Journal of Financial and Quantitative Analysis

JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS doi:10.1017/S0022109011000226

Vol. 46, No. 4, Aug. 2011, pp. 943–966

COPYRIGHT 2011, MICHAEL G. FOSTER SCHOOL OF BUSINESS, UNIVERSITY OF WASHINGTON, SEATTLE, WA 98195

Governance Problems in Closely Held Corporations
Venky Nagar, Kathy Petroni, and Daniel Wolfenzon ∗

Abstract
A major governance problem in closely held corporations is the majority shareholders’ expropriation of minority shareholders. As a solution, legal and finance research recommends that the main shareholder surrender some control to minority shareholders via ownership rights. We test this proposition on a large data set of closely held corporations. We find that shared-ownership firms report a substantially larger return on assets and lower expense-to-sales ratios. These findings are robust to institutionally motivated corrections for endogeneity of ownership structure. We provide evidence on the presence of governance problems and the effectiveness of shared ownership as a solution in settings characterized by illiquidity of ownership.

I.

Introduction

The corporate finance and governance literature with very few exceptions has focused on two extreme ownership structures: i) exclusively atomistic shareholders, and ii) atomistic shareholders and a single large shareholder (see Laeven and Levine’s (2008) extensive review). It is only recently that studies are beginning to explore the intermediate ownership structure with multiple large shareholders. Most of the empirical studies in this emerging literature examine European public firms (Laeven and Levine (2008), Lehmann and Weigand (2000), Faccio, Lang, and Young (2001), and Maury and Pajuste (2005)).1 However, a recent body of analytical research suggests that multiple large owners are particularly relevant to governance when ownership is illiquid (e.g., Bennedsen and Wolfenzon (2000)).

∗ Nagar, [e-mail], Ross School of Business, University of Michigan, 701 Tappan St., Ann

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