Corporate Governance, Corporate and Employment Law, and the Costs of Expropriation

Giulio Ecchia, Martin Gelter and Piero Pasotti

Review of Law & Economics, 2012, vol. 8, issue 2, 457-486

Abstract: We set up a model to study how ownership structure, corporate law and employment law interact to set the incentives that influence the decision by a large shareholder or manager effectively controlling the firm whether to divert resources from minority shareholders and employees. We suggest that agency problems between the controller and other investors and holdup problems between shareholders and employees are connected if the controller bears private costs of expropriating these groups. Corporate law and employment law may therefore sometimes be substitutes to some extent; employees may benefit from stronger corporate law intended to protect minority shareholders. Our model has implications for the domestic and comparative study of corporate governance structures and addresses, among other things, the question of whether large shareholders are better able to commit to a long-term relationship with employees than dispersed shareholders, or whether the separation of ownership and control facilitates long-term relationships with labor.

Date: 2012
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Working Paper: Corporate Governance, Corporate and Employment Law, and the Costs of Expropriation (2011)
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DOI: 10.1515/1555-5879.1357

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