Unbundling Ownership and Control
London School of Economics & Political Science (LSE) - Department of Finance; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)
London School of Economics & Political Science (LSE) - Department of Management; London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP)
John L. Turner
University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics
CEPR Discussion Paper No. DP6257
Treating control as an asset that can be bought and sold, we introduce a model of the simultaneous and separable trading of ownership and control in a private information setting. The model provides a novel explanation for the prevalence and persistence of the separation of ownership from control in modern corporations: efficiency in the market for corporate control is more easily achieved when ownership is not concentrated in the hands of the manager. The central reason is that low managerial ownership reduces informational rents in the market for control. Using a mechanism design approach, we fully characterize the optimal mechanism for restructuring ownership and control. Under the optimal mechanism, corporations typically increase the number of shares of the incumbent manager if he remains in control, and give him a generous golden parachute that includes both stock and cash if he is deposed. By contrast, combining ownership and control is optimal only if agency costs are extreme.
Number of Pages in PDF File: 36
Keywords: corporate control, mechanism design, ownership, restructuring
JEL Classification: D82, G32, G34working papers series
Date posted: May 21, 2008
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