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Abstract

The impact of separating cash flow and votes depends on the ownership structure. In widely held firms, one share - one vote is in general not optimal. While it ensures an efficient outcome in bidding contests, dual-class shares mitigate the free-rider problem, thereby promoting takeovers. In the presence of a controlling shareholder, one share - one vote promotes value-increasing control transfers and deters value-decreasing control transfers more effectively than any other vote allocation. Moreover, leveraging the insider's voting power aggravates agency conflicts because it protects her from the takeover threat and provides less alignment with other shareholders. Even so, minority shareholder protection is not a compelling argument for regulatory intervention, as rational investors anticipate the insider's opportunism. Rather, the rationale for mandating one share - one vote must be to disempower controlling minority shareholders in order to promote value-increasing takeovers. As this policy tends to empower managers vis-Ă -vis shareholders, it is an open question whether it would improve the quality of corporate governance, notably in systems built around large active owners. The verdict in the case of depositary certificates, priority shares, voting and ownership ceilings is less ambiguous, since they insulate managers from both takeovers and effective shareholder monitoring.

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