Market Value Maximizing Ownership Structure When Investor Protection is Weak

Abstract

We hypothesize that in a country with lax corporate governance rules Tobin's Q is maximized when controlholders' vote approaches the supermajority level. In this holding range controlholders do not possess extreme power (cannot pass supermajority decisions), nor do they feel a strong temptation to loot the firm (which largely belongs to them). Using a sample of 144 Israeli firms, we find that Tobin's Q is maximized when control group vote reaches 67%. This evidence is strong when ownership structure is treated as exogenous and weak when it is considered endogenous. Other ownership structure variables do not appear to have a significant valuation effect.

Keywords: Corporate Governance, Ownership Structure, insider ownership, ownership concentration, firm value, Firm valuation, Tobin's Q

JEL Classification: G32, G34