درگیری های آژانس، تمرکز مالکیت، و حمایت سهامداران حقوقی

This paper analyzes the interaction between legal shareholder protection, managerial incentives, monitoring, and ownership concentration. Legal protection affects the expropriation of shareholders and the blockholder's incentives to monitor. Because monitoring weakens managerial incentives, both effects jointly determine the relationship between legal protection and ownership concentration. When legal protection facilitates monitoring better laws strengthen the monitoring incentives, and ownership concentration and legal protection are inversely related. By contrast, when legal protection and monitoring are substitutes better laws weaken the monitoring incentives, and the relationship between legal protection and ownership concentration is non-monotone. This holds irrespective of whether or not the large shareholder can reap private benefits. Moreover, better legal protection may exacerbate rather than alleviate the conflict of interest between large and small shareholders.

Following the pioneering work by La Porta et al., 1997 and La Porta et al., 1998, a growing literature argues that cross-country differences in corporate governance, and more broadly in financial systems, are shaped by the quality of legal rules protecting outside investors. Examples of documented regularities are that better legal investor protection is associated with increased breadth and depth of capital markets, a faster pace of new security issues, and a greater reliance on external financing to fund firm growth (for surveys see La Porta et al., 2000b and Denis and McConnell, 2003). One prominent issue in this recent literature is the relation between cross-country ownership patterns and legal rules. Empirical studies indicate that ownership is on average more concentrated in countries with poor legal shareholder protection. This finding leads La Porta et al. (1998) to argue that “with poor investor protection, ownership concentration becomes a substitute for legal protection, because only large shareholders can hope to receive a return on their investment.” By contrast, investors are willing to take minority positions and finance companies in countries where legal rules are extensive and well enforced.1 This paper scrutinizes the commonly accepted argument that legal shareholder protection and outside ownership concentration are substitutes (see, e.g., Denis and McConnell, 2003, p. 21). To this end we analyze the interaction between legal shareholder protection, managerial incentives, monitoring, and ownership in a model where shareholder control comes with costs and benefits. As emphasized in the law and finance literature, legal protection has an impact on the ease with which the manager, possibly in collusion with the blockholder, can divert corporate resources. There is, however, another channel which this literature has overlooked: the quality of legal rules also shapes the large shareholder's incentives to monitor. This effect matters for the relationship between the law and the ownership concentration because monitoring, like legal protection, weakens managerial incentives. Moreover, the impact of legal rules on the relation between ownership concentration and monitoring intensity is not uniform but depends on how legal rules interact with monitoring. While some rules tend to complement monitoring, others are more likely to be substitutes. Overall, we find that outside ownership concentration and legal shareholder protection are not necessarily substitutes. In particular, when the law is a substitute for monitoring, legal protection and ownership concentration can be complements. Thus, our model can also account for a non-monotone relationship between ownership concentration and legal protection as for instance Aganin and Volpin (2003) document for Italy. We consider a firm with a large shareholder and otherwise dispersed ownership. The firm has the prospect of a valuable project which realizes with some probability only if the manager exerts effort. Given that the project is undertaken, the manager decides how much of the proceeds to pay out as dividends to the shareholders and how much to extract as private benefits. Managerial private benefit extraction involves no deadweight loss, but is subject to monitoring and legal constraints. More precisely, we assume that the law puts an upper bound on private benefit extraction and that monitoring lowers this bound further. By limiting private benefit extraction monitoring and legal protection increase shareholder control but also discourage managerial initiative. Depending on the quality of legal protection, maximizing net shareholder return may thus require to constrain monitoring by limiting ownership concentration or to offer the manager a higher wage. Our model obviously assumes that the large shareholder and the manager are distinct parties, irrespective of the block size. In our view, this definition of insider and outsider is not refuted by the observation that many controlling owners are Board Members and participate in management. Being a Board Member or even its Chairman is quite different from being the CEO of the firm, and their interests are likely to differ.2 This does, however, not preclude that they may on occasions collude at the expense of the small shareholders. Initially we abstract from such collusion and assume that private benefits are not transferable, or equivalently that the interests of the large and the small shareholders are perfectly congruent. We relax this assumption later (Section 5) and allow for collusion between the manager and the large shareholder. When private benefits are not transferable, the governance problem is reduced to the traditional conflict of interest between manager and (all) shareholders. In accordance with the widely-held view that legal shareholder protection and ownership concentration are substitutes, we find that legal rules and the optimal amount of monitoring are inversely related. Weaker rules enable the manager to extract more private benefits. Therefore, the manager's incentive to exert effort can be preserved even if he is monitored more closely. This effect, henceforth the extraction effect, does, however, not imply that the optimal ownership concentration must also increase. The reason is that weaker legal protection also affects the large shareholder's incentives to monitor, henceforth the monitoring effect. The monitoring effect may reinforce or counteract the extraction effect depending on how legal shareholder protection interacts with monitoring. Legal protection can be thought of as directly limiting the scope for managerial extraction and hence making monitoring less needed. Alternatively, one may argue that legal protection facilitates or complements monitoring. We do not subscribe to one or the other interpretation but believe that some legal provisions are more suitably thought of as a substitute to monitoring and others as a complement. (We provide examples of both types of rules at the end of Section 2.) Our purpose is to show that the assumed relation between monitoring and the law determines the shape of the relationship between legal protection and outside ownership concentration. In the case where monitoring and the law are (assumed to be) complements, legal shareholder protection and ownership concentration are inversely related. As legal protection becomes weaker, more monitoring is required and monitoring becomes less effective. Hence, a more concentrated ownership concentration is needed to implement the desired higher level of monitoring. In the case where monitoring and the law are substitutes, the monitoring effect runs counter to the extraction effect. Weaker legal protection allows the manager to extract more private benefits but also increases the large shareholder's monitoring incentives for a given equity stake. If the effect on the manager's incentives dominates the effect on the large shareholder's incentives, the optimal outside ownership concentration increases. Conversely, when the monitoring effect dominates the extraction effect, the large shareholder's stake needs to be reduced to restore the manager's incentives. It is, however, not possible to determine for which levels of legal protection the monitoring or the extraction effect prevails unless one resorts to specific functional forms. After solving the “general” model without such restrictions, we provide some examples to further illustrate our results. Our central proposition that better legal shareholder protection can go together with more or less concentrated ownership proves robust to collusion between the manager and the large shareholder. We further propose that better legal protection may exacerbate rather than alleviate the conflict of interest between large and small shareholders. When legal protection and outside ownership concentration are substitutes, better legal protection entails a lower ownership concentration. Owning a smaller stake, the large shareholder may choose to divert more corporate resources.

This paper scrutinizes the hypothesis, first put forward by La Porta et al., 1997 and La Porta et al., 1998, that outside ownership concentration and legal shareholder protection are substitutes. To this end, we analyze the interaction between legal shareholder protection, managerial incentives, monitoring, and ownership in a setting where monitoring and legal shareholder protection comes with costs and benefits. On the one hand, more monitoring or better legal protection reduce the risk of expropriation by the manager. On the other hand, more shareholder control deprives the manager of his private benefits, thereby reducing managerial initiative. Since managerial initiative generates shareholder return, it can be advantageous to restrict monitoring by partly dispersing share ownership and/or offer the manager a bonus when legal protection curtails private benefit extraction. As the literature emphasizes, legal shareholder protection affects the ease with which the manager, possibly in collusion with the large shareholders, can divert corporate resources. We argue that the quality of legal rules also shapes the large shareholders' incentives to monitor. Because monitoring weakens managerial incentives, both effects jointly determine the relationship between legal protection and ownership concentration. When legal protection facilitates monitoring better laws strengthen the monitoring incentives, and ownership concentration and legal protection are inversely related. By contrast, when legal protection and monitoring are substitutes better laws weaken the monitoring incentives, and the relationship between legal protection and ownership concentration is non-monotone. This holds irrespective of whether or not the large shareholder can reap private benefits. Thus, our analysis shows that the assumed relationship between monitoring and the law (substitutes or complements) is the decisive assumption with respect to the shape of the relationship between the law and outside ownership concentration.