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Private Contracting and Corporate Governance: Evidence from the Provision of Tag-Along Rights in an Emerging Market

Morten Bennedsen, Kasper Meisner Nielsen and Thomas Vester Nielsen

No 2008-2, CEI Working Paper Series from Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University

Abstract: We analyse controlling owners incentive to provide non-controlling owners with better protection against self-dealing through offering new shares with tag-along rights, - the private contracting alternative to equal price provision in takeover legislation. Our model identifies two counteracting effects: The benefit of offering tag-along rights is the anti-expropriation effect which makes it harder for new owners to finance a takeover through expropriation of minority owners. The cost is the rent transfer effect which implies that there is a wealth transfer from controlling owners to existing minority owners. Empirically we test the implications of the model using data on equity offerings in Brazil. Consistent with the theoretical predictions we find that offering tag-along rights increases market value of a firm and that companies offering shares with tag-along rights offer larger claims, have less disproportional ownership structure, have a smaller group of existing minority shareholders and are more likely to issue new shares. The paper, thus, find strong support for private contracting being an important alternative governance mechanism to legal protection of investors.

Keywords: Private contracting; Corporate governance; Emerging markets; Tag-along rights (search for similar items in EconPapers)
JEL-codes: G30 G32 G34 G38 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec and nep-cfn
Date: 2008-04
Note: November 2007
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