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Public bads and private firms: efficiency and sustainability with different allocations of voting rights

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  • Aloys Prinz
  • Tsjalle Burg

Abstract

A number of authors have proposed that firms can internalize externalities through their shareholders. This paper investigates this proposition, focusing on public bads. Theoretically it is, indeed, possible that shareholders decide that the firm reduces its public bads at the cost of profits, thereby increasing Pareto-efficiency. One of the factors which help determine the size of the reduction is the number of shareholders with a (very) small stake in the firm. The greater this number, the greater the reduction will tend to be. It is shown that the reduction in public bads can be reversed by takeovers, but under special conditions only while takeover defences may also be used. Unfortunately, there are a number of factors which significantly limit the internalization of external effects in practice. The paper also discusses a change in the legal share-voting system whereby the direct owners of the shares (i.e., the shareholders) no longer possess, in their capacity of direct owners, the legal right to vote at the General Meetings of firm owners. Instead, these rights become the property of the beneficial owners of the shares (i.e., the people who ultimately provided the money to buy the shares), but on the condition that they delegate their voting rights to a proxy voting institution. This institutional innovation may significantly increase the internalization of external effects among other things because many beneficial owners have a tiny stake in the firm. Copyright Springer Science+Business Media, LLC 2013

Suggested Citation

  • Aloys Prinz & Tsjalle Burg, 2013. "Public bads and private firms: efficiency and sustainability with different allocations of voting rights," European Journal of Law and Economics, Springer, vol. 36(3), pages 423-445, December.
    • Handle: RePEc:kap:ejlwec:v:36:y:2013:i:3:p:423-445
    DOI: 10.1007/s10657-011-9266-3
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    References listed on IDEAS

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    More about this item

    Keywords

    Corporate governance; Public bads; Voting shares; Allocative efficiency; D21; D62; H41; K00; L21; M14;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • K00 - Law and Economics - - General - - - General (including Data Sources and Description)
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility

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