The Balance of Power in Close Corporations

Morten Bennedsen and Daniel Wolfenzon
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Morten Bennedsen: Institute of Economics, University of Copenhagen
Daniel Wolfenzon: University of Harvard

No 1998-15, CIE Discussion Papers from University of Copenhagen. Department of Economics. Centre for Industrial Economics

Abstract: We analyze a model of a firm with more than one significant owner (a situation common in close corporations). In particular, we are interested in the optimal ownership structure chosen by the founder of the firm. We show that , by distributing control among several shareholders, the founder forces them to form coalitions to obtain control. This is optimal because a coalition, by grouping the cash flows of its members, internalizes to a larger extent the consequences of its actions, and hence takes more efficient actions than any of its members individually. The model has other implications. We show that having a one-share-one-vote ownership structure can increase efficiency and thereby the value of the firm. In addition, we analyze the optimal number and size of shareholder, or many equal-sized shareholders. We also show that, in firms with several large shareholders, an increase in the number of shareholders reduces efficiency. Finally, we analyze the desirability of restricting trade, and find that it is optimal to do so.

Keywords: close corporations; ownership structure and voting (search for similar items in EconPapers)
JEL-codes: G31 G32 G35 (search for similar items in EconPapers)
Pages: 47 pages
Date: 1998-09
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