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Bar Ilan June 18, 2012

Concentrated Ownership Revisited: Idiosyncratic Value and Agency Costs Zohar Goshen & Assaf Hamdani. Bar Ilan June 18, 2012. Existing Literature. Holding a Control Block is Costly Illiquidity, Reduced Diversification Bad PBC Monitoring Pie’s Distribution Increase Pie’s Size

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Bar Ilan June 18, 2012

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  1. Concentrated Ownership Revisited: Idiosyncratic Value and Agency Costs Zohar Goshen & Assaf Hamdani Bar Ilan June 18, 2012

  2. Existing Literature Holding a Control Block is Costly Illiquidity, Reduced Diversification Bad PBC Monitoring Pie’s Distribution Increase Pie’s Size Improve Minority ProtectionLegal Optimal PBC

  3. Some Difficulties Private Benefits • Good-law countries • Private equity Monitoring • Contract-based compensation • Relative costs

  4. Our View • Idiosyncratic value • Subjective value; vision; business plan • If realized, may be shared pro-rata • Bundling control with cash-flow rights: • Entrepreneur: control over idiosyncratic value • Investors: alleviates agency costs

  5. Implications • Concentrated Ownership • Can coexist with strong investor protection • Control Premium • Can reflect idiosyncratic value • Corporate Law • Balance minority protection and controller rights • Controller: property right over control • Minority investors: pro-rata share

  6. Financial Contracting Framework EntrepreneurInvestors Idiosyncratic Value Agency Costs Information Asymmetry Control Cash Flow

  7. Control Time: At Will 10 Years Indefinite Scope: Day-to-Day Complete Complete Dispersed ownership Controlling Shareholders Dual Class Private Equity Funds

  8. Cash-Flow Rights Salary + 1-3% 2%+20% Less than 50% More than 50% Dual Class Dispersed ownership Private Equity Funds Controlling Shareholders

  9. Controlling Shareholders(cash flow=voting) • Controller • Pursue idiosyncratic value increase pie’s size • Costs: illiquidity, reduced diversification, monitoring • Investors • Alleviateasymmetric information and (management) agency costs • Exposure to (control) agency costs

  10. Implications: Theory • Concentrated ownership • Even in good-law countries • Even without private benefits of control • Control premium • Control is valuable (protects idiosyncratic value)

  11. Implications: Corporate Law • Balance minority protection and controller rights

  12. Implications: Corporate Law Controller Rights • Pursue idiosyncratic value • Property-rule protection: • Management/Control • Exit Minority Protection • Agency costs • Liability-rule protection: • Pro-rata rule • Mid-stream changes

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