and Daniel Wolfenzon
Morten Bennedsen: Department of Economics, Copenhagen Business School, Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark
Daniel Wolfenzon: Harvard University, Postal: Harvard University, Department of Economics, Littauer Centre, Cambridge, MA 02138
Abstract: We analyze a closely held corporation characterized by the absence of a resale market for shares and by potentially having several significant shareholders. The founder of the firm may optimally choose to distribute voting power to several large shareholders since this forces them to form coalitions to obtain control. A coalition, by grouping the cash flows of its members, internalizes to a larger extent the consequences of its actions and hence takes more efficient actions than its individual members. The model has other implications for the ownership structure of a closely held corporation: A one-share-one-vote rule improves efficiency; the optimal ownership structure has either one dominant shareholder or several equal-sized shareholders; and finally, efficiency decreases with the number of significant shareholders.
42 pages, July 18, 1999
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