Working Paper: CEPR ID: DP2708
Authors: Mike Burkart; Fausto Panunzi
Abstract: This Paper analyses the interaction between legal shareholder protection, managerial incentives, and ownership concentration. In our framework, blockholder and manager are distinct parties and the presence of a blockholder can both protect and hurt minority shareholders. Legal shareholder protection affects both the expropriation of shareholders and the blockholder's incentives to monitor. Because of this latter effect and its repercussion on managerial incentives, outside ownership concentration and legal shareholder protection can be both substitutes and complements. When legal protection and outside ownership concentration are substitutes, better legal protection may exacerbate rather than alleviate the conflict of interest between large and small shareholders. Moreover, strengthening legal minority shareholder protection may have adverse effects on the behaviour of the manager and of the large shareholder who both enhance share value. Hence, rules aimed at protecting minority shareholders, e.g., equal treatment rules, can be detrimental.
Keywords: Corporate Governance; Law and Finance; Ownership Structure
JEL Codes: G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| legal shareholder protection (G38) | expropriation of shareholders (G34) |
| legal shareholder protection (G38) | incentives of blockholders to monitor managers (G34) |
| legal shareholder protection (G38) | ownership concentration (G32) |
| ownership concentration (G32) | managerial effort (D29) |
| legal shareholder protection (G38) | managerial effort (D29) |
| collusion between large shareholders and managers (G34) | benefit for minority shareholders (G34) |