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Private Contracting and Corporate Governance: Evidence from the Provision of Tag-Along Rights in an Emerging Market

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Author Info
Bennedsen, Morten
Nielsen, Kasper Meisner
Nielsen, Thomas Vester
Abstract

We analyse controlling owners incentive to provide non-controlling owners with better protection against self-dealing through offering new shares with tag-along rights, - the private contracting alternative to equal price provision in takeover legislation. Our model identifies two counteracting effects: The benefit of offering tag-along rights is the anti-expropriation effect which makes it harder for new owners to finance a takeover through expropriation of minority owners. The cost is the rent transfer effect which implies that there is a wealth transfer from controlling owners to existing minority owners. Empirically we test the implications of the model using data on equity offerings in Brazil. Consistent with the theoretical predictions we find that offering tag-along rights increases market value of a firm and that companies offering shares with tag-along rights offer larger claims, have less disproportional ownership structure, have a smaller group of existing minority shareholders and are more likely to issue new shares. The paper, thus, find strong support for private contracting being an important alternative governance mechanism to legal protection of investors.

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Publisher Info
Paper provided by Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University in its series CEI Working Paper Series with number 2008-2.

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Length: 20, [6] p.
Date of creation: Apr 2008
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Handle: RePEc:hit:hitcei:2008-2

Note: November 2007
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Related research
Keywords: Private contracting; Corporate governance; Emerging markets; Tag-along rights;

Find related papers by JEL classification:
G30 - Financial Economics - - Corporate Finance and Governance - - - General
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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