Corporate Governance, Corporate and Employment Law, and the Costs of Expropriation

Description

We set up a model to study how ownership structure, corporate law and employment law interact in corporate governance. We suggest that agency problems between managers or controlling shareholders and small investors on the one hand and holdup problems between shareholders and employees are connected. Our model illustrates the incentives that influence the decision by the effective controller of the firm (either a controlling shareholder or manager) to divert resources from shareholders and employees. The effectiveness of diversion (i.e. the amount taken from the prior expectation of dividends or wages and additional implicit benefits) depends on the effectiveness of corporate law and employment law respectively against the taking of private benefits of control (to the detriment of shareholders) or the exploitation of holdup situations (to the detriment of workers). Where the current comparative corporate governance literature considers stakeholder issues, it diverges on whether large shareholders are better able to bond with employees than dispersed ones, or whether it is in fact the separation of ownership and control in dispersed ownership firms that helps managers to form long-term relationships with the firm's stakeholders. We elucidate the circumstances under which each of these two assumptions holds by focusing on the costs of expropriating either minority investors or workers. In our model, private costs of expropriation borne by the controlling shareholder or manager, such as, for example, the taste for a certain social position in the community often identified in the context of family firms, may create a deterrent effect. Furthermore, our model shows that employees not only benefit from labor and employment law, but also from corporate law protecting minority shareholder, and thus highlights how corporate law and labor law are interdependent in their effects on expropriation of both groups, and may under certain circumstances act as partial substitutes.

Period	15 May 2009 → 16 May 2009
Event title	19th Annual Meeting of the American Law and Economics Association
Event type	Unknown
Degree of Recognition	International