Working Paper: CEPR ID: DP12697
Authors: Yishay Yafeh; Jesse Fried; Ehud Kamar
Abstract: A central challenge in the regulation of controlled firms is curbing rent extraction by controllers. As independent directors and fiduciary duties are often insufficient, some jurisdictions give minority shareholders veto rights over related-party transactions. To assess these rights’ effectiveness, we exploit a 2011 Israeli reform that gave minority shareholders veto rights over related-party transactions, including the pay of controllers and their relatives (“controller executives”). We find that the reform curbed controller-executive pay and led some controller executives to resign or go with little or no pay in circumstances suggesting their pay would be rejected. These findings suggest that minority veto rights can be an effective corporate governance tool.
Keywords: controlling shareholders; tunneling; corporate governance; minority shareholders; shareholder voting; veto rights; securities regulation; corporate law; executive compensation; related party transactions
JEL Codes: G18; G34; G38; J33; J38; K22; L20; M12; M52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Minority veto rights (J15) | Controller executive pay (M12) |
| Minority veto rights (J15) | Likelihood of executive disappearances (P37) |
| Controller executive pay (M12) | Likelihood of executive disappearances (P37) |
| Minority veto rights (J15) | Rent extraction by controllers (R21) |