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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].
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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

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