Governance Problems in Closely-Held Corporations

A major governance problem in closely-held corporations arising from the illiquidity of shares is the majority shareholders’ expropriation of minority shareholders. As a solution, legal and finance research recommends that the main shareholder surrender some control to minority shareholders via ownership rights. We test this proposition on a large dataset of closely-held corporations. We find that shared-ownership firms report substantially larger return on assets (up to 14 percentage points) and lower expense-to-sales ratios. These findings are robust to institutionally motivated corrections for the endogeneity of the ownership structure. We are one of the first to provide evidence on the presence of governance problems and the effectiveness of shared ownership as a solution in settings characterized by illiquidity of ownership.