Design of Corporate Governance: Role of Ownership Structure, Takeovers, and Bank Debt

43 Pages Posted: 31 Oct 2008  

Kose John

New York University (NYU) - Department of Finance

Simi Kedia

Rutgers Business School

Date Written: December 2006

Abstract

We examine how different economies would design an optimal corporate governancesystem structured from three of the main mechanisms of corporate governance (managerial ownership, monitoring by banks, and disciplining by the takeover market). We allow for interactions among the mechanisms. The first set of results characterizes the combination of governance mechanisms that can appear in any optimally designed structure: 1) when monitored debt appears in an optimal system it is accompanied by concentrated ownership, and 2) when takeovers appear in an optimal system they are accompanied by diffuse ownership. We show that out of the numerous governance structures that could arise from combinations of the governancemechanisms, only three are candidates for an optimal system. These three endogenously derived governance structures match the prevalent systems (family based, bank based and market based) in the world. The optimal system for a given economy is characterized as a function of the degrees of development of its financial institutions and markets. Our analysis yields several testableimplications.

Suggested Citation

John, Kose and Kedia, Simi, Design of Corporate Governance: Role of Ownership Structure, Takeovers, and Bank Debt (December 2006). NYU Working Paper No. CLB-06-023. Available at SSRN: https://ssrn.com/abstract=1291611

Kose John (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0337 (Phone)
212-995-4233 (Fax)

Simi Kedia

Rutgers Business School ( email )

117 Levin
94 Rockafellar Road
Piscataway, NJ
United States
8484454195 (Phone)

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