Security Design and Corporate Control: Free Choice for Entrepreneurs or Further Calls for Regulation?

In light of renewed interest in the relation between shareholder protection and control arrangements, the investigators will first review the optimality of the one-share one-vote (1S1V) security design. They first further examine the optimality of 1S1V in its original de facto perfect foresight setting by extending the problem to allow both incumbent and rival management teams to extract private benefits when in control. Next they will consider the imperfect-foresight problem where the entrepreneur-founder only knows the distribution from which the rival will be drawn. They will determine what set of rules the entrepreneur will put in place, in relation to takeovers, to maximize the firm’s IPO value. They will explain why simple 1S1V rules are not optimal with imperfect foresight and link this to alternative design structures when rival characteristics are known with perfect foresight. The researchers will explain why governments rarely step in for the design issue: they will compare the social impact of the charter choice to the private impact.