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Unbundling Ownership and Control
Daniel Ferreira London School of Economics & Political Science (LSE) - Department of Finance; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR) Emanuel Ornelas 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 August 10, 2009 ECGI - Finance Working Paper No. 172/2007 Abstract: We propose a model of ownership and control restructuring in closely-held corporations. The model exemplifies a novel explanation for the prevalence and persistence of the separation of ownership from control: efficiency in the market for corporate control is more easily achieved when ownership of cash flow rights is not concentrated in the hands of insiders. Using a mechanism design approach, we fully characterize the optimal restructuring mechanism. This mechanism requires increasing the number of shares of the incumbent insider if he remains in control, while giving him a golden parachute that may include both stock and cash if he is deposed. Combining ownership and control is optimal only when the scope for agency costs is extreme. The model generates several novel empirical predictions.
Keywords: Ownership, corporate control, restructuring JEL Classifications: G32, G34, D82 Working Paper SeriesDate posted: October 31, 2005 ; Last revised: August 11, 2009Suggested CitationContact Information
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