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Blocks, Liquidity, and Corporate Control

Authors

  • Patrick Bolton,

    1. ECARE, Université Libre de Bruxelles, and Center, Tilburg University
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  • Ernst-Ludwig Von Thadden

    1. DEEP, Université de Lausanne
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    • ECARE, Université Libre de Bruxelles, and CentER, Tilburg University (Bolton), and DEEP, Université de Lausanne (von Thadden). An earlier version of this paper has circulated under the title “The ownership structure of firms: The liquidity—control tradeoff (in the privately held firm).” We are grateful to the Studienzentrum Gerzensee (ESSET 1995) for its hospitality, and to the Schweizerischer Nationalfonds the Center for Economic Policy Research (London), and the Ente Luigi Einaudi for financial support. We have received helpful comments from Philippe Aghion, Gabriella Chiesa, Jürgen Dennert, Mathias Dewatripont, Mathias Erlei, Denis Gromb, Oliver Hart, Jürgen Siebel, Jean Tirole, and Josef Zechner. We also thank the participants of the Nobel Symposium on Law and Finance for their comments on an earlier version of this material. An anonymous referee and René Stulz, the editor, have made suggestions that greatly improved the original version.

Abstract

The paper develops a simple model of corporate ownership structure in which costs and benefits of ownership concentration are analyzed. The model compares the liquidity benefits obtained through dispersed corporate ownership with the benefits from efficient management control achieved by some degree of ownership concentration. The paper reexamines the free-rider problem in corporate control in the presence of liquidity trading, derives predictions for the trade and pricing of blocks, and provides criteria for the optimal choice of ownership structure.

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