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Milton Harris’ ResearchClick on the paper title to view or print the paper using Acrobat Reader®. To obtain a free copy of Acrobat Reader® , click here. For published papers, in some cases you will need to use a computer or proxy server associated with a subscribing library or have a personal subscription to access the paper. Working Papers“Control of Corporate Decisions: Shareholders vs. Management” (with Artur Raviv) Activist shareholders have lately been attempting to assert themselves in a struggle with management and regulators over control of corporate decisions. These efforts have met with mixed success. Meanwhile, shareholders have been pressing for changes in the rules governing access to the corporate proxy process, especially in regard to nominating directors. The key issue which these events have brought to light is whether, in fact, shareholders will be better off with enhanced control over corporate decisions. Proponents of increased shareholder participation argue that such participation is needed to counter the agency problems associated with management decisions. In this view, boards of directors do not exercise sufficient control over self-interested managers because management insiders typically hand-pick directors through their control of the proxy process. Opponents offer several arguments such as that shareholders lack the requisite knowledge and expertise to make effective decisions or that shareholders may have incentives to make value-reducing decisions. In this paper, we investigate what determines the optimality of shareholder control, taking account of some of the above arguments, both pro and con. Our main contribution is to use formal modeling to uncover some factors overlooked in these arguments. For example, we show that the claims that shareholders should not have control over important decisions because they lack sufficient information to make an informed decision or because they have a non-value-maximizing agenda are flawed. On the other hand, it has been argued that, since shareholders have the “correct” objective (value maximization) and can always delegate the decision to insiders when they believe insiders will make a better decision, shareholders should control all major decisions. We show that this argument is also flawed. “A Theory of Board Control and Size” (with Artur Raviv) Review of Financial Studies 21, #4, July 2008, 1797-1832 This paper presents a model of optimal control of corporate boards of directors. In particular, we determine when one would expect inside directors or outside directors to control the board, when the controlling party will delegate decision-making to the other party, the extent of communication with the deciding party, and the number of outside directors. Our model incorporates the traditional view of corporate boards as monitors along with a role for board members as suppliers of expertise or information relevant for the decision. Because of the agency problem between corporate insiders and owners (who are assumed to be represented by the outside directors), neither party will communicate his or her information fully to the other. Outsiders, in our model, control agency problems by making some decisions themselves. When they do, the refusal of insiders to communicate their information fully becomes costly. Therefore, shareholders can sometimes be better off by having boards controlled by insiders, contrary to conventional wisdom. We characterize optimal board control and delegation decisions, the optimal number of outsiders, and resulting profits as functions of the importance of insiders’ and outsiders’ information, the extent of agency problems, and some other factors. This leads to an endogenous relationship between profits and the number of outside directors that furthers our understanding of some documented empirical regularities. Publications“A Theory of Board Control and Size,” with Artur Raviv, Review of Financial Studies, 21, #4, July, 2008, 1797-1832. “Allocation of Decision-making Authority,” with Artur Raviv, Review of Finance, 9, #3, September, 2005, 353-383. Handbook of the Economics of Finance, Volumes 1A, 1B, editor with George Constantinides and René Stulz, Amsterdam: Elsevier-North Holland, October, 2003. “Organization Design,” with Artur Raviv, Management Science, 48, #7, July, 2002, 852-865. “Capital Budgeting and Delegation,” with Artur Raviv, Journal of Financial Economics, 50, #3, December, 1998, 259-289 (lead article). “Review of ‘Firms, Contracts, and Financial Structure,’ by Oliver Hart,” Review of Financial Studies, 9, #4, Winter, 1996, 1271-1277. “The Capital Budgeting Process: Incentives and Information,” with Artur Raviv, Journal of Finance, 51, #4, September, 1996, 1139-1174. “The Role of Games in Security Design,” with Artur Raviv, Review of Financial Studies, 8, #2, Summer, 1995, 327-367. “Differences of Opinion Make a Horse Race,” with Artur Raviv, Review of Financial Studies, 6, #3, 1993, 473-506. “Financial Contracting Theory,” with Artur Raviv, in J.-J. Laffont, Advances in Economic Theory, Sixth World Congress, Vol. II, Cambridge, UK: Cambridge University Press, 1992, 64-150. “The Theory of Capital Structure,” with Artur Raviv, Golden Anniversary Invited Review Article, The Journal of Finance, 46, March, 1991, 297-355. Reprinted in K. Keasey, S. Thompson and M. Wright, Corporate Governance, Elgar Reference Collection, International Library of Critical Writings in Economics, vol. 106, Cheltenham, U.K. and Northampton, Mass.: Elgar, 1999, 268-326. “Allocation Mechanisms for Asymmetrically Informed Agents,” with Robert M. Townsend in R. M. Townsend, Financial Structure And Economic Organization: Key Elements And Patterns In Theory And History, Cambridge, Mass. and Oxford: Blackwell, 1990, 175-211. “Capital Structure and the Informational Role of Debt,” with Artur Raviv, The Journal of Finance 45, June, 1990, 321-349 (lead article and second-place winner in the Smith-Breeden awards for best papers in The Journal of Finance in 1990). “The Design of Securities,” with Artur Raviv, Journal of Financial Economics 24, October, 1989, 255-287. Reprinted in M. J. Brennan, The Theory of Corporate Finance,Elgar Reference Collection, International Library of Critical Writings in Financial Economics, no. 1, Cheltenham, U.K.: Elgar., 1996, 387-419. “Corporate Governance: Voting Rights and Majority Rules,” with Artur Raviv, Journal of Financial Economics, 20, January/March, 1988, 203-236. “Corporate Control Contests and Capital Structure,” with Artur Raviv, Journal of Financial Economics, 20, January/March, 1988, 55-86. “On the Duration of Agreements,” with Bengt Holmström, International Economic Review, 28, June, 1987, 389-406. “A Sequential Signalling Model of Convertible Debt Call Policy,” with Artur Raviv, The Journal of Finance, 40, 5, December, 1985, 1263-1281. “Allocation Mechanisms, Asymmetric Information, and the ‘Revelation Principle’,” with Robert M. Townsend, in George R. Feiwel, Issues in Contemporary Microeconomics and Welfare, London: Macmillan, 1985, 379-394. “Job Matching With Finite Horizon and Risk Aversion,” with Yoram Weiss, Journal of Political Economy, 92, 4, August, 1984, 758-779. “Microeconomic Developments and Macroeconomics,” with Bengt Holmström, American Economic Review, 73, 2, May, 1983, 223-227. “Comment on ‘Pricing a Product Line’ by S. Oren, S. Smith, and R. Wilson,” Journal of Business, 57, 1, part 2, January, 1984, S109-S110. “Comment on ‘Models in Managerial Accounting’ by Joel Demski and David Kreps,” Journal of Accounting Research, 20, Supplement, 1982, 149-152. “Pricing Schemes When Demand is Unobservable,” in Martin Shubik and Richard Englebrecht-Wiggans, Auctions, Bidding, and Contracting: Uses and Theory, New York: New York University Press, 1983, 195-203. “A Theory of Wage Dynamics,” with Bengt Holmström, Review of Economic Studies, LXIX, July, 1982, 315-333. “Asymmetric Information, Incentives and Intrafirm Resource Allocation,” with Charles Kriebel and Artur Raviv, Management Science, 28, 6, June, 1982, 604-620. “A Theory of Monopoly Pricing Schemes with Demand Uncertainty,” with Artur Raviv, American Economic Review, 71, 3, June, 1981, 347-365. “Allocation Mechanisms and the Design of Auctions,” with Artur Raviv, Econometrica, 49, 6, November, 1981, 1477-1499. “Resource Allocation Under Asymmetric Information,” with Robert M. Townsend, Econometrica, 49, 1, January, 1981, 33-64. Reprinted in D. K. Levine and S. A. Lippman, The Economics of Information, Elgar Reference Collection, International Library of Critical Writings in Economics, vol. 53, Aldershot, U.K.: Elgar, 1995, 119-50. Reprinted in R. M. Townsend, Financial Structure And Economic Organization: Key Elements And Patterns In Theory And History, Cambridge, Mass. and Oxford: Blackwell, 1990, 212-251. “Comment on ‘Equilibrium in a Pure Currency Economy’ by Robert E. Lucas,” in J.H. Kareken and N. Wallace, Models of Monetary Economies, Minneapolis: Federal Reserve Bank of Minneapolis, 1980, 157-160. “Expectations and Money in a Dynamic Exchange Model,” Econometrica, 47, 6, November, 1979, 1403-1419. “Optimal Incentive Contracts with Imperfect Information,” with Artur Raviv, Journal of Economic Theory, 20, 2, April, 1979, 231-259. “Some Results on Incentive Contracts with Applications to Education and Employment, Health Insurance, and Law Enforcement,” with Artur Raviv, American Economic Review, 68, 1, March, 1978, 20-30. Reprinted in M. E. Ricketts, Neoclassical Microeconomics, Schools of Thought in Economics Series, no. 3, Aldershot, U.K.: Elgar, 1988, 220-30. “Dynamic Aspects of Air Quality Control Costs,” with W. Dolde, D. Epple, L. Lave, and S. Leinhardt, Journal of Environmental Economics and Management, 4, 4, December, 1977, 313-334. “Optimal Planning Under Transaction Costs: The Demand for Money and Other Assets,” Journal of Economic Theory, 12, 2, April, 1976, 298-314. “A Mutual Primal-Dual Linear Programming Algorithm,” Naval Research Logistics Quarterly, 17, 2, June, 1970, 199-206. |