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One Share/One Vote and The Market for Corporate Control

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  • Sanford J. Grossman
  • Oliver D. Hart

Abstract

A corporation's securities provide the holder with particular claims on the firm's income stream and particular voting rights. These securities can be designed in various ways: one share of a particular class may have a claim to votes which is disproportionately larger or smaller than its claim to income. In this paper we analyze some of the forces which make it desirable to set up the corporation so that all securities have the same proportion of votes as their claim to income ("one share/one vote"). We show that security structure influences both the conditions under which a control change takes place and the terms on which it occurs. First, the allocation of voting rights to securities determines which securities a party must acquire in order to win control. Secondly, the assignment of income claims to the same securities determines the cost of acquiring these voting rights. We will show that it is in shareholders' interest to set the cost of acquiring control to be as large as possible, consistent with a control change occurring whenever this increases shareholder wealth. Under certain assumptions, one share/one vote best achieves this goal. We distinguish between two classes of benefits from control: private benefits and security benefits. The private benefits of control refer to benefits the current management or the acquirer obtain for themselves, but which the target security holders do not obtain. The security benefits refer to the total market value of the corporation's securities. The assignment of income claims to voting rights determines the extent 'to which an acquirer must face competition from parties who value the firm for its security benefits rather than its private benefits.

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Bibliographic Info

Paper provided by Massachusetts Institute of Technology (MIT), Department of Economics in its series Working papers with number 440.

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Date of creation: Feb 1987
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Handle: RePEc:mit:worpap:440

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References

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  1. Demsetz, Harold, 1983. "The Structure of Ownership and the Theory of the Firm," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 375-90, June.
  2. Easterbrook, Frank H & Fischel, Daniel R, 1983. "Voting in Corporate Law," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 395-427, June.
  3. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  4. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 461-88, June.
  5. Caplin, Andrew S & Nalebuff, Barry J, 1988. "On 64%-Majority Rule," Econometrica, Econometric Society, vol. 56(4), pages 787-814, July.
  6. Grossman, Sanford J & Hart, Oliver D, 1981. "The Allocational Role of Takeover Bids in Situations of Asymmetric Information," Journal of Finance, American Finance Association, vol. 36(2), pages 253-70, May.
  7. Grossman, Sanford J. & Hart, Oliver D., 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Scholarly Articles 3450060, Harvard University Department of Economics.
  8. Levy, Haim, 1983. " Economic Evaluation of Voting Power of Common Stock," Journal of Finance, American Finance Association, vol. 38(1), pages 79-93, March.
  9. Henry G. Manne, 1965. "Mergers and the Market for Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 73, pages 351.
  10. Mayers, David & Smith, Clifford Jr., 1986. "Ownership structure and control : The mutualization of stock life insurance companies," Journal of Financial Economics, Elsevier, vol. 16(1), pages 73-98, May.
  11. Baron, David P, 1983. " Tender Offers and Management Resistance," Journal of Finance, American Finance Association, vol. 38(2), pages 331-43, May.
  12. Henry G. Manne, 1965. "Mergers and the Market for Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 73, pages 110.
  13. DeAngelo, Harry & DeAngelo, Linda & Rice, Edward M, 1984. "Going Private: Minority Freezeouts and Stockholder Wealth," Journal of Law and Economics, University of Chicago Press, vol. 27(2), pages 367-401, October.
  14. Jensen, Michael C. & Ruback, Richard S., 1983. "The market for corporate control : The scientific evidence," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 5-50, April.
  15. Lease, Ronald C & McConnell, John J & Mikkelson, Wayne H, 1984. "The Market Value of Differential Voting Rights in Closely Held Corporations," The Journal of Business, University of Chicago Press, vol. 57(4), pages 443-67, October.
  16. Dodd, Peter & Warner, Jerold B., 1983. "On corporate governance : A study of proxy contests," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 401-438, April.
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