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Private Contracting and Corporate Governance: Evidence from the Provision of Tag-Along Rights in an Emerging Market


  • Bennedsen, Morten
  • Nielsen, Kasper Meisner
  • Nielsen, Thomas Vester


We analyse controlling owners incentive to provide non-controlling owners with better protection against self-dealing through offering new shares with tag-along rights, - the private contracting alternative to equal price provision in takeover legislation. Our model identifies two counteracting effects: The benefit of offering tag-along rights is the anti-expropriation effect which makes it harder for new owners to finance a takeover through expropriation of minority owners. The cost is the rent transfer effect which implies that there is a wealth transfer from controlling owners to existing minority owners. Empirically we test the implications of the model using data on equity offerings in Brazil. Consistent with the theoretical predictions we find that offering tag-along rights increases market value of a firm and that companies offering shares with tag-along rights offer larger claims, have less disproportional ownership structure, have a smaller group of existing minority shareholders and are more likely to issue new shares. The paper, thus, find strong support for private contracting being an important alternative governance mechanism to legal protection of investors.

Suggested Citation

  • Bennedsen, Morten & Nielsen, Kasper Meisner & Nielsen, Thomas Vester, 2008. "Private Contracting and Corporate Governance: Evidence from the Provision of Tag-Along Rights in an Emerging Market," CEI Working Paper Series 2008-2, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
  • Handle: RePEc:hit:hitcei:2008-2
    Note: November 2007

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    Cited by:

    1. Black, Bernard S. & de Carvalho, Antonio Gledson & Gorga, √Črica, 2010. "Corporate governance in Brazil," Emerging Markets Review, Elsevier, vol. 11(1), pages 21-38, March.

    More about this item


    Private contracting; Corporate governance; Emerging markets; Tag-along rights;

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • 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
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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