K.U.Leuven - Faculty of Economics and Applied Economics
DTEW - AFI_0613 pages:1-36
Confusingly, the seminal contributions on the 'one share, one vote '(1S1V) issue - Grossman and Hart (GH,1988) and Harrisand Raviv (HR,1989)- are quoted as evidence by both proponents and opponents of 1S1V. Infact, GH-HR stress the cases where the rule is optimal, but do acknowledge possible deviations from the optimality of 1S1V(without developing these cases). In light of renewed interest in the relation between shareholder protectionand control arrangements, we first thoroughly review the optimality of 1S1V in the original setting, without the complication of structural enhancements except that both incumbent and rival management can have private benefits simultaneously. After this analysis of the perfect-foresight optimal charter we also consider the imperfect-foresight problem where the entrepreneur-founder only knows the distribution from which the rival will be drawn. The issue is what set of rules the entrepreneur wil lput in place, retake-overs, so as to maximize the IPO value of the firm. We find that, from the founder's perspective, 1S1V is never optimal with imperfect foresight, and optimality is surprisingly rare even with perfect foresight. We also explain why governments rarely step in: from simulations we find that the social impact of the charter choice seems to be far smaller than the private impact (on IPO value or post-take-over value). Lastly, we go beyond the dual-class case, explaining the role and usefulness of multiple-class structures.