August 2000
Kose John and Simi Kedia
ABSTRACT
We examine the design of an optimal corporate governance system structured from four of the main mechanisms
of corporate governance (managerial ownership, monitoring by a large outside shareholder, monitoring by banks,
and disciplining by the takeover market). The optimal blends of the different mechanisms are characterized as a
function of the embedding economy's legal system, takeover environment, and the efficiency of monitoring by banks
and large shareholders. Our design incorporates interactions among these governance mechanisms, as well as entrepreneur,
the manager and the large shareholder). The results on the optimal governance systems include (1) joint optimality
of concentrated insider ownership and bank debt, (2) joint optimality of diffused ownership and takeovers, and
(3) optimality of full ownership with neither takeovers nor bank debt. Difference in governance across firms in
a given economy arise from firm heterogeneity in liquidity needs and activity-specific agency cost. We show that
cross-sectional and inter-temporal variation in ownership structures will be greater in an economy with an effective
takeover environment as opposed to a weak takeover environment.
Kose John
Institution: Stern School of Business, New York University
Email: kjohn@stern.nyu.edu
Telephone: (212) 998-0337
Simi Kedia
Institution: Graduate School of Business Administration, Harvard University
Email: skedia@hbs.edu
Telephone: (617) 495-5057
To request a copy of this paper click here
The Finance Department Working Paper Series has been generously sponsored by