Document Type

Article

Publication Date

2019

DOI

https://doi.org/10.1017/9781108554442.002

Abstract

In this chapter, we outline the theory of idiosyncratic vision and explored its implications. Our theory can be summarized as follows: First, while investors value control because it offers them protection from agency costs, entrepreneurs value control because it allows them to pursue their idiosyncratic vision. Second, any contract between entrepreneurs and investors represents a balance between the entrepreneurs’ freedom to secure their idiosyncratic vision and the investors’ protection against agency costs. Third, the investors and entrepreneurs will allocate cash-flow and control rights through the bargaining process to achieve this balance.

In addition, this chapter demonstrates that ownership structures are multiple solutions placed along a spectrum dividing control and cash-flow rights, and concentrated ownership is one such structure somewhere in the middle of this spectrum. We have seen that concentrated ownership bundles control and cash-flow rights to foster the controller’s idiosyncratic vision and reduce the minority shareholders’ exposure to agency costs. We conclude by explaining how the tension between the idiosyncratic vision and agency costs is informing, and should inform, the shape of corporate law doctrines concerning corporations with controlling shareholders.

Disciplines

Business Organizations Law | Law

Comments

This material has been published in "The Law and Finance of Related Party Transactions", edited by Luca Enriques and Tobias H. Tröger. This version is free to view and download for private research and study only. Not for re-distribution or re-use.

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