Discussion paper

DP2708 Agency Conflicts, Ownership Concentration, and Legal Shareholder Protection

This Paper analyses the interaction between legal shareholder protection, managerial incentives, and ownership concentration. In our framework, blockholder and manager are distinct parties and the presence of a blockholder can both protect and hurt minority shareholders. Legal shareholder protection affects both the expropriation of shareholders and the blockholder's incentives to monitor. Because of this latter effect and its repercussion on managerial incentives, outside ownership concentration and legal shareholder protection can be both substitutes and complements. When legal protection and outside ownership concentration are substitutes, better legal protection may exacerbate rather than alleviate the conflict of interest between large and small shareholders. Moreover, strengthening legal minority shareholder protection may have adverse effects on the behaviour of the manager and of the large shareholder who both enhance share value. Hence, rules aimed at protecting minority shareholders, e.g., equal treatment rules, can be detrimental.


Panunzi, F and M Burkart (2001), ‘DP2708 Agency Conflicts, Ownership Concentration, and Legal Shareholder Protection‘, CEPR Discussion Paper No. 2708. CEPR Press, Paris & London. https://cepr.org/publications/dp2708