The prevalence of concentrated ownership depends on whether the country

The prevalence of concentrated ownership depends on

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The prevalence of concentrated ownership depends on whether the country practices common or civil law and the related protection for shareholders. In common-law countries: - Investor protection makes it harder for concentrated shareholders - Diversification of costs in concentrated shareholders - Until SEC was created in 1930s, US had mostly concentrated shareholders - Legal protection of arm’s-length investors is strong, so shareholding is dispersed and individual shareholders rarely have the size to be effective monitors - Separation of ownership and control makes being a large shareholder unattractive - Securities and Exchange Act of 1934: protected small investors by strengthening legal protection and weakening active intervention by large shareholders - Limited ability of large shareholders to trade their stock (insider trading) or do business with the company; cannot take active role in controlling company - Hostile takeovers enforce discipline, alignment of incentives between managers and shareholders reduces the problems - Political influence also reduces attractiveness of being a large shareholder - Creates an equity market with more widely dispersed shareholding and better liquidity - Attractive in changing times (high liquidity and adaptability) In civil-law countries: Legal protection is weak Regulation limits company access to securities markets, forcing them to banks (who have political influence)
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Being a shareholder is unattractive without having a large stake (or else cannot exercise control), so shareholding is concentrated Typically banks in Japan and Germany Families elsewhere Hostile takeovers are rare Attractive in stable environment Attractiveness of equity market in common-law countries had led to emulation of that model Security of civil-law leads to better commitment and efficiency, but common law is more adaptable 4. In the U.S., in the absence of concentrated ownership, is there any mechanism to control manager misbehavior? Why is this mechanism much less available in countries where concentrated ownership is common? - If shareholders in the US feel they have been cheated, they can sue. The law recognizes that those in control of the corporation have a “duty of loyalty” to the shareholders, and most forms of self-dealing are seen as a violation of this duty. - In response to the free-rider problem (those with only a small stake won’t see it as worthwhile to go to the trouble and expense of a lawsuit when most benefits go to others) the US has - contingency fees (lawyers are paid only if they win) and class-action suits (suits in the name of all shareholders) - but these can lead to “legal predation” where companies find it cheaper to settle than go to court.
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