Working Paper: CEPR ID: DP6257
Authors: Daniel Ferreira; Emanuel Ornelas; John L. Turner
Abstract: Treating control as an asset that can be bought and sold, we introduce a model of the simultaneous and separable trading of ownership and control in a private information setting. The model provides a novel explanation for the prevalence and persistence of the separation of ownership from control in modern corporations: efficiency in the market for corporate control is more easily achieved when ownership is not concentrated in the hands of the manager. The central reason is that low managerial ownership reduces informational rents in the market for control. Using a mechanism design approach, we fully characterize the optimal mechanism for restructuring ownership and control. Under the optimal mechanism, corporations typically increase the number of shares of the incumbent manager if he remains in control, and give him a generous golden parachute that includes both stock and cash if he is deposed. By contrast, combining ownership and control is optimal only if agency costs are extreme.
Keywords: Corporate Control; Mechanism Design; Ownership; Restructuring
JEL Codes: D82; G32; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| low managerial ownership (J54) | reduces informational rents (D89) |
| separation of ownership from control (G34) | enhances efficiency in the market for corporate control (G34) |
| low managerial ownership (J54) | facilitates efficient restructuring of ownership and control (G34) |
| managerial ownership (G34) | affects market for corporate control (G34) |
| agency costs arise when managerial ownership is low (G34) | complicates separation of ownership and control (G34) |
| optimal restructuring mechanism (D47) | is likely to be efficient unless agency costs are extreme (D61) |
| managerial ownership (G34) | influences participation constraints of noncontrolling shareholders (G34) |
| participation constraints of noncontrolling shareholders (G34) | impacts overall efficiency of the market (G14) |