The Effect of Minority Veto Rights on Controller Tunneling

Yishay Yafeh, Jesse Fried and Ehud Kamar

No 12697, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: A central challenge in the regulation of controlled firms is curbing rent extraction by controllers. As independent directors and fiduciary duties are often insufficient, some jurisdictions give minority shareholders veto rights over related-party transactions. To assess these rights’ effectiveness, we exploit a 2011 Israeli reform that gave minority shareholders veto rights over related-party transactions, including the pay of controllers and their relatives (“controller executives†). We find that the reform curbed controller-executive pay and led some controller executives to resign or go with little or no pay in circumstances suggesting their pay would be rejected. These findings suggest that minority veto rights can be an effective corporate governance tool.

Keywords: Controlling shareholders; Tunneling; Corporate governance; Minority shareholders; Shareholder voting; Veto rights; Securities regulation; Corporate law; Executive compensation; Related party transactions (search for similar items in EconPapers)
JEL-codes: G18 G34 G38 J33 J38 K22 L20 M12 M52 (search for similar items in EconPapers)
Date: 2018-02
New Economics Papers: this item is included in nep-cfn, nep-hrm and nep-lma
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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