Paul Voss is Assistant Professor of Economics and Business at Central European University; and Marius Kulms is an Actuary at Continentale Versicherung. This post is based on their recent paper, forthcoming in the American Economic Review.
Our paper Separating Ownership and Information, forthcoming in the American Economic Review, provides a new perspective on the separation of ownership and control—the fundamental problem in corporate governance according to classical theories (Berle and Means 1932; Jensen and Meckling 1976). We show that the separation of ownership and control is necessary for efficient trade in the market for corporate control. Our results highlight the importance of communication between inside and outside shareholders and call mandatory disclosure requirements during takeovers into question.
We develop a model of the market for corporate control with two-sided asymmetric information. We build on the basic idea that insiders obtain private information by virtue of exercising control. Hence, the separation of ownership and control naturally leads to a separation of ownership and information. In the model, ownership and control are separated in that the insider (e.g., incumbent management) controls the firm but only has a minority stake in the outstanding shares. The majority of ownership rights reside with outside shareholders. By exercising control, the insider has private information regarding the target’s stand-alone value vis-à-vis the uninformed, outside shareholders. A potential bidder, who privately knows the value of the target under her management, can obtain control via a tender offer for the majority of shares. The insider can respond by a strategic (cheap talk) recommendation to the outside shareholders, who ultimately decide on the success of the takeover by their tendering decisions.
