Do families keep control of their firms because they, operating in an environment with weak protection of minority shareholders, fear being exploited by management after the IPO? Or is ownership concentration due to the value families attach to control? We find a positive relation between use of security designs that separate votes from capital and frequency of family-controlled firms in Sweden and other countries. It is not caused by differences in legal regimes or in minority protection. Since control blocks are never sold piecemeal to preserve control value, ownership remains highly concentrated. Family-controlled firms trade at a discount because of the misallocation of control rights to heirs who make inefficient decisions, not because of extraction of pecuniary benefits.

This paper uses a law and finance approach to develop a new takeover theory that formalizes the idea that large target shareholders, who can block a takeover attempt, exercise a strategic influence on tender offer prices, and thereby, on the distribution of the takeover gain. The theory captures the interaction between legal rules, target ownership structure, bidder toehold and potential effects of arbitrageurs in an endogenously determined bargaining parameter that predicts a skewed distribution of the gain in favor of target shareholders. In a regression model, the parameter has significant explanatory power, specifically when the total takeover gain is positive.