Market-Value-Maximizing Ownership Structure when Investor Protection is Weak

Abstract

We hypothesize that in a country with lax corporate governance rules Tobin's Q is maximized when controlholders’ vote approaches the supermajority level. In this holding range, controlholders do not possess extreme power (cannot pass supermajority decisions), nor do they feel a strong temptation to loot the firm (which largely belongs to them). Using a sample of 144 Israeli firms, we find that Tobin's Q is maximized when control group vote reaches 67%. This evidence is strong when ownership structure is treated as exogenous and weak when it is considered endogenous. Other ownership structure variables do not appear to have a significant valuation effect.

Citation

Lauterbach, B. and Tolkowsky, E. (2007), "Market-Value-Maximizing Ownership Structure when Investor Protection is Weak", Hirschey, M., John, K. and Makhija, A.K. (Ed.) Issues in Corporate Governance and Finance (Advances in Financial Economics, Vol. 12), Emerald Group Publishing Limited, Leeds, pp. 27-47. https://doi.org/10.1016/S1569-3732(07)12002-8