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Voting rights, private benefits, and takeovers


  • Frank A. Schmid


This article analyzes the effects that institutional design of the firm has on the allocation of control over the firm’s assets. The efficient allocation of control is a necessary condition for the optimal allocation of resources. Dynamic efficiency in resource allocation presupposes that control over firms will change hands when a given allocation becomes suboptimal.> Typically, changes in control are brought about through (successful) tender offers or block trades. With regard to takeovers, a firm may have two types of value to consider: First, there is the public value of the firm, which is the market value of the firm’s securities. Second, there may be a private value of the firm. The private value is the benefit an investor enjoys from exercising control over the firm. Private control benefits are most signficant for entrepreneurial start-ups, for established family-owned businesses, and for organizations where personal investors also pursue non-pecuniary goals, such as media groups or professional sports organizations.> Of the legal arrangements identified in the finance literature, the most significant for wealth-maximization in takeovers are the one share–one vote principle, majority rules, and mandatory tender offers. We analyze the implications of these three institutional arrangements in a simple textbook takeover model. The model helps in understanding the optimal design of a legal environment in which the market for corporate control promotes efficient allocation of capital.

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  • Frank A. Schmid, 2002. "Voting rights, private benefits, and takeovers," Review, Federal Reserve Bank of St. Louis, issue Jan., pages 35-46.
  • Handle: RePEc:fip:fedlrv:y:2002:i:jan.:p:35-46:n:v.84no.1

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    References listed on IDEAS

    1. Grossman, Sanford J. & Hart, Oliver D., 1988. "One share-one vote and the market for corporate control," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 175-202, January.
    2. Stewart C. Myers, 2000. "Outside Equity," Journal of Finance, American Finance Association, vol. 55(3), pages 1005-1037, June.
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    Cited by:

    1. Frank A. Schmid & Mark Wahrenburg, 2002. "Mergers and acquisitions in Germany," Working Papers 2002-027, Federal Reserve Bank of St. Louis.

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