Lecture Note Nineth_Tsing Hua_2009 - Lecture Note 9...

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Corporate Finance Lecture Note 9 1 Lecture Note 9 Corporate Control
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Corporate Finance Lecture Note 9 2 What is in This Note? Overview of Control Rights Why the Control Right is Valuable Overview of Shareholder Right from Corporate Law Overview of Investor Right from Securities Law
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Corporate Finance Lecture Note 9 3 Roadmap Be able to understand Ownership Structures What are the Shareholder Rights What works in Securities Law
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Corporate Finance Lecture Note 9 4 See Rafael La Porta, Florencio Lopez-de- Silanes, and Andrei Shleifer, 1999. Corporate Ownership around the World. Journal of Finance 54, 471-517. See Rafael La Porta, Florencio Lopez-de- Silanes, Andrei Shleifer, and Robert W. Vishny, 1998. Law and finance . Journal of Political Economy 106, 1113-1155. Rafael La Porta, Florencio Lopez-de- Silanes, and Andrei Shleifer, 2006. What Works in Securities Laws? Journal of Finance 61, 1-32.
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Corporate Finance Lecture Note 9 5 Control rights
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Corporate Finance Lecture Note 9 6 Control rights Fraction of the firm's voting rights , if any, owned by its controlling shareholder. To measure control, we combine a shareholder's direct (i.e., through shares registered in her name) and indirect ( i.e. ., through shares held by entities that, in turn, she controls) voting rights in the firm. A shareholder has an x percent indirect control over firm A if: (1)she controls directly firm B which, in turn, directly controls x percent of the votes in firm A; or (2) she controls directly firm C which in turn controls firm E (or a sequence of firms leading to firm R, each of which has control over the next one, i.e., they form a control chain) which, in turn, directly controls x percent of the votes in firm A. A group of n companies form a chain of control if each firm 1 through n - 1controls the consecutive firm.
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Control rights For example, a shareholder has x percent indirect control over firm A if she controls directly firm C that, in turn, controls directly firm B, which directly controls x percent of the votes of firm A. Corporate Finance Lecture Note 9 7
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Cash-Flow Rights For example, if a large shareholder of firm A holds the fraction y of cash-flow rights in firm B and firm B in turn holds the fraction x of the cash-flow rights in firm C, then the large shareholder’s indirect cash-flow rights in firm C equal the product of x and y. Corporate Finance Lecture Note 9 8
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Corporate Finance Lecture Note 9 9 Private benefits of control As a benefit of controlling the firm, the entrepreneur can divert a share s of the profits from the firm to himself, before he distributes the rest as dividends. This diversion or tunneling can take the form of salary, transfer pricing, subsidized personal loans, non-arms-length asset transactions, and, in some cases, outright theft. In most countries, much of such diversion, short
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This note was uploaded on 04/18/2010 for the course FINANCE 936116531 taught by Professor Wuyiling during the Spring '10 term at Nashville State Community College.

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Lecture Note Nineth_Tsing Hua_2009 - Lecture Note 9...

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