Seminar: Morten Bennedsen, Department of Economics, CBS

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

Abstract:

This paper analyses controlling owners incentive to voluntary provide noncontrolling owners with better protection against self-dealing. A tag-along rights is a contractual obligation used to protect a minority shareholder by securing that if a majority shareholder sells their stake, then the minority shareholder has the right to sell their share at the same price. We analyze a simple model of the benefits and costs for controlling shareholders to extend tag-along rights to minority investors. The model predicts that tag-along rights only will be given in cases where the owner does not fully internalize the rent effect from a new share issue. The model delivers a number of testable results that we investigate empirically using data on equity offerings in Brazil. Consistent with the theoretical predictions we find that the probability of minority protection is a) increasing in the controlling owners cash flow stake, b) decreasing in the level of disproportional ownership and c) increasing in the stake of the firm being offered. More generally, our findings sheed light on the scope and limitations of private contracting to mitigate potential agency problems and through this become a substitute to legal investor protection.