No. 246 - Change of Ownership: Incentives and Rules

by Luigi Zingales
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This paper analyzes the difference between private and social incentives in corporate control transfers. I show that the desire to extract a larger surplus from a potential buyer will induce agents to choose an amount of ownership that makes ex-post impossible some socially efficient changes of control. Furthermore, this inefficiency cannot be renegotiated away because of a free rider problem. This provides a rationale for a corporate law regulating acquisitions. However, I show that the most widely used rules do not achieve the social optimum. I propose a new rule that guarantees that optimum and I show why this rule may not emerge through private contracting, but needs to be imposed by fiat.

This paper was presented at the conference held in Rome on 24-25 March 1994 to examine the results of the Bank of Italy's research project on the market for corporate control. The final reports discussed on that occasion have been published by II Mulino, Bologna.

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  1. 31 December 1994
    No. 246 - Change of Ownership: Incentives and Rules
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