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Going Public without Governance: Managerial Reputation Effects

  • Armando Gomes

    (The Wharton School, University of Pennsylvania)

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    This paper addresses the agency problem between controlling shareholders and minority shareholders. This problem is common among public firms in many countries where the legal system does not effectively protect minority shareholders against oppression by controlling shareholders. We show that even without any explicit corporate governance mechanisms protecting minority shareholders, controlling shareholders can implicitly commit not to expropriate them. Stock prices of such companies are significantly higher and firms are more likely go public because of this reputation effect. Moreover, insiders divest shares gradually over time, at a rate that is negatively related to the degree of moral hazard. Copyright The American Finance Association 2000.

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    Article provided by American Finance Association in its journal The Journal of Finance.

    Volume (Year): 55 (2000)
    Issue (Month): 2 (04)
    Pages: 615-646

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    Handle: RePEc:bla:jfinan:v:55:y:2000:i:2:p:615-646
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