A Contractual Approach to Discipline Self-Dealing by Controlling Shareholders
53 Pages Posted: 28 May 2014 Last revised: 30 Jan 2015
Date Written: May 22, 2014
Abstract
We analyze systematically the legal regulations on self-dealing transactions (where controlling shareholders are an interested party to transactions undertaken by the firm) and compare the outcomes produced by these regimes, both in terms of total welfare generated by the firm, and of minority expropriation, with the outcome that can be achieved with a contractual solution. We prove that investment eciency and welfare can be increased by letting the interested parties enter into long-term contracts regulating private benefit extraction and, as an example, we propose a simple contract based on the use of options that is more efficient than existing regulations.
Keywords: Self-dealing; Minority Expropriation; Private Beneffits; Corporate Governance; Corporate Law
JEL Classification: G32; G34; K22
Suggested Citation: Suggested Citation
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