The Dynamics of the Management-Shareholder Conflict

Posted: 11 Dec 1998

See all articles by Zsuzsanna Fluck

Zsuzsanna Fluck

Michigan State University - Department of Finance

Multiple version iconThere are 3 versions of this paper

Abstract

This article investigates the distribution of equity ownership between entrenched management and dispersed outsiders when management has the ability to manipulate the cash flows and when it is costly for equityholders to prove managerial wrongdoing in court. Management chooses the distribution of equity ownership so as to maximize private benefits against the risk of potential control challenges. When shareholders are long-term oriented, then outside shares trade at a premium over their value to management, and management is inclined to sell off its equity stake to dispersed outsiders. When shareholders are short-term oriented, then outside shares trade at a discount below their value to management, and disciplinary pressure can be substantially reduced via strategic share purchases. Changes in the cost of capital drive a wedge between entrenched management's and dispersed outsiders' valuation of shares. Management exercises its option to buy (sell) shares when the option is in the money: when management values shares more (less) than outsiders do.

JEL Classification: G31, G32, G34

Suggested Citation

Fluck, Zsuzsanna, The Dynamics of the Management-Shareholder Conflict. Review of Financial Studies, Vol. 12, No. 2. Available at SSRN: https://ssrn.com/abstract=140417

Zsuzsanna Fluck (Contact Author)

Michigan State University - Department of Finance ( email )

Eli Broad Graduate School of Management
315 Eppley Center
East Lansing, MI 48824-1122
United States
517-353-3019 (Phone)
517-432-1080 (Fax)

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