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Corporate Control and Balance of Powers

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  • Daron Acemoglu

Abstract

Most managers enjoy considerable discretion and protection from possible interventions which enables them to look after their own interests. This is often attributed to the dispersion of shareholders and regulations that deter effective outside interventions. This paper presents a model that has empire-building managers who have important effort choices. Because the manager is not the residual claimant of the relevant returns, in order to provide him with the opportunity to share some of the rents he creates. To achieve this, equilibrium organizational form separates control from ownership and tries to contain the manager's empire-building incentives using performance contracts and the capital structure rather than more direct methods of control. Nevertheless, owners will often be unable to commit to managerial discretion because ownership of the assets gives them the right to decide what use that asset will be put and thus a right to fire the manager. In this case, it will be necessary to choose a disperse ownership structure in order to create free-rider effects among shareholders and thus to commit them to be passive. Thus, the dispersion of ownership, rather than being the cause of the problem, may be a solution to a more serious one. Nevertheless, there will often be benefits to having large shareholders. In this case, the paper shows that an intermediate level of dispersion is the optimum.

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Bibliographic Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0239.

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Date of creation: May 1995
Date of revision:
Handle: RePEc:cep:cepdps:dp0239

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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Cited by:
  1. Arnoud W.A. Boot & Jonathan R. Macey, 1998. "Objectivity, Control and Adaptability in Corporate Governance," Tinbergen Institute Discussion Papers 98-064/2, Tinbergen Institute.
  2. repec:dgr:uvatin:1998064 is not listed on IDEAS
  3. Ralph P. Heinrich, 1999. "A Model of Corporate Governance as a System," Kiel Working Papers 931, Kiel Institute for the World Economy.
  4. Daron Acemoglu & Miles Gietzmann, 1998. "Auditor independence, incomplete contracts and the role of legal liability," European Accounting Review, Taylor & Francis Journals, vol. 6(3), pages 355-375.
  5. Arnoud W.A. Boot & Jonathan R. Macey, 1999. "Objectivity, Proximity and Adaptability in Corporate Governance," William Davidson Institute Working Papers Series 266, William Davidson Institute at the University of Michigan.
  6. repec:dgr:uvatin:2098064 is not listed on IDEAS
  7. Jason G. Cummins & Ingmar Nyman, 2001. "Optimal investment with fixed refinancing costs," Finance and Economics Discussion Series 2001-40, Board of Governors of the Federal Reserve System (U.S.).

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