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Negotiated Block Trade And Rebuilding Of Trust

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  • Pak Hung Au
  • Yuk‐Fai Fong
  • Jin Li

Abstract

We investigate the impact of corporate governance on customers' trust using a dynamic model of experience‐goods firm. In the optimal equilibrium, customers' trust in the firm is linked to its behavior in the market for corporate control, so that the controlling shareholder has incentives to ensure high product quality while noncontrolling shareholders' interests are protected. Following a trust‐damaging event, turnover of the controlling share block restores customers' trust and enhances total shareholder value. Our analysis identifies an endogenous cost of corporate control, offers implications for the control premium, and provides a novel rationale for the separation of ownership and control.

Suggested Citation

  • Pak Hung Au & Yuk‐Fai Fong & Jin Li, 2020. "Negotiated Block Trade And Rebuilding Of Trust," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(2), pages 901-939, May.
    • Handle: RePEc:wly:iecrev:v:61:y:2020:i:2:p:901-939
    DOI: 10.1111/iere.12444
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