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Bar IlanJune 18, 2012
Concentrated Ownership Revisited:
Idiosyncratic Value and Agency Costs
Zohar Goshen & Assaf Hamdani
Existing Literature
Holding a Control Block is Costly
Illiquidity, Reduced Diversification
Bad PBC Monitoring
Pie’s Distribution Increase Pie’s Size
Improve Minority Protection Legal Optimal PBC
Some Difficulties
Private Benefits•Good-law countries•Private equity
Monitoring• Contract-based compensation• Relative costs
Our View
•Idiosyncratic value▫Subjective value; vision; business plan▫If realized, may be shared pro-rata
•Bundling control with cash-flow rights:▫Entrepreneur: control over idiosyncratic
value▫Investors: alleviates agency costs
Implications
• Concentrated Ownership▫ Can coexist with strong investor protection
• Control Premium▫Can reflect idiosyncratic value
• Corporate Law▫Balance minority protection and controller
rights▫Controller: property right over control▫Minority investors: pro-rata share
Financial Contracting Framework
Entrepreneur Investors
Idiosyncratic Value Agency Costs
Information Asymmetry
Control
Cash Flow
Control
Dual
Class
Dispersed ownership
Private Equity Funds
Controlling
Shareholders
Time: At Will 10 Years IndefiniteScope: Day-to-Day Complete Complete
Cash-Flow Rights
Dual
Class
Dispersed ownershi
p
Private Equity Funds
Controlling
Shareholders
Salary + 1-3% 2%+20% Less than 50% More than 50%
Controlling Shareholders(cash flow=voting)
•Controller▫Pursue idiosyncratic value increase
pie’s size▫Costs: illiquidity, reduced diversification,
monitoring
• Investors▫Alleviate asymmetric information and
(management) agency costs▫Exposure to (control) agency costs
Implications: Theory
•Concentrated ownership▫Even in good-law countries▫Even without private benefits of control
•Control premium▫Control is valuable (protects idiosyncratic
value)
Implications: Corporate Law
•Balance minority protection and controller rights
Implications: Corporate Law
Controller Rights
− Pursue idiosyncratic value− Property-rule protection:
− Management/Control− Exit
Minority Protection
− Agency costs− Liability-rule protection:
− Pro-rata rule− Mid-stream changes