Ownership Structure and the Market for Corporate Control

We study the impact of the ownership structure of a corporation on the characteristics and efficiency of the market for corporate control. We adopt a general mechanism design approach, in which endogenous sources of inefficiency in the market, including adverse selection, moral hazard, budget balance and voluntary trading, may preclude the possibility of efficiently restructuring control and ownership. We identify necessary and sufficient conditions for an efficient market, and describe the characteristics of efficient restructuring mechanisms, when they exist. In efficient restructuring, corporations typically increase the number of shares of the incumbent manager when he remains in control, or give him a generous golden parachute when he is deposed. Corporations are also reluctant to assign full control and full ownership to a single stockholder, unless agency costs are severe. We characterize the set of ownership structures for which efficient restructuring is possible. While the distribution of ownership among the non-controlling shareholders is irrelevant, the level of initial managerial ownership is a central determinant of this set. Typically, efficient restructuring is easier to obtain for low levels of managerial ownership.