The Balance of Power in Closely Held Corporations
INSEAD - Economics and Political Sciences
Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)
Journal of Financial Economics, Vol. 58, No. 1-2, January 1, 2000
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
Date posted: May 18, 2001