Capital Lock-in, Liquidity, and the Separation of Ownership and Control

43 Pages Posted: 13 Sep 2019

See all articles by Giuseppe Dari‐Mattiacci

Giuseppe Dari‐Mattiacci

University of Amsterdam - University of Amsterdam Faculty of Law

Date Written: August 28, 2019

Abstract

Who should own firm assets, the collection of investors or a distinct legal entity? In a partnership, individual investors own firm assets and retain the right to unilaterally withdraw their capital at will. If, instead, firm assets are owned by a distinct legal entity (the corporation), investors implicitly waive this right, locking capital in the firm. Capital lock-in facilitates long-term investments but carries a risk of inefficient continuation of unprofitable projects. Withdrawal at will can lead to the inefficient liquidation of profitable projects. In this paper I provide a theory of the capital lock-in and the choice of organizational form.

Keywords: liquidity, ownership and control, theory of the firm, legal entity, capital lock-in

JEL Classification: G30, K22

Suggested Citation

Dari-Mattiacci, Giuseppe, Capital Lock-in, Liquidity, and the Separation of Ownership and Control (August 28, 2019). Columbia Law and Economics Working Paper No. 607, Available at SSRN: https://ssrn.com/abstract=3452250 or http://dx.doi.org/10.2139/ssrn.3452250

Giuseppe Dari-Mattiacci (Contact Author)

University of Amsterdam - University of Amsterdam Faculty of Law ( email )

Postbus 15654
1001 ND
Amsterdam, Noord-Holland 1001 ND
Netherlands

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