NBER WORKING PAPER SERIES A RENT-PROTECTION THEORY OF CORPORATE OWNERSHIP AND CONTROL. Lucian Arye Bebchuk

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1 NBER WORKING PAPER SERIES A RENT-PROTECTION THEORY OF CORPORATE OWNERSHIP AND CONTROL Lucian Arye Bebchuk Working Paper NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA July 1999 An earlier version of this manuscript was circulated as A Theory of the Choice between Concentrated and Dispersed Ownership of Corporate Shares and Votes (1998). For helpful comments and conversations, I am grateful to Eric Bergloff, John Coates, Robert Daines, Laura Field, Jesse Fried, Dennis Gromb, Sharon Hannes, Oliver Hart, Marcel Kahan, Reinier Kraakman, Rafael Laporta, Bo Li, Mark Roe, Steve Shavell, Andrei Shleifer, Elu von Thadden, Paolo Volpin, Luigi Zingales, and workshop participants at Chicago, Columbia, Harvard, NYU, Stanford, Tel-Aviv University, and the ALEA meeting. For financial support, I wish to thank the National Science Foundation and the Harvard John M. Olin Center for Law, Economics, and Business. All opinions expressed are those of the authors and not those of the National Bureau of Economic Research by Lucian Arye Bebchuk. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including notice, is given to the source. A Rent-Protection Theory of Corporate

2 Ownership and Control Lucian Arye Bebchuk NBER Working Paper No July 1999 JEL No. G3, K22 ABSTRACT This paper develops a rent-protection theory of corporate ownership structure - and in particular, of the choice between concentrated and dispersed ownership of corporate shares and votes. The paper analyzes the decision of a company s initial owner whether to maintain a lock on control when the company goes public. This decision is shown to be very much influenced by the size that private benefits of control are expected to have. Most importantly, when private benefits of control are large - and when control is thus valuable enough - leaving control up for grabs would attract attempts by rivals to grab control and thereby capture these private benefits; in such circumstances, to preclude a control grab, the initial owner might elect to maintain a lock on control. Furthermore, when private benefits of control are large, maintaining a lock on control would enable the company s initial shareholders to capture a larger fraction of the surplus from value-producing transfers of control. Both results suggest that, in countries in which private benefits of control are large, publicly traded companies will tend to have a controlling shareholder. It is also shown that separation of cash flow rights and voting rights will tend to be used in conjunction with a controlling shareholder structure but not with a dispersed ownership structure. Finally, the paper analyzes why companies might make control partially contestable, as many US companies currently do by adopting antitakeover arrangements. The results of the paper are consistent with the available evidence, can explain the observed patterns of corporate ownership, and yield testable predictions for future empirical work. The analysis also implies that a corporate law system that effectively limits private benefits of control can produce more efficient choices of ownership structure. Lucian Arye Bebchuk Harvard Law School Cambridge, MA and NBER Bebchuk@law.harvard.edu

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