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http://hdl.handle.net/2451/25997
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| Title: | Governance Problems in Close Corporations |
| Authors: | Nagar, Venky
Petroni, Kathy
Wolfenzon, Daniel |
| Keywords: | Close corporations
Closely-held corporations
Performance, Expropriation
Control Dilution
Ownership |
| Issue Date: | 11-May-2008 |
| Series/Report no.: | CLB-06-024 |
| Abstract: | More than 90 percent of all US firms are close corporations, and these
firms account for 51 percent of the private sector output and 52 percent
of all private employment. Understanding governance issues and agency
problems facing these firms is therefore of considerable importance. The
legal and finance literature argues that the main governance problem in
close corporations is not so much between the management and the
shareholders as between the majority and the minority shareholders. As a
solution, this literature recommends that the main shareholder in close
firms surrender some control to minority shareholders at the outset.
With shared control rights, no shareholder can take unilateral actions
for her own benefit at the expense of the firm and other shareholders.
We test this hypothesis using two independent novel datasets of close
corporations. We find that shared ownership firms report substantially
larger return on assets (up to 14 percentage points) and lower
expense-to-sales ratios and these findings persist after we control for
the endogeneity of ownership structure. We thus provide one of the first
evidence on the presence of governance problems among shareholders in
close corporations as well as the effectiveness of shared ownership as a solution. |
| URI: | http://hdl.handle.net/2451/25997 |
| Appears in Collections: | NYU Pollack Center for Law & Business Working Papers
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