A Defense of Shareholder Favoritism

45 Pages Posted: 10 Jul 2001

See all articles by Stephen J. Choi

Stephen J. Choi

New York University School of Law

Eric L. Talley

Columbia University - School of Law; European Corporate Governance Institute (ECGI)

Date Written: July 2001

Abstract

This paper considers the efficiency implications of managerial "favoritism" towards block shareholders of public corporations. While favoritism can take any number of forms (including the payment of green-mail, diversion of opportunities, selective information disclosure, and the like), each may have the effect (if not the intent) of securing a block shareholder's loyalty in order to entrench management. Accordingly, the practice of making side payments is commonly perceived to be contrary to other shareholders' interests and, more generally, inefficient. In contrast to this received wisdom, we argue that when viewed ex ante, permissible acts of patronage toward block shareholders may play an important efficiency role that benefits all shareholders alike. We demonstrate that the prospect of having to share rents with a third party may itself have a deterrent effect on managerial self-dealing - an off-equilibrium benefit that would not be readily apparent if one looked only at instances where favoritism actually occurs in practice.

Suggested Citation

Choi, Stephen J. and Talley, Eric L., A Defense of Shareholder Favoritism (July 2001). Available at SSRN: https://ssrn.com/abstract=276424 or http://dx.doi.org/10.2139/ssrn.276424

Stephen J. Choi (Contact Author)

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

Eric L. Talley

Columbia University - School of Law ( email )

435 West 116th Street
New York, NY 10025
United States

HOME PAGE: http://www.erictalley.com

European Corporate Governance Institute (ECGI) ( email )

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

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