Article2011

Governance Problems in Closely Held Corporations

Venky Nagar · Kathy Ruby Petroni · Daniel Wolfenzon

104 citations0/0 files storedJournal of Financial and Quantitative Analysis

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Corporate Finance and Governance Family Business Performance and Succession Corporate Governance and Financial Management

Abstract

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.

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References

1998Law and Finance 1997A Survey of Corporate Governance 1988Management ownership and market valuation 2003Estimating Production Functions Using Inputs to Control for Unobservables 1985The Structure of Corporate Ownership: Causes and Consequences 1990Additional evidence on equity ownership and corporate value 2002The ultimate ownership of Western European corporations 2008Bank governance, regulation and risk taking

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