Signaling to Dispersed Shareholders and Corporate Control

52 Pages Posted: 10 Jul 2014 Last revised: 18 Apr 2015

See all articles by Mike Burkart

Mike Burkart

Swedish House of Finance; London School of Economics and Political Science, Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Samuel Lee

Santa Clara University - Leavey School of Business; European Corporate Governance Institute (ECGI); Swedish House of Finance

Date Written: July 4, 2014

Abstract

This paper analyzes how outsiders, such as bidders or activist investors, overcome the lack of coordination and information among dispersed shareholders. We identify the two basic means to achieve this goal. First, the outsider must relinquish private benefits in a manner that is informative about security benefits. We show under which conditions this is feasible and which acquisition strategies used in practice meet these conditions. Second, the outsider can alternatively use derivatives to drive a wedge between her voting power and her economic interest in the firm. Such separation of ownership and control, while typically considered a source of corporate governance problems, is an efficient response to the frictions dispersed ownership causes for control contestability.

Keywords: Tender Offers, Investor Activism, Signaling, Free-Rider Problem, Means of Payment, Unbundling Ownership and Control, Empty Voting

JEL Classification: G32

Suggested Citation

Burkart, Mike C. and Lee, Samuel, Signaling to Dispersed Shareholders and Corporate Control (July 4, 2014). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 431/2014. Available at SSRN: https://ssrn.com/abstract=2462505 or http://dx.doi.org/10.2139/ssrn.2462505

Mike C. Burkart (Contact Author)

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

London School of Economics and Political Science, Department of Finance ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

HOME PAGE: http://www.cepr.org/default_static.htm

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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

Samuel Lee

Santa Clara University - Leavey School of Business

500 El Camino Real
Santa Clara, CA California 95053
United States

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

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