Protopapa,
Marco (2009) An Essay in Corporate Finance:
Managerial Incentives, Financial Constraints and Ownership Concentration. PhD
Thesis, LSE-UK.
I investigate the role of internal discipliners in
the form of optimal equity ownership for the purpose of committing the
management to the pursuit of shareholder value in the presence of separation
between ownership and control. By rooting the conflicts of interests between
managers and shareholders upon the control of internal funds, a simple model
allows to analyze the link between profit uncertainty, growth options and
decisional powers. I derive implications for the optimal degree of equity
concentration, the effect of firm fundamentals on the allocation of income and
control rights, and the pay for luck phenomenon. First, optimal equity
ownership is positively related to the short-term performance of the firm and
negatively related to both its growth options and riskiness. Second, optimal
equity ownership is negatively related to the probability of the firm being
financially constrained, in the sense that the level of desired investment
exceeds internally available resources. Furthermore, I also show that straight
debt alone does not implement the second best, in absence of a large
shareholder. Finally, I show that, in presence of financial constraints, pay for
luck is associated in equilibrium to a lower optimal degree of ownership
concentration. In other words, pay for luck and looser governance, as
implemented by the internal discipliner of equity concentration; emerge as the
equilibrium result of a constrained incentive problem.
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