Unbundling Ownership and Control

36 Pages Posted: 21 May 2008

See all articles by Daniel Ferreira

Daniel Ferreira

London School of Economics - Department of Finance; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Emanuel Ornelas

Sao Paulo School of Economics

John L. Turner

University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: May 2007

Abstract

Treating control as an asset that can be bought and sold, we introduce a model of the simultaneous and separable trading of ownership and control in a private information setting. The model provides a novel explanation for the prevalence and persistence of the separation of ownership from control in modern corporations: efficiency in the market for corporate control is more easily achieved when ownership is not concentrated in the hands of the manager. The central reason is that low managerial ownership reduces informational rents in the market for control. Using a mechanism design approach, we fully characterize the optimal mechanism for restructuring ownership and control. Under the optimal mechanism, corporations typically increase the number of shares of the incumbent manager if he remains in control, and give him a generous golden parachute that includes both stock and cash if he is deposed. By contrast, combining ownership and control is optimal only if agency costs are extreme.

Keywords: corporate control, mechanism design, ownership, restructuring

JEL Classification: D82, G32, G34

Suggested Citation

Ferreira, Daniel and Ornelas, Emanuel and Turner, John L., Unbundling Ownership and Control (May 2007). CEPR Discussion Paper No. DP6257, Available at SSRN: https://ssrn.com/abstract=1135495

Daniel Ferreira (Contact Author)

London School of Economics - Department of Finance ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
(+44) 20 7955 7544 (Phone)

HOME PAGE: http://personal.lse.ac.uk/FERREIRD/

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Emanuel Ornelas

Sao Paulo School of Economics ( email )

Rua Itapeva 474 s.1202
São Paulo, São Paulo 01332-000
Brazil

HOME PAGE: http://https://sites.google.com/site/emanuelornelaseo/

John L. Turner

University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics ( email )

Athens, GA 30602-6254
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
5
Abstract Views
644
PlumX Metrics