SFB 303 Discussion Paper No. A - 210
Author: DeMarzo, Peter
Title: Majority Voting and Corporate Control: The Rule of the Dominant Shareholder
Abstract: This paper incorporates a model of corporate control into a general equilibrium framework for production
economies with incomplete markets. Various firm objectives are considered. First, the notion of value
maximization is extended to incomplete markets and is shown to be consistent with all mechanisms of
shareholder control satisfying the Pareto criterion. Next, the particular institution of majority voting by
shareholders is examined. It is shown that for generic economies, a majority rule equilibrium for a firm implies
that production is optimal for the largest, or dominant, shareholder. Finally, more realistic control forms are
considered in which majority voting by shareholders is constrained by a group of shareholders, or Board of
Directors, who control the voting agenda. The result is that shareholders not on the Board have no influence on
the equilibrium production choice of the firm.
Creation-Date: November 3, 1988
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