The benefits and costs of control over corporate resources have attracted much attention among financial economists. The debate was originally initiated by Adam Smith’s legendary warning in his 1776 published book “An Inquiry into the Nature and Causes of the Wealth of Nations” about the “negligence and profusion” that will result when those who manage enterprises are “rather of other people’s money than of their own”.1 A century and a half later Adolf Berle and Gardiner Means (1932) returned to the theme of diffuse stock ownership. They argue in their seminal work “The Modern Corporation and Private Property” that modern enterprises face “the dissolution of the old atom of ownership [i.e. small organizations in which the owners where also the managers] into its component parts, control and beneficial ownership”.2 This notion of the separation of ownership and control has had a profound impact on economists. Michael C. Jensen and William H. Meckling (1976) modelled the effects of the dispersion of ownership and control by emphasizing “the general problem of agency”.3 As economists started to employ this agency perspective, it was mainly in the context of diffuse shareholders and professional managers.4


Corporate Governance Minority Shareholder Large Shareholder Control Transfer Emerge Market Economy 
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  1. 1.
    Adam Smith (1776); reprinted by Modern Library, New York (1937, p. 700).Google Scholar
  2. 2.
    Berle and Means (1932, p. 8).Google Scholar
  3. 3.
    Jensen and Meckling (1976, p. 309).Google Scholar
  4. 4.
    Morck et al. (1988, p. 301) suggest that at low levels of ownership, increases in managerial ownership help to align the interests of managers and shareholders. At higher levels of ownership, however, additional ownership by insiders leads to entrenchment. McConnell and Servaes (1990, p. 607) only confirm the findings for low levels of inside ownership. The most important theoretical objection has been put forward by Demsetz and Lehn (1985, p. 1174). Basically, they argue that in a competitive market environment market forces will make sure that every company chooses its value maximizing ownership structure. As a consequence, an endogeneity problem arises because ownership structure and firm value are determined simultaneously. Himmelberg et al. (1999, p. 360) note that panel data have certain advantages in addressing these issues.Google Scholar
  5. 5.
    La Porta et al. (1999, p. 474).Google Scholar
  6. 6.
    In particular, Shleifer and Vishny (1986, p. 471) argue that the presence of a large shareholder provides a partial solution to the free-rider problem in takeovers.Google Scholar
  7. 7.
    Burkart et al. (1997, p. 716) challenge the view that the reduction of managerial discretion by large shareholders is purely beneficial. Rather the authors stress that ownership concentration involves a trade-off between control and initiative.Google Scholar
  8. 8.
    See Denis and McConnell (2003, pp. 9–19) for an international review of the conflicting effects of controlling blockholders on firm value.Google Scholar
  9. 9.
    Holderness (2003) surveys the US literature; Becht and Röell (1999) examine blockholdings in Europe based on the research initiative by the European Corporate Governance Network (ECGN).Google Scholar
  10. 10.
    Grossman and Hart (1980) focus on firms with dispersed ownership; Shleifer and Vishny (1986) and Burkart et al. (1997) model a single controlling shareholder; Burkart et al. (2000) analyze transfers of control with a minority block shareholder and otherwise dispersed ownership; Bennedsen and Wolfenzon (2000) focus on firms in which corporate policy is the result of interaction among multiple large shareholders.Google Scholar
  11. 11.
    For detailed comparison of China’s creditor rights, shareholder rights, law enforcement and legal system with the La Porta et al. (1998) sample see Allen et al. (2005, pp. 65–69).Google Scholar
  12. 12.
    For an introduction to China’s stock market see e.g. Green (2004).Google Scholar
  13. 13.
    See e.g. Fan et al. (2007, p. 4), Chen et al. (2006, p. 432); Kato and Long (2006, p. 799).Google Scholar
  14. 14.
    Liu and Sun (2005) classify shareholdings of Chinese listed firms on the basis of the principle of ultimate ownership. This significantly increased the understanding of ultimate control structures of China’s listed firms.Google Scholar
  15. 15.
    Megginson and Netter (2001) provide an exhaustive review of over 225 studies regarding various economic aspects surrounding privatization.Google Scholar

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