The Balance of Power in Closely Held Corporations

Posted: 18 May 2001  

Morten Bennedsen

INSEAD - Economics and Political Sciences

Daniel Wolfenzon

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Abstract

We analyze a closely held corporation characterized by the absence of a resale market for its shares. We show that the founder of the firm can optimally choose an ownership structure with several large shareholders to force them to form coalitions to obtain control. By grouping member cash flows, a coalition internalizes to a larger extent the consequences of its actions and hence takes more efficient actions than would any of its individual members. The model has implications for the optimal bundling of cash flow and voting rights, and for the optimal number and size of shareholders.

Keywords: Closely held corporations; Ownership structure; Control dilution; Controlling coalition; One-share - one vote

JEL Classification: G32, G34

Suggested Citation

Bennedsen, Morten and Wolfenzon, Daniel, The Balance of Power in Closely Held Corporations. Journal of Financial Economics, Vol. 58, No. 1-2, January 1, 2000. Available at SSRN: https://ssrn.com/abstract=251877

Morten Bennedsen (Contact Author)

INSEAD - Economics and Political Sciences ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France

Daniel Wolfenzon

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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