Are Control Rights Less Valuable When Shareholders Lack Information?

Abstract

Activists and journalists argue that allocation of greater control rights to shareholders mitigates the classic agency problem in corporations. I show that the effectiveness of such control rights depends on the cost of acquiring information on a firm. These rights have a positive effect on firm outcomes when information costs are low, but little or no effect when such costs are high. I exploit two natural experiments to provide causal evidence on this interaction: exogenous variation in shareholder rights resulting from Delaware Court rulings in 1995; and, exogenous variation in information costs resulting from brokerage mergers. Finally, I examine which type of agency problem is mitigated jointly by rights and information, and find evidence mainly in support of an 'empire building' hypothesis.

Keywords: Shareholder rights, Delaware Court rulings, Information costs

JEL Classification: G30, G34