Governance Problems in Closely-Held Corporations

36 Pages Posted: 31 Oct 2008 Last revised: 10 Jan 2010

See all articles by Venky Nagar

Venky Nagar

University of Michigan, Stephen M. Ross School of Business

Kathy R. Petroni

Michigan State University - Eli Broad College of Business and Eli Broad Graduate School of Management

Daniel Wolfenzon

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: October 2009

Abstract

A major governance problem in closely-held corporations arising from the illiquidity of shares is the majority shareholders’ expropriation of minority shareholders. As a solution, legal and finance research recommends that the main shareholder surrender some control to minority shareholders via ownership rights. We test this proposition on a large dataset of closely-held corporations. We find that shared-ownership firms report substantially larger return on assets (up to 14 percentage points) and lower expense-to-sales ratios. These findings are robust to institutionally motivated corrections for the endogeneity of the ownership structure. We are one of the first to provide evidence on the presence of governance problems and the effectiveness of shared ownership as a solution in settings characterized by illiquidity of ownership.

Keywords: Close corporations, Closely-held corporations, Performance, Expropriation, Control Dilution, Ownership

Suggested Citation

Nagar, Venky and Petroni, Kathy Ruby and Wolfenzon, Daniel, Governance Problems in Closely-Held Corporations (October 2009). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1291612

Venky Nagar (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-647-3292 (Phone)
734-764-3146 (Fax)

Kathy Ruby Petroni

Michigan State University - Eli Broad College of Business and Eli Broad Graduate School of Management ( email )

East Lansing, MI 48824-1121
United States
517-432-2924 (Phone)
517-432-1101 (Fax)

Daniel Wolfenzon

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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