Complementarities in Corporate Governance: Ownership Concentration, Capital Structure, Monitoring, and Pecuniary Incentives
Kiel Working Paper No. 968
32 Pages Posted: 9 May 2000
Date Written: March 2000
The paper shows that, as owners accumulate larger stakes and hence become less risk-tolerant, their incentives to monitor management are attenuated because monitoring shifts some of the firm?s risk from management to owners. This counterbalances the positive effect which more concentrated ownership has on monitoring via reduced free rider problems. Moreover, the paper shows how the opportunity cost of concentrated ownership, which is the loss of risk-sharing benefits, creates scope to use leverage as an additional complementary governance instrument. The paper offers new explanations for several empirical regularities found in the literature.
JEL Classification: G32, G34, J33
Suggested Citation: Suggested Citation