Uncertainty, Disagreement, and Allocation of Control in Firms

62 Pages Posted: 22 Nov 2013 Last revised: 16 Feb 2022

See all articles by David L. Dicks

David L. Dicks

Baylor University - Department of Finance, Insurance & Real Estate

Paolo Fulghieri

University of North Carolina Kenan-Flagler Business School; European Corporate Governance Institute (ECGI)

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Date Written: February 14, 2022

Abstract

We study the impact of (Knightian) uncertainty on the allocation of control in firms. Uncertainty generates disagreement between insiders and outsiders. Optimal governance depends on both firm characteristics and the composition of the outsider's overall portfolio. Strong governance is desirable when assets in place, relative to the growth opportunity, are sufficiently small or is sufficiently large, suggesting a corporate governance life cycle. Diversified outsiders prefer stronger governance, while outsiders with portfolios heavily invested in similar assets as the firm are more willing to tolerate weak governance. Finally, uncertainty links governance and transparency, whereby firms with weak governance should be opaque.

Keywords: Corporate Governance, Ambiguity Aversion, Disagreement

JEL Classification: G34, D81

Suggested Citation

Dicks, David L. and Fulghieri, Paolo, Uncertainty, Disagreement, and Allocation of Control in Firms (February 14, 2022). ECGI - Finance Working Paper No. 396/2013 , UNC Kenan-Flagler Research Paper No. 2357599, Available at SSRN: https://ssrn.com/abstract=2357599 or http://dx.doi.org/10.2139/ssrn.2357599

David L. Dicks (Contact Author)

Baylor University - Department of Finance, Insurance & Real Estate ( email )

P.O. Box 98004
Waco, TX 76798-8004
United States

Paolo Fulghieri

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

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