part 2

[Audio] We welcome you to our presentation on dispersed ownership and its impact on corporate governance. Dispersed ownership occurs when share ownership is spread across many hands rather than being concentrated in the hands of a few large shareholders. There are several reasons why this can happen including shareholder preferences management's ability to manipulate rules and the collective action problem among dispersed shareholders. In the next section we will explore the conceptual framework surrounding takeovers and their impact on corporate governance. Thank you for your attention..

[Audio] Discuss the concept of dispersed ownership and its impact on corporate governance. Dispersed ownership occurs when shareholders have small individual wealth and may want to diversify risk or prioritize liquidity. To address this issue mandatory governance rules are necessary to ensure that the interests of all relevant constituencies are represented and the collective action problem is overcome. These rules can take the form of stock exchange rules legislative requirements court orders or supervisory authority guidelines. The finance and corporate law literature primarily focuses on shareholders' collective action problems but we will also touch on the collective action problems faced by other constituencies such as corporate bondholders employees and clients. There are five main ways to mitigate shareholders' collective action problems including limiting managerial discretion and introducing supermajority requirements into the corporate charter..

[Audio] 1. Corporate governance problems arise from dispersed ownership. 2. Addressing these issues requires either concentrated ownership or regulatory intervention. 3. A difficulty with the first two approaches is the risk of collusion between management and the delegated monitor. 4. Dispersed shareholders have no incentive to supervise management. 5. Directors generally have smaller stakes than dispersed shareholders but they have better incentives to oversee management. 6. Pension fund managers may not spend resources to make informed decisions when the benefits are for themselves. 7. Securities regulation can prevent excessive concentration of power. 8. The threat of class-action suits can hold management accountable and protect the interests of dispersed shareholders. 9. Aligning managerial interests with investors through executive compensation contracts can promote corporate governance. 10. Regulatory intervention can be used to address the problems of dispersed ownership and promote corporate governance. 11. The first two approaches to addressing the problems of dispersed ownership have their own limitations and drawbacks. 12. Defining fiduciary duties for C-E-Os can help ensure they act in the best interests of the corporation and its shareholders. 13. Aligning.

[Audio] Discuss the conceptual framework of how dispersed ownership can lead to corporate governance issues. Dispersed ownership can occur due to shareholder preferences management's ability to manipulate rules and the collective action problem among dispersed shareholders. While it may seem that corporate raiders who concentrate ownership are not susceptible to the delegated monitoring problem this is only partially true. When firms are acquired through a hostile bid they become significantly more leveraged and may have resolved the shareholder collective action problem but at the cost of increasing the expected cost of financial distress. Enforcement of fiduciary duties through the courts has its own shortcomings. Management can shield itself from shareholder lawsuits by taking out appropriate insurance contracts the business judgement rule severely limits shareholders' ability to prevail in court and plaintiffs' attorneys may not always have the right incentives to monitor management. This regulatory bias in U-S corporate law has been highlighted by Black (1990) Roe (1990 91 94) and Bhide (1993). Most large U-S corporations have taken out director and officer liability (D&O) insurance policies and fiduciary duties liability and D&O insurance are complex issues that require careful consideration. In conclusion addressing issues with corporate governance requires either concentrated ownership or regulatory intervention..

[Audio] We explain the concept of a hostile takeover and its ex-ante efficiency in the context of ex-post takeovers. In a hostile takeover the raider makes an offer to buy a fraction of outstanding shares at a stated tender price. We discuss how the takeover is successful if the raider gains more than 50% of the voting shares thus obtaining effective control of the company. With more than 50% of the voting shares the raider gains majority representation on the board and can appoint the C-E-O--. We draw on Scharfstein’s analysis to show that takeovers reduce the informational monopoly of incumbent managers and provide a mechanism for ex-ante discipline of managers. In essence takeovers are useful because they are ex-ante mechanisms for ex-post discipline of managers through the reduction of information asymmetry and providing a mechanism for ex-ante discipline of managers..

[Audio] Our firm has implemented regulatory intervention to address issues that arise from dispersed ownership. Some solutions to this problem include using models to replace inefficient managers and improve governance. However Scharfstein's observation suggests that even if a firm can commit to an ex-ante optimal contract this contract is generally inefficient because the financier and manager design the contract to try and extract the efficiency rents of future raiders. This can lead to too few hostile takeovers on average. Regulatory intervention can limit anti-takeover defenses such as super-majority amendments staggered boards fair price amendments and poison pills. However Scharfstein's argument suggests that some of these defenses should be regulated or banned..

[Audio] 1. Examine the work of Grossman and Hart (1980) and their formal model of a tender offer game. 2. In this model a raider can raise the value per share from v = 0 under current management to v = 1. 3. He needs 50% of the voting shares and makes a conditional tender offer of p per share. 4. Share ownership is completely dispersed and it is not difficult to see that a dominant strategy for each shareholder is to tender if p ≥ 1 and to hold on to their shares if p < 1. 5. Therefore the lowest price at which the raider is able to take over the firm is p = 1 the post-takeover value per share. 6. In other words the raider has to give up all the value he can generate to existing shareholders. 7. Grossman and Hart (1980) suggest several ways of improving the efficiency of the hostile takeover mechanism. 8. All involve some dilution of minority shareholder rights. 9. Consistent with their proposals for example is the idea that raiders be allowed to squeeze (freeze out) minority shareholders that have not tendered their shares or to allow raiders to build up a larger toehold before they are required to disclose their stake. 10. In the U S a shareholder owning more than 5% of outstanding shares must disclose his stake to the S-E-C-. 11. The raider can always make a profit on his toehold by taking over the firm..

[Audio] We will start by discussing the literature on takeover models which has analyzed different variants of the takeover game. The theoretical literature following Grossman and Hart is concerned with explaining bidding patterns and equilibrium bids given existing regulations. Formal analyses of optimal takeover regulation have focused on four issues: 1) whether deviations from a one-share-one vote rule result in inefficient takeover outcomes; 2) whether raiders should be required to buy out minority shareholders; 3) whether takeovers may result in the partial expropriation of other inadequately protected claims; and 4) whether takeovers may result in the misallocation of resources. Empirical studies have found that on average all the gains from hostile takeovers go to target shareholders consistent with Grossman and Hart's result but other explanations have been suggested such as competition by multiple bidders or raiders' hubris leading to over-eagerness to close the deal. However there are still many open questions that need to be addressed in order to fully understand the dynamics of takeovers and their impact on corporate governance..

[Audio] Dispersed ownership can negatively impact corporate governance resulting from shareholder preferences management manipulation and collective action among dispersed shareholders. To address these issues either concentrated ownership or regulatory intervention is required. The one-share-one-vote rule where companies with a single class of voting stock and the same number of votes each can facilitate efficient corporate control contests. However deviations from this rule may allow initial shareholders to extract a greater share of the efficiency gain of the raider in a value-increasing takeover. Ford Motor Company's dual class stock capitalization in 1956 allowed the Ford family to exert 40% of the voting rights with 5.1% of the capital which is an exception to the listing rule. In conclusion mechanisms and regulations are necessary to address the problems caused by dispersed ownership and ensure efficient corporate control to prevent expropriation..

[Audio] We believe that deviations from one-share-one-vote in the context of corporate governance can have both positive and negative impacts on the firm and the exchange. On the one hand it may induce more listings by firms whose owners value retaining control of the company particularly family-owned firms who might go public if they could retain control through a dual-class share structure. This can benefit both the firm and the exchange. On the other hand some costly takeovers may be deterred due to the agency problem where the raider does not own 100% of the shares ex post. To reduce this inefficiency some deviations from one-share-one-vote may be desirable. The analysis of mandatory bid rules is similar as it maximizes the price an inefficient raider must pay to acquire control. However this rule may also discourage some value-increasing takeovers which can be undesirable if they result in a breach of trust between management and employees which may discourage investment in informal relations with the new managerial team that has taken over the firm..

[Audio] A slide deck has been created with the purpose of aiding comprehension of the various components that lead to dispersed ownership. If any additional inquiries need to be made please do not delay in reaching out to us..

[Audio] Discuss the issue of dispersed ownership and its impact on corporate governance. When ownership is widely distributed it can lead to shareholder preferences and management manipulation. To address these challenges we examine two models: the presence of a poison pill and a semi-concentrated ownership structure with at least one large shareholder monitoring management and implementing changes. While these models can be effective it is crucial for companies to carefully consider their ownership structure and governance mechanisms to ensure they run in the best interest of stakeholders..

[Audio] Corporate governance is affected by dispersed ownership. This occurs when ownership is in the hands of many shareholders rather than concentrated in the hands of a few large shareholders. This can create issues with management and monitoring. There are a number of reasons for dispersed ownership including shareholder preferences management's ability to manipulate rules and the collective action problem among dispersed shareholders. Approaches to address these issues include concentrating ownership in the hands of a few large shareholders or using regulatory intervention to subsidize blockholders and encourage them to hold larger blocks. Researchers have considered a number of different models to address the tradeoff between optimal risk diversification and optimal monitoring incentives including the tradeoff between under-investing in monitoring and diversifying holdings. In equilibrium large shareholders may under-invest in monitoring because they prefer to diversify their holdings. Subsidizing blockholders to hold larger blocks may improve corporate governance by giving greater incentives to monitor..

[Audio] In this slide we will discuss the reasons why dispersed ownership can cause problems with corporate governance. One reason for this is that the high liquidity of U-S secondary markets can make it difficult to provide incentives to large shareholders to monitor management. Some commentators argue that the liquidity of these markets can actually undermine large shareholders' incentives to intervene leading to under-monitoring. Another reason for these problems is that the collective action problem among dispersed shareholders can make it difficult to hold management accountable. When shareholders are not concentrated in a single block it can be challenging to coordinate efforts to address governance issues. To address these challenges some argue that concentrated ownership is necessary or that regulatory intervention may be required. In this slide.

[Audio] Large shareholders can monitor the performance of start-ups financed with venture capital by acquiring information in the secondary markets. This idea is supported by various papers and can be applied for corporate governance in dispersed ownership settings. By adjusting the size of their stake large shareholders can achieve the desired level of information acquisition..

[Audio] Dispersed ownership can lead to potential downsides such as conflict of interest expropriation self-dealing collusion with management and the collective action problem among dispersed shareholders. These issues can be addressed through concentrated ownership or regulatory intervention..

[Audio] Discussing reasons for dispersed ownership including shareholder preferences management manipulation and collective action problem among dispersed shareholders. Addressing these issues requires either concentrated ownership or regulatory intervention. Analyzing dispersed ownership using models and commentators such as Wolfenzon Bebchuk and Aghion. Discussing self-dealing and negative consequences of collusion between management and the blockholder. Understanding potential problems of dispersed ownership and finding solutions to improve corporate governance..

[Audio] In this section we discuss the impact of blockholder structures versus dispersed shareholder structures on corporate governance. While blockholder structures provide ongoing monitoring dispersed shareholders can only provide monitoring and intervention in crisis situations. The benefit of dispersed ownership is enhanced liquidity in secondary markets. The need for intervention and the demand for liquidity can dominate the other depending on the value of monitoring and the regulatory structure in place. Another approach to addressing the collective action problem is through regulatory intervention. This can take the form of shareholder proposals which can encourage shareholders to actively participate in the governance process. Regulatory intervention can also include mechanisms for resolving disputes and ensuring transparency in decision-making. Companies should carefully consider various factors including the regulatory environment the need for intervention and the demand for liquidity when making decisions about their corporate governance arrangements..

[Audio] We are discussing the relationship between dispersed ownership and corporate governance problems. Dispersed ownership can vary depending on shareholder preferences management manipulation and the collective action problem among dispersed shareholders. To address these issues either concentrated ownership or regulatory intervention is required. We have discussed two models that can be used to determine the optimal governance mechanism: the Ayres and Cramton model and the dispersed ownership and hostile takeovers model. The Ayres and Cramton model takes into account the costs of bank monitoring and the effectiveness of hostile takeovers. Depending on the values of these parameters the optimal governance mechanism is either concentrated ownership bank monitoring or dispersed ownership and hostile takeovers. We have also discussed the role of institutional shareholder activism by pension funds and other financial intermediaries. Institutional investors often buy large stakes in corporations but tend to be passive in monitoring management due to regulatory constraints or lack of incentives. However greater activism by these large institutional investors can lead to better monitoring and less myopic market pressure to perform..