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The Effect of Minority Veto Rights on Controller Tunneling

Jesse Fried, Ehud Kamar and Yishay Yafeh

No 12697, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: A central challenge in the regulation of controlled firms is curbing controller tunneling. As independent directors and fiduciary duties are widely seen as not up to the task, a number of jurisdictions have given minority shareholders veto rights over these transactions. To assess these rights' efficacy, we exploit a 2011 regulatory reform in Israel that gave the minority the ability to veto pay packages of controllers and their relatives ("controller executives"). We find that the reform curbed the pay of controller executives and led some controller executives to quit their jobs, or work for free, in circumstances suggesting their pay would not have received approval. These findings suggest that minority veto rights can help curb controller tunneling.

Keywords: controlling shareholders; corporate governance; corporate law; Executive compensation; minority shareholders; related party transactions; securities regulation; shareholder voting; tunneling; veto rights (search for similar items in EconPapers)
JEL-codes: G18 G34 G38 J33 J38 K22 L20 M12 M52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-hrm and nep-lma
Date: 2018-02
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