Essays on the protection and expropriation of minority investors

In this work I explore some of the consequences of the lack of investor protection for the capital structure and the government of the firm, as well as the effects that the level of investor protection can have on the existence and organization of the venture capital industry. In the first chapter I explain how put warrants attached to a new equity issue (a protective put) can achieve the first best solution in a moral hazard framework when neither debt nor equity can. Firms in countries with low protection for both creditors and minority shareholders can use it in order to achieve higher levels of efficiency. In the second chapter I show how minority shareholder expropriation can be inefficient even if it is costless. I consider a model in which projects have attached a costless transfer among shareholders. This transfer biases the decision making process, causing the agents to disregard relevant information. For this reason a controlling shareholder will generally not be able to maximize the expected value of the firm. A supermajority rule can help to extract the private information of the minority; and a numerical example suggests that it might be possible for the controlling shareholder to be better off under the supermajority rule than making decisions by himself with only his private information. Finally, the third chapter establishes how the level of investor protection can shape both the investment and exit policies of the venture capitalist. It therefore might help to explain the correlation between the development of both the venture capital industry and the stock market across countries, as well as some of the differences between the venture capital industry in Europe and in the U.S