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Shareholder Protection and Outside Blockholders: Substitutes or Complements?

Listed author(s):
  • Sergey Stepanov

    ()

    (New Economic School and CEFIR)

This paper joins the literature examining connections between legal protection of shareholders and finance. Driven by the need to attract funds a manager tries to reduce agency costs by selling a fraction of equity to a large investor (the outside blockholder). Monitoring by the blockholder can serve as a commitment device limiting inefficient private benefits extraction. However, the threat of collusion between the blockholder and the manager hampers raising funds from dispersed shareholders. We examine how the manager’s choice of the ownership structure is affected by the legal protection of shareholders. Our main finding is that, contrary to the widespread view, there can be a U-shape dependence of the outside ownership concentration on the quality of shareholder protection. At the same time our result on the total ownership concentration is consistent with recent research.

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File URL: http://www.cefir.ru/papers/WP133.pdf
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Paper provided by Center for Economic and Financial Research (CEFIR) in its series Working Papers with number w0133.

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Length: 29 pages
Date of creation: Nov 2009
Handle: RePEc:cfr:cefirw:w0133
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  1. Barca, Fabrizio & Becht, Marco (ed.), 2001. "The Control of Corporate Europe," OUP Catalogue, Oxford University Press, number 9780199247424.
  2. Shleifer, Andrei & Wolfenzon, Daniel, 2002. "Investor protection and equity markets," Journal of Financial Economics, Elsevier, vol. 66(1), pages 3-27, October.
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    • Mike Burkart & Fausto Panunzi & Andrei Shleifer, 2003. "Family Firms," Journal of Finance, American Finance Association, vol. 58(5), pages 2167-2202, October.
  4. Burkart, Mike & Panunzi, Fausto, 2001. "Agency Conflicts, Ownership Concentration, and Legal Shareholder Protection," CEPR Discussion Papers 2708, C.E.P.R. Discussion Papers.
  5. Shleifer, Andrei & Vishny, Robert W, 1997. " A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
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  8. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert W., 1998. "Law and Finance," Scholarly Articles 3451310, Harvard University Department of Economics.
  9. 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.
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  11. Mike Burkart & Denis Gromb & Fausto Panunzi, 1997. "Large Shareholders, Monitoring, and the Value of the Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 112(3), pages 693-728.
  12. Patrick Bolton & Marco Becht & Alisa Röell, 2002. "Corporate Governance and Control," NBER Working Papers 9371, National Bureau of Economic Research, Inc.
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  15. Becht, Marco & Roell, Ailsa, 1999. "Blockholdings in Europe:: An international comparison1," European Economic Review, Elsevier, vol. 43(4-6), pages 1049-1056, April.
  16. Denis, Diane K. & McConnell, John J., 2003. "International Corporate Governance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(01), pages 1-36, March.
  17. Marco Becht & Ailsa Roell, 1999. "Blockholdings in Europe: an international comparison," ULB Institutional Repository 2013/13316, ULB -- Universite Libre de Bruxelles.
  18. Rafael La Porta & Florencio Lopez-deSilanes & Andrei Shleifer & Robert W. Vishny, 1999. "Investor Protection and Corporate Valuation," NBER Working Papers 7403, National Bureau of Economic Research, Inc.
  19. Marco Pagano & Ailsa Röell, 1998. "The Choice of Stock Ownership Structure: Agency Costs, Monitoring, and the Decision to Go Public," The Quarterly Journal of Economics, Oxford University Press, vol. 113(1), pages 187-225.
  20. Himmelberg, Charles P. & Hubbard, R. Glenn & Love, Inessa, 2002. "Investor protection, ownership, and the cost of capital," Policy Research Working Paper Series 2834, The World Bank.
  21. Marco Becht & Fabrizio Barca, 2001. "The control of corporate Europe," ULB Institutional Repository 2013/13302, ULB -- Universite Libre de Bruxelles.
  22. Mike Burkart & Fausto Panunzi, 2006. "Agency conflicts, ownership concentration, and legal shareholder protection," LSE Research Online Documents on Economics 69547, London School of Economics and Political Science, LSE Library.
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