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Concentrated Ownership Revisited: The Idiosyncratic Value of Corporate Control

Zohar Goshen

Columbia University - Law School; Ono Academic College Faculty of Law

Assaf Hamdani

Hebrew University - Faculty of Law

April 1, 2013

Columbia Law and Economics Working Paper No. 444
ECGI - Law Working Paper No. 206

This Article offers a novel theory of corporate control and uses it to shed a new light on concentrated ownership — the prevalent form of corporate ownership around the world — and a wide spectrum of other corporate ownership patterns. Our core claim is that control allows entrepreneurs to capture the idiosyncratic value that they attach to their execution of their business idea. Under conditions of asymmetric information, control over corporate decision-making allows entrepreneurs to pursue their business idea in whatever manner they see fit even against investors' objections. Our framework identifies a fundamental tradeoff underlying all corporate ownership patterns, namely, the tension, stemming out of asymmetric information, between entrepreneurs' pursuit of idiosyncratic value and investors’ need for protection against agency costs. We show that ownership structures lie on a spectrum representing different allocations of control and cash-flow rights to address this inevitable tension.

Our analysis offers an innovative understanding of firms with controlling shareholders. The predominant view within economic and legal scholarship contends that controlling shareholders’ incentive for holding a control block is their desire to extract private benefits of control. We, however, show that controllers may hold a control block to increase the pie’s size (pursue idiosyncratic value) rather than dictate the pie’s distribution (consume private benefits). Importantly, when the entrepreneur’s idiosyncratic value is ultimately realized, it will be distributed pro-rata to all investors.

Our framework provides important insights for investor protection and corporate law doctrine and policy. We argue that corporate law for publicly-traded firms with controlling shareholders should balance the controller’s need to secure idiosyncratic value against minority protection. While the corporate law literature has focused solely on minority shareholders’ protection, we show that an equally important focus should be given to controllers’ rights.

Number of Pages in PDF File: 52

Keywords: Concentrated Ownership, Dispersed Ownership, Corporate Law, Dividend, Freezeout, Business Judgment Rule, Agency Cost, Control Premium, Financial Contracting, Asymmetric Information, Idiosyncratic Value, Dual Class Shares, Private Equity, Controlling Shareholder, Minority Protection

JEL Classification: K22, D23, D82, G32, G34, L22

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Date posted: March 4, 2013 ; Last revised: April 15, 2015

Suggested Citation

Goshen, Zohar and Hamdani, Assaf, Concentrated Ownership Revisited: The Idiosyncratic Value of Corporate Control (April 1, 2013). Columbia Law and Economics Working Paper No. 444; ECGI - Law Working Paper No. 206. Available at SSRN: http://ssrn.com/abstract=2228194 or http://dx.doi.org/10.2139/ssrn.2228194

Contact Information

Zohar Goshen (Contact Author)
Columbia University - Law School ( email )
435 West 116th Street
New York, NY 10025
United States
212-854-9760 (Phone)
212-854-7946 (Fax)
Ono Academic College Faculty of Law
104 Zahal St.
Kiryat Ono, 55000
972-50-5344332 (Phone)
972-3-5356120 (Fax)
HOME PAGE: http://www.hakirya.ac.il
Assaf Hamdani
Hebrew University - Faculty of Law ( email )
Mount Scopus, 91905

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