Are All Private Benefits of Control Ineffective? Principal–Principal Benefits, External Governance Quality, and Firm Performance

33 Pages Posted: 27 Apr 2019

See all articles by Steve Sauerwald

Steve Sauerwald

University of Illinois at Chicago

Pursey P.M.A.R. Heugens

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM)

Roxana Turturea

Aalto University

Marc Van Essen

University of South Carolina - Department of International Business; EMLYON Business School

Date Written: June 2019

Abstract

Private benefits of control (PBC) are benefits that controlling shareholders consume, but that are not shared with minority shareholders. Research focusing on the value protection role of corporate governance typically frames PBC as principal–principal (PP) agency costs, and interprets them as a form of minority shareholder expropriation that decreases firm performance. Taking a value creation perspective of corporate governance, however, we propose a more nuanced role for PBC. Specifically, we see them also as PP agency benefits that compensate controlling shareholders for their monitoring and advisory services, which can increase firm performance. Since both PP costs and benefits affect firm performance, we theorize that PBC enhance firm performance at a diminishing rate. Furthermore, we show that the effect of PBC on firm performance is more positive when country‐level external governance mechanisms are strong.

Keywords: control transactions, comparative corporate governance, controlling shareholders, institutions, firm performance, private benefits of control

Suggested Citation

Sauerwald, Steve and Heugens, Pursey P.M.A.R. and Turturea, Roxana and Van Essen, Marc, Are All Private Benefits of Control Ineffective? Principal–Principal Benefits, External Governance Quality, and Firm Performance (June 2019). Journal of Management Studies, Vol. 56, Issue 4, pp. 725-757, 2019. Available at SSRN: https://ssrn.com/abstract=3378768 or http://dx.doi.org/10.1111/joms.12420

Steve Sauerwald (Contact Author)

University of Illinois at Chicago

1200 W Harrison St
Chicago, IL 60607
United States

HOME PAGE: ssauerw@uic.edu

Pursey P.M.A.R. Heugens

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands
0031 10 408 2365 (Phone)
0031 10 408 9012 (Fax)

Roxana Turturea

Aalto University

Marc Van Essen

University of South Carolina - Department of International Business

United States

EMLYON Business School

23 Avenue Guy de Collongue
Ecully, 69132
France

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