The Challenge of Disproportional Ownership

Abstract

Entrepreneurs in emerging countries often use disproportional ownership structures - set up through dual class shares, pyramids and similar devices - as a measure to retain control over listed firms. These ownership structures have the potential to stimulate economic growth in developing jurisdictions, where institutions are largely defective. At the same time, however, disproportional ownership throws the internal governance of firms into disarray. To make things worse, policy measures drawn up to address this particular problem have yet to produce noticeable results. This paper builds a framework meant to guide policymakers in the process of designing and implementing rules to address the challenge posed by the presence of disproportional ownership in developing countries.

Keywords: Dual class shares, pyramids, control-enhancing mechanisms, private benefits of control, controlling shareholders, corporate law

JEL Classification: G18, G34, G38, K22, K42, L22