Time Varying Voting Rights and the Private Benefits of Control

58 Pages Posted: 6 Mar 2008 Last revised: 21 Feb 2010

See all articles by Avner Kalay

Avner Kalay

Tel Aviv University - Faculty of Management; University of Utah - David Eccles School of Business

Shagun Pant

University of Iowa - Department of Finance

Multiple version iconThere are 3 versions of this paper

Date Written: November 2009

Abstract

In the presence of derivative markets, shareholders can choose their desired mix of cash-flows/votes and vary it through time. We find that the optimal security-voting structure is time varying. Even in the presence of derivatives, most of the time, shareholders optimally choose 1S1V. 1S1V turns out to be the socially as well as privately optimal choice for the majority of the life-cycle of the firm. However, when faced with a control contest shareholders optimally deviate from 1S1V. Shareholders use synthetic stocks to change their per vote exposure to cash flows and force the winning team to pay them its entire surplus. This flexibility to deviate from 1S1V when needed increases the market value of the firm. We show that during the control contest, the difference between the price of the stock and the synthetic stock provides a measure of the private benefits of control.

Keywords: corporate governance, regulation, security voting structure, control contests, derivatives

JEL Classification: G32, G34

Suggested Citation

Kalay, Avner and Pant, Shagun, Time Varying Voting Rights and the Private Benefits of Control (November 2009). EFA 2008 Athens Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1102832 or http://dx.doi.org/10.2139/ssrn.1102832

Avner Kalay

Tel Aviv University - Faculty of Management ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel
972 3 6406298 (Phone)
972 3 6406330 (Fax)

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States
801-581-5457 (Phone)

Shagun Pant (Contact Author)

University of Iowa - Department of Finance ( email )

Iowa City, IA 52242-1000
United States

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