The balance of power in closely held corporations

By Morten Bennedsen, Daniel Wolfenzon. 2000

694 citations recorded by the source corpus.

We analyze a closely held corporation characterized by the absence of a resale market for its shares. We show that the founder of the firm can optimally choose an ownership structure with several large shareholders to force them to form coalitions to obtain control. By grouping member cash flows, a coalition internalizes to a larger extent the consequences of its actions and hence takes more efficient actions than would any of its individual members. The model has implications for the optimal bundling of cash flow and voting rights, and for the optimal number and size of shareholders.

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Citations in the corpus

Managerial Entrenchment and Corporate Social Performance (2008, background): “to expropriate minority shareholders requires the consent of a coalition of investors – controlling coalition- a situation which dilutes the power, protects the minority and prevents entrenchment collusion with the manager; this influences corporate performance positively (Bennedsen and Wolfenzon, 2”
Incentive and entrenchment effects in European ownership (2009, background): “There are a number of theoretical contributions that analyze the consequences of dual class shares with a focus on takeover based arguments (Grossman and Hart, 1988; Harris and Raviv, 1988, among others) and on non-takeover based arguments (Bennedsen and Wolfenzon, 2000).”
Complex Ownership and Capital Structure (2012, unknown): “Next, higher debt might be a signal for avoidance of empire building by controlling shareholders (5)Bennedsen and Wolfenzon (2000) suggest that large shareholders compete to form controlling coalition which will secure their private benefits of control. Pagano and Roell (1998) focus on the possibili”
Investor Protection and Equity Markets (2002, unknown): “In Section 4.1, we assume perfect capital mobility across countries, and in Section 4.2 we assume no capital mobility.”
Controlling Shareholders and Corporate Value: Evidence from Thailand (2001, unknown): “Similar to the alignment effect hypothesized by Jensen and Meckling (1976), Gomes (2000) and Bennedsen and Wolfenzon (2000) describe that by holding a large ownership stake, the controlling shareholder internalizes private benefits he extracts, and hence the expropriation costs are reduced.”
Audit effort and earnings management (2008, background): “Private companies often have a single controlling shareholder who is in a better position than dispersed shareholders to coordinate activities that expropriate other stakeholders (Ang et al., 2000; Bennedsen and Wolfenzon, 2000).”
Governance of Family Firms (2015, background): “They can also form coalitions with the family to increase their joint control (e.g., above a majority threshold), which, as Bennedsen & Wolfenzon (2000) show theoretically, can be an optimal choice for founders.”
Who Disciplines Bank Managers? (2009, unknown): “Such a dilution of power among a limited number of large shareholders enables the initial owner to retain de facto control of the firm (Bennedsen and Wolfenzon, 2000).”
How Are U.S. Family Firms Controlled (2009, background): “3 Corporate governance scholars and regulators in the United States have traditionally been concerned about protecting investors from managerial entrenchment and expropriation––the classic agency problem described by Berle and Means (1932) and Jensen and Meckling (1976).”
Multiple large shareholders, excess leverage and tunneling: evidence from an emerging market (2017, unknown): “…structure as an important and most efficient means to curb tunneling activities of controlling shareholders in emerging economies For example, Bennedsen and Wolfenzon (2000) indicate that multiple large shareholders can monitor controlling shareholders by competing for control…”
Blockholders and Corporate Governance (2014, unknown): “" In Zwiebel (1995), shareholder structure is privately chosen by the blockholders , but in Bennedsen & Wolfenzon (2000), it is chosen by a founding entrepreneur when going public.”
Complex Ownership Structures and Corporate Valuations (2007, unknown): “Bennedsen and Wolfenzon (2000) show that greater dispersion of cash-flow rights makes it easier to form ruling coalitions with small cash-flow rights, which reduces the value of the firm.”
Multiple large shareholders, control contests, and implied cost of equity (2008, background): “This evidence, in line with the theoretical models of Bennedsen and Wolfenzon (2000), Gomes and Novaes (2005) and Pagano and Roell (1998), suggests that shared control (i.e., the presence of MLS), as an internal governance mechanism, is likely to mitigate firm’s agency costs, and therefore benefit…”