2005, “Sharing of Control versus Monitoring as Corporate Governance Mechanisms”, Working Paper, Penn Institute for Economic Research

Do large shareholders monitor firms on behalf of minority shareholders, or share control with other insiders to maximize their own gains? We show how firm characteristics and governance laws determine the role of large shareholders. If investment opportunities are hard for insiders to evaluate, letting a large shareholder monitor the firm is efficient because shared control creates disagreement costs that are more likely to destroy profitable opportunities than to prevent bad investments. In contrast, sharing control is efficient if investment opportunities are hard for outsiders to evaluate, when financing requirements are large, and in countries that poorly protect minority shareholders. ∗We would like to thank the participants of the 2004 Corporate Governance Conference at Washignton Uni