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Unbundling Ownership and Control

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  • Ferreira, Daniel
  • Ornelas, Emanuel
  • Turner, John L.

Abstract

Treating control as an asset that can be bought and sold, we introduce a model of the simultaneous and separable trading of ownership and control in a private information setting. The model provides a novel explanation for the prevalence and persistence of the separation of ownership from control in modern corporations: efficiency in the market for corporate control is more easily achieved when ownership is not concentrated in the hands of the manager. The central reason is that low managerial ownership reduces informational rents in the market for control. Using a mechanism design approach, we fully characterize the optimal mechanism for restructuring ownership and control. Under the optimal mechanism, corporations typically increase the number of shares of the incumbent manager if he remains in control, and give him a generous golden parachute that includes both stock and cash if he is deposed. By contrast, combining ownership and control is optimal only if agency costs are extreme.

Suggested Citation

  • Ferreira, Daniel & Ornelas, Emanuel & Turner, John L., 2007. "Unbundling Ownership and Control," CEPR Discussion Papers 6257, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:6257
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    Cited by:

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    2. Mike Burkart & Samuel Lee, 2010. "Signaling in Tender Offer Games," FMG Discussion Papers dp655, Financial Markets Group.
    3. Mike Burkart & Samuel Lee, 2015. "Signalling to Dispersed Shareholders and Corporate Control," Review of Economic Studies, Oxford University Press, vol. 82(3), pages 922-962.
    4. Díez-Esteban, José María & García-Gómez, Conrado Diego & López-Iturriaga, Félix Javier & Santamaría-Mariscal, Marcos, 2017. "Corporate risk-taking, returns and the nature of major shareholders: Evidence from prospect theory," Research in International Business and Finance, Elsevier, vol. 42(C), pages 900-911.
    5. Bauguess, Scott W. & Slovin, Myron B. & Sushka, Marie E., 2012. "Large shareholder diversification, corporate risk taking, and the benefits of changing to differential voting rights," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 1244-1253.

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    More about this item

    Keywords

    corporate control; mechanism design; ownership; restructuring;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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