FIN-02-017 |
NYU Stern School of Business |
February 2002
Venky Nagar, Kathy Petroni and Daniel Wolfenzon
ABSTRACT
Close corporations account for 51 percent of the private sector output and 52
percent of all private employment in the US. Understanding governance issues
facing these firms is therefore of considerable importance. Legal scholars extensively
recommend that the main shareholder in close firms surrender some control to
minority shareholders at the outset in order to improve overall firm performance.
With shared control rights, no shareholder can take unilateral actions for her
own benefit at the expense of the firm and other shareholders. In two independent
samples of close corporations, we find this to be the case, with shared ownership
firms reporting substantially larger return on assets (by 4 to 12 percentage
points) and lower expense-to-sales ratios. An important reason why this result
establishes the role of ownership in firm performance is the absence of a ready
market for shares in close corporations. This illiquidity makes the ownership
structure a historical, statistically predetermined measure, allowing us to
sidestep the ownership endogeneity problem confronting ownership-performance
studies of public firms.
Classification: G32, L20.
Keywords: Close corporations, Closely-held corporations, Performance,
Expropriation, Control Dilution, Ownership.
Venky Nagar
Institution: University of Michigan Business School University of Michigan
Ann Arbor, MI 48109
Email: venky@umich.edu
Kathy Petroni
Institution: Eli Broad School of Business
Michigan State University
East Lansing, MI 48824
Email: petroni@msu.edu
Daniel Wolfenzon
Institution: Stern School of Business
New York University
New York, NY 10012
Email: dwolfenz@stern.nyu.edu
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