Sharing of Control versus Monitoring as Corporate Governance Mechanisms∗

Do large shareholders monitor firms on behalf of minority shareholders, or share control with other insiders to maximize the gains of the controlling group? We show how firm characteristics and governance laws determine the role of large shareholders in corporate governance. If the value of investment opportunities are hard for insiders to evaluate, letting a large shareholder monitor a single controlling shareholder is efficient because shared control creates disagreement costs that are more likely to destroy profitable opportunities than preventing bad investments. In contrast, sharing control is efficient if investment opportunities are hard for outsiders to evaluate, in countries that poorly protect minority shareholders, and when external financing requirements are large. ∗We would like to thank seminar participants at University of Chicago, Wharton, and PUC. Gomes and be reached at [email protected] and Novaes can be reached at [email protected].