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Unbundling Ownership and Control

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  • Ferreira, Daniel
  • Ornelas, Emanuel
  • Turner, John L.

Abstract

Treating control as an asset that can be bought and sold, we introduce a model of the simultaneous and separable trading of ownership and control in a private information setting. The model provides a novel explanation for the prevalence and persistence of the separation of ownership from control in modern corporations: efficiency in the market for corporate control is more easily achieved when ownership is not concentrated in the hands of the manager. The central reason is that low managerial ownership reduces informational rents in the market for control. Using a mechanism design approach, we fully characterize the optimal mechanism for restructuring ownership and control. Under the optimal mechanism, corporations typically increase the number of shares of the incumbent manager if he remains in control, and give him a generous golden parachute that includes both stock and cash if he is deposed. By contrast, combining ownership and control is optimal only if agency costs are extreme.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6257.

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Date of creation: May 2007
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Handle: RePEc:cpr:ceprdp:6257

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Keywords: corporate control; mechanism design; ownership; restructuring;

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References

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Citations

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Cited by:
  1. Mike Burkart & Samuel Lee, 2010. "Signaling in Tender Offer Games," FMG Discussion Papers dp655, Financial Markets Group.
  2. Vasiliki Skreta & Nicolas Figueroa, 2008. "What to Put on the Table," Working Papers 08-11, New York University, Leonard N. Stern School of Business, Department of Economics.
  3. Bauguess, Scott W. & Slovin, Myron B. & Sushka, Marie E., 2012. "Large shareholder diversification, corporate risk taking, and the benefits of changing to differential voting rights," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 1244-1253.

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