The Price of Power: Valuing the Controlling Position of Owner-Managers in French IPO Firms

Abstract

Going public often creates an agency conflict between the owner-manager and minorityshareholders. This problem is especially severe in countries with poor legal investorprotection, such as France. We examine the controlling position of owner-managers inFrench IPO firms. We find that investors anticipate the increased agency conflictassociated with a lock on control and lower firm value when the owner-manager is morepowerful. Shareholder agreements in which the owner-manager agrees to share controlwith other pre-IPO owners enhance firm value. We also report that higher cash flowownership by the owner-manager is positively related to firm value when he is not in fullcontrol. Finally, we document that the large (non-pecuniary) private benefits of controlin France may motivate owner-managers to retain control after the IPO.

Keywords: Ownership structure, initial public offerings (IPOs), going public

JEL Classification: M, G3, G32