Abstract

http://ssrn.com/abstract=141122
 
 

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Trust and Opportunism in Close Corporations


Paul G. Mahoney


University of Virginia School of Law

November 1998

NBER Working Paper No. w6819

Abstract:     
The majority shareholder in a closely held corporation may use its control of the corporate machinery to appropriate wealth from the minority, and it is difficult for the majority to make a binding commitment not to do so. This paper models the interaction between majority and minority shareholders as a trust game in which the majority is constrained by the possibility of non-legal sanctions, including family or social disapproval and loss of reputation. The paper applies the analysis to the longstanding debate over appropriate exit rules for close corporation shareholders. Where the parties are well-informed and rational and judicial valuations are unbiased, giving the minority the unconditional right to e cashed out should reduce majority opportunism without producing opportunistic behavior by the minority. The paper suggests that the apparent failure of close corporation shareholders to bargain for such a right reflects the courts' success in using dissolution and fiduciary duty actions to deter majority misbehavior.

Number of Pages in PDF File: 27

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Date posted: December 31, 1998  

Suggested Citation

Mahoney, Paul G., Trust and Opportunism in Close Corporations (November 1998). NBER Working Paper No. w6819. Available at SSRN: http://ssrn.com/abstract=141122

Contact Information

Paul G. Mahoney (Contact Author)
University of Virginia School of Law ( email )
580 Massie Road
Charlottesville, VA 22903
United States
434-924-7343 (Phone)
434-924-7536 (Fax)

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