The Scarcity Of Effective Monitors And Its Implications For Corporate Takeovers And Ownership Structures

Overview: Agency problems in firms are prevalent because effective corporate monitors are scarce. This article presents a model that formalizes the scarcity of effective monitors and explores its implications for corporate monitoring mechanisms and ownership structures. Their special monitoring ability is a scarce resource in the economy. These restructuring specialists are more effective monitors than coalitions of many small investors run by managers, which face their own agency problems that make them less effective at monitoring. The restructuring specialists have an incentive to acquire blocks for restructuring purposes only in those states of the world in which a restructuring increases firm value the most. The extent of dispersed ownership also depends on the degree of monitoring superiority of the restructuring specialists and the capital available to them, as well as the likelihood that a restructuring may be needed. Firms with initially dispersed ownership and with a financial intermediary as a blockholder can coexist although they are otherwise identical. The model can explain several observations concerning ownership structures and monitoring mechanisms in different developed economies.

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Format: PDF | Size: 211KB | Date: Jul 2002 | Pages: 42