CARESS Working Paper 01-06
Sharing of Control as a Corporate Governance Mechanism
Armando Gomes
The Wharton School
2300 Steinberg Hall-Dietrich Hall
Philadelphia, PA 19104
Walter Novaes
∗
Department of Finance, Box 353200
University of Washington
Seattle, WA 98195
December 7, 2000
Abstract
This paper identifies a new corporate governance mechanism: sharing control. We show
that bargaining problems among multiple controlling shareholders may prevent inefficient
investment decisions that harm minority shareholders. The same bargaining problems may
block efficient investment decisions, though. By solving this trade-off, we show that the
likelihood that shared control is efficient increases with three firm characteristics: overinvestment problems, the cost of verifying cash flows, and financing requirements. The
model provides testable implications for the role that large shareholders play in corporate
governance, contrasting shared control and monitoring as alternative governance mechanisms.
jel: G30, G34, G32. keywords: Sharing of control, corporate governance, monitoring,
investment decisions.
∗
We would like to thank Yakov Amihud, Chris Geczy, Gary Gorton, Dennis Gromb, Matthias Kahl, Oded
Sarig, and seminar participants at University of Chicago and the 1999 AFE meeting in New York for valuable
comments. Gomes also thanks the support of the Rodney L. White Center for Financial Research.
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6:
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wkh phfkdqlvp1 Wr fkdudfwhul}h wkhvh wzr frqvwudlqwv/ ohw [ +|> e , @ H ^{+|> e > e ,` eh wkh
h{shfwhg suredelolw| wkdw wkh surmhfw zloo eh xqghuwdnhq frqglwlrqhg rq | dqg frqwuroolqj
vkduhkroghu l dqqrxqflqj e +wkh h{shfwdwlrq lv wdnhq zlwk uhvshfw wr e xvlqj wkh eholhiv ri
frqwuroolqj vkduhkroghu l,1 Olnhzlvh/ W +|> e , @ H ^w +|> e > e ,` lv wkh h{shfwhg qhw wudqvihu
wr vkduhkroghu l jlyhq e dqg |1 Jlyhq [ +=, dqg W +=,/ wkh h{shfwhg xwlolw| ri vkduhkroghu l
frqglwlrqhg rq dqqrxqflqj ae zkhq klv2khu wuxh sulydwh ehqhw lv e lv
X +|> ae > e , @ y +|> e ,[ +|> ae , . W +|> ae ,=
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frqvwudlqw +LF, uhtxluhv wkdw
+LF,
X +|> e , X +|> ae > e ,
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lq wkh gluhfw phfkdqlvp dv lq h{huflvlqj klv2khu uljkw wr yhwr wkh surmhfw1 Irupdoo|/
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Ohppd fkdudfwhul}hv wkh vhw ri lpsohphqwdeoh gluhfw phfkdqlvpv1
6;
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wkh frqwuroolqj vkduhkroghu l*v suredelolw| glvwulexwlrq +diwhu wkh uhdol}dwlrq ri wkh vljqdov, rq
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ghqvlw| dqg fxpxodwlyh glvwulexwlrq ri { eh/ uhvshfwlyho|/ i dqg I +e| dq dexvh ri qrwdwlrq,
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dvvxpswlrqv ri wkh Sursrvlwlrq1 Dq h{0srvw hflhqw phfkdqlvp lv wkxv qrw lpsohphqwdeoh/
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73
Table 1
Public Companies with Shareholders’ Agreements in Italy
Number of
Median number Median percentage
of shares in the
Companies of shareholders in
agreement
the agreement
Buy-out Agreements
Voting Agreements
Control Agreements
Any Agreement
52
(17.16%)
39
(12.87%)
20
(6.6%)
58
(19.14%)
4.5
50.6%
4.0
51.0%
6.0
50.4%
4.0
50.8%
This table shows the fraction of the 303 Italian public firms with shareholders’ agreements, as reported by
the “Ownership Structure of Companies Listed on Stock Exchanges in Italy,” CONSOB, December 1996.
Buy-out agreements impose restrictions on the transferability of shares. Voting (or pooling) agreements force
the participants of the agreement to vote with the group. Control agreements set corporate policies that
otherwise would be decided by the board of directors. Any agreement refers to firms that have any of the
previously mentioned shareholders’ agreements. Numbers in parenthesis show the percentage of the 303
public firms that have the agreements.
Table 2
Close Corporations in the U.S.
Full
Sample
Manager-Owned
Firms
Non-ManagerOwned Firms
310
223
87
64,708
46,990
17,718
Average number of employees
98.0
98.7
95.9
Average asset value ($ million)
7.5
6.9
9.2
Average annual sales ($ million)
23.3
22.4
25.6
3.0
(74.4)
3.0
(7.9)
10.0
(250.7)
Number of firms with at least one
large shareholder -- %
86.9
93.7
69.0
Number of firms with multiple large
shareholders -- %
57.2
69.4
24.9
Probability of having multiple large
shareholders conditioned on having at
least one large shareholder -- %
65.8
74.0
36.1
Number of firms with minority
shareholders -- %
67.7
60.6
86.7
Observations
Number of firms
Median (Average) number of
shareholders
45.6
55.2
20.7
Probability of having multiple large
shareholders conditioned on having
minority shareholders and at least one
large shareholder -- %
The NSSBF database includes 4,637 firms with less than 500 employees that answered the 1992 National
Survey of Small Business Finances. Out of these 4,637 firms we extracted the close corporations with more
than one shareholder and annual sales above $10 million, ending up with our full sample of 310 firms.
Manager-Owned Firms excludes firms where the manager is not a shareholder, while Non-Manager-Owned
Firms includes only firms where the manager is not a shareholder. Observations give the number of firms in
each sub-sample. Number of firms gives the NSSBF estimate of the number of firms that each sub-sample
would have if all firms had answered the survey. For the estimated number of firms of each sub-sample,
Average number of employees, Average asset value ($ million), and Average annual sales ($ million) give,
respectively, the average number of employees, and the average book value of assets and annual sales in
millions of dollars. Median (Average) number of shareholders is the median (average) number of
shareholders of the estimated number of firms in each sub-sample. Number of firms (condition)- % is the
fraction of the estimated number of firms satisfying the (condition) over the estimated number of firm in
each sub-sample in percentage terms. A firm is said to have multiple large shareholders if two shareholders
have at least 10% of the shares and one of them has more than 20%. A firm has one large shareholder if at
least one shareholder has more than 20% of the shares while the other shareholders have less than 10% of
the shares. A firm has minority shareholders if there are no large shareholders or if there is a shareholder
with less than half of the shares of a large shareholder.