Modeling Horizontal Shareholding With Ownership Dispersion
27 Pages Posted: 3 Nov 2018 Last revised: 2 Nov 2019
Date Written: October 31, 2019
The dominant formulation for modeling the objective function of the firm's manager in the presence of horizontal shareholding has been critiqued for producing the result that it may solely reflect the interests of a small number of shareholders even if, collectively, those shareholders do not have full control of the firm. We show that this issue can be avoided with an alternative formulation. This formulation is derived from a probabilistic voting model in which shareholders may differ in their evaluation of the amount of resources the manager will divert from the firm for personal use, which yields the result that the manager maximizes a control-weighted sum of the shareholders' relative (rather than absolute) expected returns.
Keywords: Horizontal Shareholding, Ownership Dispersion, Manager Objective Function, Proportional Control, Banzhaf Control
JEL Classification: L13, L41
Suggested Citation: Suggested Citation