Hostname: page-component-78c5997874-dh8gc Total loading time: 0 Render date: 2024-11-20T04:10:07.947Z Has data issue: false hasContentIssue false
  • English
  • Français

Governance Problems in Closely Held Corporations

Published online by Cambridge University Press:  19 April 2011

Venky Nagar ,
Kathy Petroni  and
Daniel Wolfenzon
Venky Nagar
Affiliation:
Ross School of Business, University of Michigan, 701 Tappan St., Ann Arbor, MI 48109, [email protected]
Kathy Petroni
Affiliation:
Broad College of Business, Michigan State University, 315 Eppley Center, East Lansing, MI 48824, [email protected]
Daniel Wolfenzon
Affiliation:
Graduate School of Business, Columbia University, 3022 Broadway, New York, NY 10027, and NBER, [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

A major governance problem in closely held corporations is the majority shareholders’ expropriation of minority shareholders. As a solution, legal and finance research recommends that the main shareholder surrender some control to minority shareholders via ownership rights. We test this proposition on a large data set of closely held corporations. We find that shared-ownership firms report a substantially larger return on assets and lower expense-to-sales ratios. These findings are robust to institutionally motivated corrections for endogeneity of ownership structure. We provide evidence on the presence of governance problems and the effectiveness of shared ownership as a solution in settings characterized by illiquidity of ownership.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 46 , Issue 4 , August 2011 , pp. 943 - 966
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Ang, J. S.; Cole, R. A.; and Lin, J. W.. “Agency Costs and Ownership Structure.” Journal of Finance, 55 (2000), 81–106.CrossRefGoogle Scholar
Angrist, J. D., and Krueger, A. B.. “Instrumental Variables and the Search for Identification: From Supply and Demand to Natural Experiments.” Journal of Economic Perspectives, 15 (2001), 69–85.CrossRefGoogle Scholar
Armour, J.; Hansmann, H., and Kraakman, R.. “What Is Corporate Law? ” In The Anatomy of Corporate Law: A Comparative and Functional Approach, Kraakman, R., Armour, J., Davies, P., Enriques, L., Hansmann, H., Hertig, G., Hopt, K., Kanda, H., and Rock, E., eds. Oxford, UK: Oxford University Press (2009).Google Scholar
Barringer, F. “Newspaper Chain Weighs Stock Offering.” New York Times (Aug. 8, 2002).Google Scholar
Bennedsen, M.; Nielsen, K. M.; Perez-Gonzalez, F.; and Wolfenzon, D.. “Inside the Family Firm: The Role of Families in Succession Decisions and Performance.” Quarterly Journal of Economics, 122 (2007), 647–691.CrossRefGoogle Scholar
Bennedsen, M., and Wolfenzon, D.. “The Balance of Power in Closely Held Corporations.” Journal of Financial Economics, 58 (2000), 113–139.CrossRefGoogle Scholar
Bertrand, M.; Mehta, P.; and Mullainathan, S.. “Ferreting Out Tunneling: An Application to Indian Business Groups.” Quarterly Journal of Economics, 117 (2002), 121–148.CrossRefGoogle Scholar
Brav, O. “Access to Capital, Capital Structure, and the Funding of the Firm.” Journal of Finance, 64 (2009), 263–308.CrossRefGoogle Scholar
Chen, E. H., and Dixon, W. J.. “Estimates of Parameters of a Censored Regression Sample.” Journal of the American Statistical Association, 67 (1972), 664–671.CrossRefGoogle Scholar
Clark, R. C. Corporate Law. Boston, MA: Little, Brown and Company (1986).Google Scholar
Core, J. E., and Larcker, D. F.. “Performance Consequences of Mandatory Increases in Executive Stock Ownership.” Journal of Financial Economics, 64 (2002), 317–340.CrossRefGoogle Scholar
Demsetz, H., and Lehn, K.. “The Structure of Corporate Ownership: Causes and Consequences.” Journal of Political Economy, 93 (1985), 1155–1177.CrossRefGoogle Scholar
Dyck, A., and Zingales, L.. “Private Benefits of Control: An International Comparison.” Journal of Finance, 59 (2004), 537–600.CrossRefGoogle Scholar
Faccio, M., and Lang, L. H. P.. “The Ultimate Ownership of Western European Corporations.” Journal of Financial Economics, 65 (2002), 365–395.CrossRefGoogle Scholar
Faccio, M.; Lang, L. H. P.; and Young, L.. “Dividends and Expropriation.” American Economic Review, 91 (2001), 54–78.CrossRefGoogle Scholar
Gomes, A., and Novaes, W.. “Sharing of Control as a Corporate Governance Mechanism.” Institute for Law and Economics Research Paper 01-12, PIER Working Paper No. 01-029, University of Pennsylvania (2005).Google Scholar
Gorton, G., and Schmid, F. A.. “Universal Banking and the Performance of German Firms.” Journal of Financial Economics, 58 (2000), 29–80.CrossRefGoogle Scholar
Hamilton, B. H. “Does Entrepreneurship Pay? An Empirical Analysis of the Returns to Self- Employment.” Journal of Political Economy, 108 (2000), 604–631.CrossRefGoogle Scholar
Hannan, M. T. “Ecologies of Organizations: Diversity and Identity.” Journal of Economic Perspectives, 19 (2005), 51–70.CrossRefGoogle Scholar
Heaton, J., and Lucas, D.. “Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk.” Journal of Finance, 55 (2000), 1163–1198.CrossRefGoogle Scholar
Himmelberg, C. P.; Hubbard, R. G.; and Palia, D.. “Understanding the Determinants of Managerial Ownership and the Link between Ownership and Performance.” Journal of Financial Economics, 53 (1999), 335–384.CrossRefGoogle Scholar
Holmström, B., and Tirole, J.. “ Inside and Outside Liquidity.” Cambridge, MA: MIT Press (2011).CrossRefGoogle Scholar
John, K.; Litov, L.; and Yeung, B.. “Corporate Governance and Risk-Taking.” Journal of Finance, 63 (2008), 1679–1728.CrossRefGoogle Scholar
Ke, B. “Taxes as a Determinant of Managerial Compensation in Privately Held Insurance Companies.” Accounting Review, 76 (2001), 655–674.CrossRefGoogle Scholar
Ke, B.; Petroni, K.; and Safieddine, A.. “Ownership Concentration and Sensitivity of Executive Pay and Accounting Performance Measures: Evidence from Publicly and Privately-Held Insurance Companies.” Journal of Accounting and Economics, 28 (1999), 185–209.CrossRefGoogle Scholar
Kennedy, P.A Guide to Econometrics, 3rd ed.Cambridge, MA: MIT Press (1992).Google Scholar
Laeven, L., and Levine, R.. “Complex Ownership Structures and Corporate Valuations.” Review of Financial Studies, 21 (2008), 579–604.CrossRefGoogle Scholar
Laeven, L., and Levine, R.. “Bank Governance, Regulation, and Risk Taking.” Journal of Financial Economics, 93 (2009), 259–275.CrossRefGoogle Scholar
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A.; and Vishny, R. W.. “Law and Finance.” Journal of Political Economy, 106 (1998), 1113–1155.CrossRefGoogle Scholar
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A.; and Vishny, R. W.. “Agency Problems and Dividend Policies around the World.” Journal of Finance, 55 (2000), 1–33.CrossRefGoogle Scholar
Lehmann, E., and Weigand, J.. “Does the Governed Corporation Perform Better? Governance Structures and Corporate Performance in Germany.” European Finance Review, 4 (2000), 157–195.CrossRefGoogle Scholar
Levinsohn, J., and Petrin, A.. “Estimating Production Functions Using Inputs to Control for Unobservables.” Review of Economic Studies, 70 (2003), 317–341.CrossRefGoogle Scholar
Maury, B., and Pajuste, A.. “Multiple Large Shareholders and Firm Value.” Journal of Banking and Finance, 29 (2005), 1813–1834.CrossRefGoogle Scholar
McConnell, J. J., and Servaes, H.. “Additional Evidence on Equity Ownership and Corporate Value.” Journal of Financial Economics, 27 (1990), 595–612.CrossRefGoogle Scholar
Morck, R.; Shleifer, A.; and Vishny, R. W.. “Management Ownership and Market Valuation: An Empirical Analysis.” Journal of Financial Economics, 20 (1988), 293–315.CrossRefGoogle Scholar
Moskowitz, T. J., and Vissing-Jorgensen, A.. “The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle? ” American Economic Review, 92 (2002), 745–778.CrossRefGoogle Scholar
Olley, G. S., and Pakes, A.. “The Dynamics of Productivity in the Telecommunications Equipment Industry.” Econometrica, 64 (1996), 1263–1297.CrossRefGoogle Scholar
O’Neal, F. H., and Thompson, R.. O’Neal’s Oppression of Minority Shareholders. Wilmette, IL: Callaghan Lawyers Cooperative Publishing (1985).Google Scholar
Pagano, M., and Roell, A.. “The Choice of Stock Ownership Structure: Agency Costs, Monitoring, and the Decision to Go Public.” Quarterly Journal of Economics, 113 (1998), 187–225.CrossRefGoogle Scholar
Petersen, M. A., and Rajan, R. G.. “Does Distance Still Matter? The Information Revolution in Small Business Lending.” Journal of Finance, 57 (2002), 2533–2570.CrossRefGoogle Scholar
Price Waterhouse LLP. National Survey of Small Business Finances: Methodology Report. Washington, DC: Board of Governors of the Federal Reserve System (1996).Google Scholar
Shleifer, A., and Vishny, R. W.. “A Survey of Corporate Governance.” Journal of Finance, 52 (1997), 737–783.CrossRefGoogle Scholar
Shleifer, A., and Wolfenzon, D.. “Investor Protection and Equity Markets.” Journal of Financial Economics, 66 (2002), 3–27.CrossRefGoogle Scholar
Sorkin, A. R. “ ‘Super Mario’ Has a Super Headache.” New York Times (Sept. 25, 2005).Google Scholar
Stiglitz, J. E. Whither Socialism? Cambridge, MA: MIT Press (1994).Google Scholar
Zhou, X. “Understanding the Determinants of Managerial Ownership and the Link between Ownership and Performance: Comment.” Journal of Financial Economics, 62 (2001), 559–571.CrossRefGoogle Scholar
Zingales, L. “The Value of the Voting Right: A Study of the Milan Stock Exchange Experience.” Review of Financial Studies, 7 (1994), 125–148.CrossRefGoogle Scholar