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Shareholder Protection and Outside Blockholders: Substitutes or Complements?

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Author Info

  • Sergey Stepanov

    ()
    (New Economic School and CEFIR)

Abstract

This paper joins the literature examining connections between legal protection of shareholders and finance. Driven by the need to attract funds a manager tries to reduce agency costs by selling a fraction of equity to a large investor (the outside blockholder). Monitoring by the blockholder can serve as a commitment device limiting inefficient private benefits extraction. However, the threat of collusion between the blockholder and the manager hampers raising funds from dispersed shareholders. We examine how the manager’s choice of the ownership structure is affected by the legal protection of shareholders. Our main finding is that, contrary to the widespread view, there can be a U-shape dependence of the outside ownership concentration on the quality of shareholder protection. At the same time our result on the total ownership concentration is consistent with recent research.

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Bibliographic Info

Paper provided by Center for Economic and Financial Research (CEFIR) in its series Working Papers with number w0133.

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Length: 29 pages
Date of creation: Nov 2009
Date of revision:
Handle: RePEc:cfr:cefirw:w0133

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Keywords: Corporate governance; shareholder protection; blockholder monitoring; collusion; ownership structure;

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References

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  1. Mike Burkart & Fausto Panunzi, 2001. "Agency conflicts, ownership concentration, and legal shareholder protection," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 25056, London School of Economics and Political Science, LSE Library.
  2. Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer, 1998. "Corporate Ownership Around the World," NBER Working Papers 6625, National Bureau of Economic Research, Inc.
  3. Patrick Bolton & Marco Becht & Alisa Röell, 2002. "Corporate Governance and Control," NBER Working Papers 9371, National Bureau of Economic Research, Inc.
  4. Mike Burkart & Fausto Panunzi & Andrei Shleifer, 2003. "Family Firms," Journal of Finance, American Finance Association, American Finance Association, vol. 58(5), pages 2167-2202, October.
  5. Shleifer, Andrei & Vishny, Robert W, 1997. " A Survey of Corporate Governance," Journal of Finance, American Finance Association, American Finance Association, vol. 52(2), pages 737-83, June.
  6. Andrei Shleifer & Daniel Wolfenson, 2000. "Investor Protection and Equity Markets," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1906, Harvard - Institute of Economic Research.
  7. Rafael LaPorta & Florencio Lopez de-Silanes & Andrei Shleifer & Robert W. Vishny, 1996. "Law and Finance," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1768, Harvard - Institute of Economic Research.
    • Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny, 1996. "Law and Finance," NBER Working Papers 5661, National Bureau of Economic Research, Inc.
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    • La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert W., 1998. "Law and Finance," Scholarly Articles 3451310, Harvard University Department of Economics.
  8. Himmelberg, Charles P. & Hubbard, R. Glenn & Love, Inessa, 2002. "Investor protection, ownership, and the cost of capital," Policy Research Working Paper Series 2834, The World Bank.
  9. Rafael La porta & Florencio Lopez-De-Silanes & Andrei Shleifer & Robert Vishny, 2002. "Investor Protection and Corporate Valuation," Journal of Finance, American Finance Association, American Finance Association, vol. 57(3), pages 1147-1170, 06.
  10. Tirole, Jean, 2001. "Corporate Governance," Econometrica, Econometric Society, Econometric Society, vol. 69(1), pages 1-35, January.
  11. Denis, Diane K. & McConnell, John J., 2003. "International Corporate Governance," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 38(01), pages 1-36, March.
  12. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 3(4), pages 305-360, October.
  13. Becht, Marco & Roell, Ailsa, 1999. "Blockholdings in Europe:: An international comparison1," European Economic Review, Elsevier, Elsevier, vol. 43(4-6), pages 1049-1056, April.
  14. Marco Becht & Ailsa Röell, 1999. "Blockholdings in Europe: an international comparison," ULB Institutional Repository 2013/13316, ULB -- Universite Libre de Bruxelles.
  15. Marco Pagano & Ailsa Röell, 1998. "The Choice Of Stock Ownership Structure: Agency Costs, Monitoring, And The Decision To Go Public," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 113(1), pages 187-225, February.
  16. Burkart, Mike & Gromb, Denis & Panunzi, Fausto, 1997. "Large Shareholders, Monitoring, and the Value of the Firm," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(3), pages 693-728, August.
  17. Marco Becht & Fabrizio Barca, 2001. "The control of corporate Europe," ULB Institutional Repository 2013/13302, ULB -- Universite Libre de Bruxelles.
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Cited by:
  1. Sergey Stepanov, 2007. "Shareholder Access to Manager-Biased Courts and the Monitoring/Litigation Tradeoff," Working Papers, Center for Economic and Financial Research (CEFIR) w0106, Center for Economic and Financial Research (CEFIR).

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