Delegation of Control Rights, Ownership Concentration, and the Decline of External Finance
AbstractIf ownership and control are separated, leaving the manager with discretion may be of value. This paper discusses the extent to which a firm's ownership structure may serve as a commitment for shareholders not to interfere with the manager's project decisions, thereby reducing the agency cost of debt. As shareholder passivity means granting the manager more freedom, the costs of this commitment are increased managerial on-the-job consumption and shirking. Trading off the costs and benefits of managerial discretion, we derive a unique optimal ownership concentration. The paper also establishes a link between firm growth and ownership structure, implying that firms with concentrated ownership may forego profitable investment opportunities even if there is no credit rationing. Moreover, the paper discusses the extent to which agency problems between shareholders and debtholders can be alleviated by delegating control to debtholders.
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Bibliographic InfoPaper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 99-68.
Length: 29 pages
Date of creation: 28 Jun 1999
Date of revision:
Note: Financial Support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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This paper has been announced in the following NEP Reports:
- NEP-ALL-1999-07-12 (All new papers)
- NEP-CFN-1999-07-12 (Corporate Finance)
- NEP-FIN-1999-07-12 (Finance)
- NEP-IND-1999-07-12 (Industrial Organization)
- NEP-LAW-1999-07-12 (Law & Economics)
- NEP-MIC-1999-07-12 (Microeconomics)
- NEP-PKE-1999-07-12 (Post Keynesian Economics)
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