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Download the Paper (554 K, PDF file) - July 1, 2001 Tell a colleague about it. Printing Tips: Select 'print as image' in the Acrobat print dialog if you have trouble printing.

ABSTRACT:
This paper considers the efficiency implications of managerial "favoritism" towards block shareholders of public corporations. While favoritism can take any number of forms (including the payment of green-mail, diversion of opportunities, selective information disclosure, and the like), each may have the effect (if not the intent) of securing a block shareholder's loyalty in order to entrench management. Accordingly, the practice of making side payments is commonly perceived to be contrary to other shareholders' interests and, more generally, inefficient. In contrast to this received wisdom, we argue that when viewed ex ante, permissible acts of patronage toward block shareholders may play an important efficiency role that benefits all shareholders alike. We demonstrate that the prospect of having to share rents with a third party may itself have a deterrent effect on managerial self-dealing - an off-equilibrium benefit that would not be readily apparent if one looked only at instances where favoritism actually occurs in practice.

SUGGESTED CITATION:
Stephen Choi, "A Defense of Shareholder Favoritism" (July 1, 2001). Boalt Working Papers in Public Law. Paper 71.
http://repositories.cdlib.org/boaltwp/71