Abstract

http://ssrn.com/abstract=987486
 
 

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The One Share - One Vote Debate: A Theoretical Perspective


Mike Burkart


Swedish House of Finance; Stockholm School of Economics - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); London School of Economics - Financial Markets (FMG) Group

Samuel Lee


New York University (NYU) - Leonard N. Stern School of Business; European Corporate Governance Institute (ECGI)

May 2007

ECGI - Finance Working Paper No. 176/2007

Abstract:     
The impact of separating cash flow and votes depends on the ownership structure. In widely held firms, one share - one vote is in general not optimal. While it ensures an efficient outcome in bidding contests, dual-class shares mitigate the free-rider problem, thereby promoting takeovers. In the presence of a controlling shareholder, one share - one vote promotes value-increasing control transfers and deters value-decreasing control transfers more effectively than any other vote allocation. Moreover, leveraging the insider's voting power aggravates agency conflicts because it protects her from the takeover threat and provides less alignment with other shareholders. Even so, minority shareholder protection is not a compelling argument for regulatory intervention, as rational investors anticipate the insider's opportunism. Rather, the rationale for mandating one share - one vote must be to disempower controlling minority shareholders in order to promote value-increasing takeovers. As this policy tends to empower managers vis-à-vis shareholders, it is an open question whether it would improve the quality of corporate governance, notably in systems built around large active owners. The verdict in the case of depositary certificates, priority shares, voting and ownership ceilings is less ambiguous, since they insulate managers from both takeovers and effective shareholder monitoring.

Number of Pages in PDF File: 65

Keywords: Security-Voting Structure, Market for Corporate Control, Controlling Minority Shareholders, Shareholder Activism

JEL Classification: G32

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Date posted: June 1, 2007  

Suggested Citation

Burkart, Mike and Lee, Samuel, The One Share - One Vote Debate: A Theoretical Perspective (May 2007). ECGI - Finance Working Paper No. 176/2007. Available at SSRN: http://ssrn.com/abstract=987486 or http://dx.doi.org/10.2139/ssrn.987486

Contact Information

Mike C. Burkart (Contact Author)
Swedish House of Finance ( email )
Drottninggatan 98
111 60 Stockholm
Sweden

Stockholm School of Economics - Department of Finance ( email )
P.O. Box 6501
Sveavagen 65
SE-113 83 Stockholm
Sweden
+46 8 736 9678 (Phone)
+46 8 31 6422 (Fax)
HOME PAGE: http://www.hhs.se/Finance/People/ShowPerson.htm?personid=54
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
HOME PAGE: http://www.cepr.org/default_static.htm
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
HOME PAGE: http://www.ecgi.org
London School of Economics - Financial Markets (FMG) Group
Houghton Street
London WC2A 2AE
United Kingdom
HOME PAGE: http://www.lse.ac.uk/collections/finance/facultyAndStaff/profiles/mikeBurkart.htm
Samuel Lee
New York University (NYU) - Leonard N. Stern School of Business ( email )
44 West 4th Street
New York, NY NY 10012
United States
European Corporate Governance Institute (ECGI) ( email )
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
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