Governance Problems in Close Corporations

Close corporations account for 51 percent of the private sector output and 52 percent of all private employment in the US. Understanding governance issues and agency problems facing these firms is therefore of considerable importance. Legal scholars extensively recommend that the main shareholder in close firms surrender some control to minority shareholders at the outset in order to improve overall firm performance. With shared control rights, no shareholder can take unilateral actions for her own benefit at the expense of the firm and other shareholders. In two independent samples of close corporations, we find that shared ownership firms report substantially larger return on assets (by 4 to 12 percentage points) and lower expense-to-sales ratios. JEL Classification Codes: G32, L20.