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Kiel Institute for World Economics Kiel Working Papers, Kiel Institute for World Economics

No 968:
Complementarities in Corporate Governance: Ownership Concentration, Capital Structure, Monitoring and Pecuniary Incentives

Ralph P. Heinrich

Abstract: The paper shows that, as owners accumulate larger stakes and hence become less risk-tolerant, their incentives to monitor management are attenuated because monitoring shifts some of the firm’s risk from management to owners. This counterbalances the positive effect which more concentrated ownership has on monitoring via reduced free rider problems. Moreover, the paper shows how the opportunity cost of concentrated ownership, which is the loss of risk-sharing benefits, creates scope to use leverage as an additional complementary governance instrument. The paper offers new explanations for several empirical regularities found in the literature.

Keywords: Corporate governance, Complementarity, Agency problem; (follow links to similar papers)

29 pages, February 2000

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