PBC and board size, implying the optimality of medium-sized (about 11 directors) supervisory boards. This result is substantially stronger for PBC than traditional measures of corporate performance. There is also some evidence that director ownership helps to mitigate governance problems. Most remarkably, we find that non-executive/independent directors are associated with larger PBC and thus do not seem to help improve corporate governance. In contrast, regressions with accounting performance measures as dependent variables tend to suggest a positive role of these directors in corporate governance.

When a proxy contest is looming, the rate at which CEOs exercise options in order to sell (hold) the resulting shares slows down by 80% (accelerates by 60%), consistent with their desire to maintain or strengthen voting rights when facing challenges. Such deviations are closely aligned with features unique to proxy contests, such as the record dates and nomination status, and are more pronounced when the private benefits are higher or when the voting rights are more crucial. The distortions suggest that incumbents value their stocks higher than the market price when voting rights are valuable for defending control.

The paper analyzes how the choice of organizational structure leads to the best compromise between controlling behavior based on authority rights and minimizing costs for implementing high efforts. Concentrated delegation and hierarchical delegation turn out to be never an optimal compromise. If the CEO is more efficient than the division heads (i.e., the CEO's costs from exerting high effort are smaller than those of the division heads), the owner will prefer full delegation to the divisions to replace high incentive pay to the division heads by incentives based on private benefits of control. In that situation, decentralization is the optimal form of full delegation given that selfish behavior is more important than cooperation, but cross-authority delegation is optimal for cooperation being crucial. If, however, the division heads are clearly more efficient than the CEO, the owner will choose centralization given that cooperation is the dominating issue, but partial delegation if selfish behavior is crucial.

Using a sample of firms from nine East Asian countries over 2006-2010, we find that CEO turnover is less related to poor performance when firms have shareholders with large ultimate control rights or when the control divergence (i.e., larger voting than cash flow rights) is high. These results imply that controlling shareholders prefer not to adopt or enforce a performance-based disciplinary scheme to evaluate the CEOs in facilitating the extraction of private benefits. As predicted, we also find that such an agency problem is stronger for firms in countries with weak investor protection than in countries with strong investor protection. We further document that the ultimate control position drives this type of problem for state-controlled firms, but the control divergence manifests the agency problem for family-controlled firms.

This paper analyses some of the tradeoffs involved in the decision to go public. The main point is that entrepreneurs go public in order to fund larger projects, but lose discretion over decisions by becoming accountable to outside investors. The analysis focuses on succession and recruiting problems and assumes that the major source of private benefits of control is connected with investments in human capital. Firms' control structure influences their decision to search for new managers. This creates an externality between firms and equilibria can be Pareto ranked, such that the emergence of a superior control structure for all firms is inhibited by coordination failure.

This paper studies the determinants of the value of voting rights in U. S. corporations. Results support the hypothesis that the price of a vote is determined by the expected additional payment vote holders will receive for their votes in case of a control contest. The size of this differential payment is a function of the probability that a vote is pivotal in a control contest and the magnitude of the private benefits obtainable by controlling the company. Simple proxies for these two factors explain up to 30 percent of the variation of the voting premium across companies and through time. My findings also suggest that the value of managerial perquisites are, at least partially, reflected in the price of votes.

To eliminate control of state-owned enterprise managers of self-interest is a key problem for management of state-owned enterprises, the Chinese government has adopted a separate government functions from enterprise management, clear property rights, the board of directors system, assignment of the board of supervisors system, disciplinary leadership system reform, the mixed ownership and other measures, are difficult to eliminate the soe managers to seize control of self-interest, together with the present situation of China's state-owned enterprises, this paper proposed by the board of supervisors as the center of the corporate governance structure, powers and running of the reform of internal management mechanism, to try to eliminate the control gain, achieving the value of state-owned enterprises.

In many countries around the globe, portfolio managers utilize well accepted models, assuming that a partial stake of ownership is proportionally valued. This assumption is incorrect in markets in which traded firms or publicly held firms are controlled by major owners who would take any possible measure to protect and maintain a 'lock' on control, so they can secure a sellable asset to another control seeker. In this case, estimation of key parameters such as, volatility, expected returns and diversification effect, may be grossly distorted.We would argue that a major trigger for the value of the benefits of control is the ability of control owners to transfer assets from their own portfolio to a controlled publicly traded firm. While it is obvious that these transfers will take place, if and only if, it is beneficial to the control owners, the impact on the minor shareholders may not necessarily be negative and may vary depending on several parameters. Thus, the benefits of control are not entirely "private", i.e. appropriation and diversion of the resources of publicly traded firms for the benefit of the control owners. This paper aims to model the effect of the benefits of control on the value of a minority held public firms. It focuses on two related issues that are discussed in the literature on the benefits of control: what drives the value of the benefits of control, given the empirical evidence that control seekers are willing to pay a significant premium for control, and secondly, can these benefits be rationally modeled? To better understand these issues, it then models a specific drive on the part of control seekers who, in addition to their stake in a publicly traded firm, own a private portfolio. It could be argued that they may 'transfer' inferior investments to the public firms that they control exploiting less than perfect transparency. However, while they own this valuable option of 'transferring' inferior investments into the public firm, these actions may still be beneficial to the minority shareholders.We establish a model and derive a simulation procedure that are applied to several cases in which transfers are made in exchange for cash or equity, instances of full disclosure or partial transparency, the likelihood that the control owners' actions will be contested in court, level of risk, and other parameters. Then we will compare the results to empirical finding. The final model will be greatly simplified so that the end formula can be easily used by practitioners.

The globally increasing involvement of states in corporate governance through regulation and ownership is puzzling since research has not yet produced a compelling explanation for this involvement....

This paper attempts to explain the tendency of foreign acquirers to choose better performing firms in emerging markets, which limits underperforming firms’ access to foreign capital. Using a simple law and finance model, we offer an explanation based on emerging countries’ weaker investor protection (IP) compared to acquirers’ home countries, predicting a positive relation between the gap in the strength of IP (between acquiring and target countries) and the intensity to cherry pick. To test this prediction, we identify among our sample countries 20 economies that enacted major corporate governance reforms (CGRs). These CGRs change the gap in IP between an acquirer and a target country in a staggered fashion, enabling us to estimate differences-in-differences. Estimation results reveal that cherry picking moderates after a target country undertakes a CGR, which narrows the IP gap. Conversely, cherry picking intensifies after an acquirer’s home country enacts a CGR, which enlarges the IP gap. These results imply emerging economies must strengthen investor protection if they want to increase underperforming firms’ access to foreign capital.

In this paper we show that dual-class shares can be an answer to agency conflicts rather than a result of agency conflicts. When a firm issues voting shares to raise funds, an incumbent manager’s control rights are diluted. This increases the risk that an incumbent could lose control of the firm and therefore, could lose the associated benefits of control. Thus, the incumbent may forgo positive NPV investments in an effort to maximize his expected wealth. Non-voting shares allow a firm to raise funds without diluting manager’s control rights; hence, it can alleviate the underinvestment problem. But non-voting shares facilitate entrenchment and therefore, reduces value-enhancing takeover activities. Also, non-voting shares dilute dividends per share. We obtain conditions under which the benefit of using non-voting shares, that is, higher firm value due to higher investment outweighs the entrenchment and dividend dilution costs. Others have shown that deviations from “one share-one vote” can be optimal, but our study is the first to integrate the dualclass decision into the rich body of research on capital structure and underinvestment.