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Shareholder Protection and Outside Blockholders: Substitutes or Complements?

  • Sergey Stepanov

Should outside blockholders be more common in countries with weaker shareholder protection? I show that there can be a U-shape dependence of the outside ownership concentration on the quality of shareholder protection. This result is in line with the recent empirical evidence questioning the traditional law-and-finance view. In my model, a lower cost of private benefit extraction makes outside monitoring less desirable for an entrepreneur, thereby calling for a smaller outside blockholder's share. However, a low blockholder's share may provoke collusion between the entrepreneur and the blockholder, which hampers raising funds from dispersed shareholders. This trade-off yields the described U-shape relationship.

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Article provided by Mohr Siebeck, Tübingen in its journal Journal of Institutional and Theoretical Economics.

Volume (Year): 169 (2013)
Issue (Month): 2 (June)
Pages: 355-381

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Handle: RePEc:mhr:jinste:urn:sici:0932-4569(201306)169:2_355:spaobs_2.0.tx_2-t
DOI: 10.1628/093245613X666315
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