Seminar: Alex Edmans, University of Pennsylvania, The Wharton School. Please notice: Tuesday!

Joint seminar with the Centre for Corporate Governance.

Abstract:

Most firms have multiple blockholders. This dilution of ownership generates .free-rider.problems and is therefore difficult to explain with traditional theories. In such models, blockholders add value through direct intervention (.voice.) and a concentrated stake is optimal to encourage them to incur the associated costs.

This paper rationalizes the presence of multiple blockholders by showing that the same co-ordination difficulties that hinder voice improve their effectiveness in adding value through a second channel: disciplining the manager through .exit.. Since multiple blockholders cannot co-ordinate to limit their trades and maximize combined trading profits, competition among them impounds more information into prices. This makes the threat of disciplinary exit more credible, thus inducing higher managerial effort. The model.s comparative statics derive empirical predictions on the factors affecting optimal blockholder structure.