This paper analyzes the incentives of large shareholders to monitor public corporations. We investigate the hypothesis that a liquid stock market reduces large shareholders' incentives to monitor because it allows them to sell their stocks more easily. Even though this is true, a liquid market also makes it less costly to hold larger stakes and easier to purchase additional shares. We show that this fact is important if monitoring is costly: market liquidity mitigates the problem that small shareholders free ride on the effort of the large shareholder. We find that liquid stock markets are beneficial because they make corporate governance more effective.

This paper presents a theory of initial public offerings based on the idea that the optimal ownership structure of a company changes over the life cycle of the firm. Insiders take the company public when they have lost the comparative advantage over outsiders in gathering information to evaluate the firm's growth prospects. The size of the share sold to the public depends on the relative abilities of the market and insiders to gather this information and on the frictions in the going-public process. Intermediaries help to reduce these frictions and lead to a more efficient allocation if IPOs are conducted more frequently. Discrimination between different classes of investors may be beneficial. Learning by the market about projects in a new industry can lead to a clustering of new issues (hot issue markets). JEL Classification: G24, G32.

This paper discusses a model that combines internal and external control mechanisms in a firm in which assets can have alternative uses that are in some states more profitable than the current one. However, restructuring a firm in order to realize the gains from alternative uses affects managers adversely since they invest in firm-specific human capital. Managers can be motivated to restructure the firm through their compensation scheme. Alternatively, investors can acquire costly information on the firm and interfere with managers' decisions. The main focus is on independent directors, who review and monitor contracts and managers' compensation. If information is not too costly, directors are the optimal institution to check managerial discretion and the degree of managerial entrenchment depends on the compensation of independent directors. However, if directors fail to exercise control over management properly, takeovers or creditor control become second-best solutions. If information is costly to transfer, unchecked managerial control may be optimal.

We analyze how 14, 000 top U.S. executives exercise their stock options. Factors suggested by existing theories have low or moderate explanatory power. Variables that model executives’ motive to diversify fare particularly poorly, whereas variables that capture reference-dependent preference, such as past highs and lows of stock prices, perform better. By contrast, characteristics of option portfolios are of first-order importance and suggest that managers have target ownership levels. Institutional features like vesting restrictions or blackout periods also have a first-order impact. We conclude that executives’ main motivations for exercising stock options early seem to be outside the scope of extant models. (JEL G30, M52)Received August 20, 2018; editorial decision December 28, 2019 by Editor Andrew Ellul.

We study shareholder voting on management proposals. We build on a simple model of strategic voting, provide structural estimates of its parameters, and derive testable implications. The evidence suggests that voting is strategic in the sense that shareholders take into account the information of other shareholders when making their voting decisions. We conclude that strategic voting prevents incorrect rejections of management proposals.

[We analyze the efficiency of indexing executive pay by calibrating the standard compensation model to a large sample of U.S. CEOs. The benefits from indexing the strike price of options are small, and fully indexing all options would increase compensation costs by 50% for most firms. Indexing has several effects with overall ambiguous outcome; the quantitatively most important effect is to reduce incentives, because indexed options pay off when CEOs' marginal utility is low. The results also hold if CEOs can extract rents and extend to the case of indexing shares. Our findings may justify the common practice of "pay-for-luck."]

This paper analyzes the incentives of large shareholders to monitor public corporations. We investigate the hypothesis that a liquid stock market reduces large shareholders' incentives to monitor because it allows them to sell their stocks more easily. Even though this is true, a liquid market also makes it less costly to hold larger stakes and easier to purchase additional shares. We show that this fact is important if monitoring is costly: market liquidity mitigates the problem that small shareholders free ride on the effort of the large shareholder. We find that liquid stock markets are beneficial because they make corporate governance more effective.

We discuss two-class voting procedures where voters are divided into classes and a separate majority is required in each class. Examples include Chapter 11 bankruptcy proceedings and some political mechanisms. We investigate how voting mechanisms aggregate information dispersed among voters when voters have conflicts of interests as well as different information regarding a proposal. We find that two-class voting provides a significant improvement over one-class voting in all situations where voters have significant conflicts of interests, and where the voters are relatively evenly divided between interest groups. However, two-class voting is inefficient absent conflicts of interests.

We show that chief executive officers (CEOs) of prestigious firms earn less. Total compensation is on average 8% lower for firms listed in Fortune’s ranking of America’s most admired companies. We suggest that CEOs are willing to trade off status and career benefits from working for a publicly admired company against additional monetary compensation. Our identification strategy is based on matched sample analyses, difference-in-differences regressions, and a regression discontinuity design. We perform several robustness checks and exclude many alternative explanations, including that firm prestige just proxies for better corporate governance or for increased exposure of the pay-setting process to media attention.

ABSTRACT We develop a unified theory of blockholder governance and the voting premium in a setting without takeovers or controlling shareholders. A voting premium emerges when a minority blockholder can influence shareholder composition by accumulating votes and buying shares from dissenting shareholders. Our theory reconciles conflicting empirical findings by showing that standard measures of the voting premium often misrepresent the true value of voting rights, increased conflicts between the blockholder and small shareholders do not necessarily raise the voting premium, and the voting premium can even turn negative when small shareholders free‐ride on the blockholder's trades.