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Sharing of Control as a Corporate Governance Mechanism
Armando R. Gomes Washington University, St. Louis - John M. Olin School of Business Walter Novaes Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics February 2005 PIER Working Paper No. 01-029; U of Penn, Inst for Law & Econ Research Paper 01-12 Abstract: This paper identifies a new corporate governance mechanism: sharing control. We show that bargaining problems among multiple controlling shareholders may prevent inefficient investment decisions that harm minority shareholders. The same bargaining problems may block efficient investment decisions, though. By solving this trade-off, we show that the likelihood that shared control is efficient increases with three firm characteristics: overinvestment problems, the cost of verifying cash flows, and financing requirements. The model provides testable implications for the role that large shareholders play in corporate governance, contrasting shared control and monitoring as alternative governance mechanisms. Working Paper Series Date posted: July 18, 2001 ; Last revised: March 31, 2005Suggested CitationContact Information
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