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No derivative shareholder suits in Europe: A model of percentage limits and collusion

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  • Grechenig, Kristoffel
  • Sekyra, Michael
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    Abstract

    We address one of the cardinal puzzles of European corporate law: the lack of derivate shareholder suits. We explain this phenomenon on the basis of percentage limits which require shareholders to hold a minimum amount of shares in order to bring a lawsuit. We show that, under this legal regime, managers will collude with large shareholders by means of settlements or bribes that impose a negative externality on small shareholders. Contrary to conventional agency models, we find that large shareholders do not monitor the management; as a consequence, there is no free riding opportunity for small shareholders.

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    Bibliographic Info

    Article provided by Elsevier in its journal International Review of Law and Economics.

    Volume (Year): 31 (2011)
    Issue (Month): 1 (March)
    Pages: 16-20

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    Handle: RePEc:eee:irlaec:v:31:y:2011:i:1:p:16-20

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    Web page: http://www.elsevier.com/locate/irle

    Related research

    Keywords: Derivative shareholder suits Percentage limits Collusion Monitoring Free riding;

    References

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    1. A. Admati & P. P├čeiderer & J. Zechner, 2005. "Large shareholder activism, risk sharing, and financial market equilibrium," Public Economics 0502011, EconWPA.
    2. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
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    4. Zingales, Luigi, 1995. "What Determines the Value of Corporate Votes?," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 1047-73, November.
    5. Sanford Grossman & Oliver Hart, . "An Analysis of the Principal-Agent Problem," Rodney L. White Center for Financial Research Working Papers 15-80, Wharton School Rodney L. White Center for Financial Research.
    6. Barclay, Michael J & Holderness, Clifford G, 1992. "The Law and Large-Block Trades," Journal of Law and Economics, University of Chicago Press, vol. 35(2), pages 265-94, October.
    7. Alexander Stremitzer, 2008. "Plaintiffs exploiting Plaintiffs," Bonn Econ Discussion Papers bgse2_2008, University of Bonn, Germany.
    8. Demsetz, Harold, 1986. "Corporate Control, Insider Trading, and Rates of Return," American Economic Review, American Economic Association, vol. 76(2), pages 313-16, May.
    9. Barclay, Michael J. & Holderness, Clifford G., 1989. "Private benefits from control of public corporations," Journal of Financial Economics, Elsevier, vol. 25(2), pages 371-395, December.
    10. Alchian, Armen A & Demsetz, Harold, 1972. "Production , Information Costs, and Economic Organization," American Economic Review, American Economic Association, vol. 62(5), pages 777-95, December.
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