Voting rights, private benefits, and takeovers

Frank A. Schmid

Review, 2002, vol. 84, issue Jan., 35-46

Abstract: This article analyzes the effects that institutional design of the firm has on the allocation of control over the firm?s assets. The efficient allocation of control is a necessary condition for the optimal allocation of resources. Dynamic efficiency in resource allocation presupposes that control over firms will change hands when a given allocation becomes suboptimal.> Typically, changes in control are brought about through (successful) tender offers or block trades. With regard to takeovers, a firm may have two types of value to consider: First, there is the public value of the firm, which is the market value of the firm?s securities. Second, there may be a private value of the firm. The private value is the benefit an investor enjoys from exercising control over the firm. Private control benefits are most signficant for entrepreneurial start-ups, for established family-owned businesses, and for organizations where personal investors also pursue non-pecuniary goals, such as media groups or professional sports organizations.> Of the legal arrangements identified in the finance literature, the most significant for wealth-maximization in takeovers are the one share?one vote principle, majority rules, and mandatory tender offers. We analyze the implications of these three institutional arrangements in a simple textbook takeover model. The model helps in understanding the optimal design of a legal environment in which the market for corporate control promotes efficient allocation of capital.

Keywords: Corporations; -; Finance (search for similar items in EconPapers)
Date: 2002
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Citations: View citations in EconPapers (1)

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