Abstract

http://ssrn.com/abstract=1654165
 
 

References (53)



 


 



On the Optimal Allocation of Power between Shareholders and Managers


Nina Walton


University of Southern California

August 5, 2010

USC CLEO Research Paper No. C10-12
23rd Australasian Finance and Banking Conference 2010 Paper
USC Law Legal Studies Paper No. 10-13

Abstract:     
The question of how to allocate power between managers and shareholders, while intensely debated, remains unresolved among scholars and policymakers. This paper contributes to this debate by formally investigating the optimal allocation of power for shareholders recognizing that they may be heterogeneous, and that agency problems exist with managers. In the model, I treat shareholders as economic actors who choose decision rules (or the degree of management insulation) under a veil of ignorance with the goal of maximizing their utility. Managers choose their consumption of private benefits based on the insulation levels chosen by shareholders. I demonstrate that shareholders face a trade-off when choosing the level of managerial power. High insulation is desirable because it prevents other minority shareholders from blocking potentially profitable investments. Low insulation level is desirable because it prevents other shareholders from approving potentially unprofitable investments, as well as reducing agency costs. I discuss how optimal insulation changes if we relax assumptions about shareholder heterogeneity and the presence of agency costs.

Number of Pages in PDF File: 46

Keywords: Shareholders, voting rules, managers, corporate governance

JEL Classification: D72, G34, G38, K22

working papers series


Download This Paper

Date posted: August 6, 2010 ; Last revised: November 12, 2013

Suggested Citation

Walton, Nina, On the Optimal Allocation of Power between Shareholders and Managers (August 5, 2010). USC CLEO Research Paper No. C10-12; 23rd Australasian Finance and Banking Conference 2010 Paper; USC Law Legal Studies Paper No. 10-13. Available at SSRN: http://ssrn.com/abstract=1654165 or http://dx.doi.org/10.2139/ssrn.1654165

Contact Information

Nina Walton (Contact Author)
University of Southern California ( email )
699 Exposition Boulevard
Los Angeles, CA 90089
United States

Feedback to SSRN


Paper statistics
Abstract Views: 1,053
Downloads: 212
Download Rank: 79,590
References:  53

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo8 in 0.359 seconds