Sharing of Control as a Corporate Governance Mechanism

44 Pages Posted: 18 Jul 2001

See all articles by Armando R. Gomes

Armando R. Gomes

Washington University in Saint Louis - John M. Olin Business School

Walter Novaes

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics

Date Written: February 2005

Abstract

This paper identifies a new corporate governance mechanism: sharing control. We show that bargaining problems among multiple controlling shareholders may prevent inefficient investment decisions that harm minority shareholders. The same bargaining problems may block efficient investment decisions, though. By solving this trade-off, we show that the likelihood that shared control is efficient increases with three firm characteristics: overinvestment problems, the cost of verifying cash flows, and financing requirements. The model provides testable implications for the role that large shareholders play in corporate governance, contrasting shared control and monitoring as alternative governance mechanisms.

Suggested Citation

Gomes, Armando R. and Novaes, Walter, Sharing of Control as a Corporate Governance Mechanism (February 2005). PIER Working Paper No. 01-029; U of Penn, Inst for Law & Econ Research Paper 01-12. Available at SSRN: https://ssrn.com/abstract=277111 or http://dx.doi.org/10.2139/ssrn.277111

Armando R. Gomes (Contact Author)

Washington University in Saint Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
3145607087 (Phone)

Walter Novaes

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics ( email )

Rua Marques de Sao Vicente, 225/206F
Rio de Janeiro, RJ 22453
Brazil

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