Reputation Turnaround, Negotiated Block Trade, and Endogenous Cost of Corporate Control

Reputation is a valuable asset to firms, yet the impact of corporate governance of reputationreliant firms is underexplored. This paper investigates how a firm’s reputation in the product market responds to a change in its controlling shareholder, and derives the optimal firm ownership and control structure. We consider a dynamic model of an experience-goods firm, in which a controlling shareholder actively engages in management, and the controlling share block can be traded through private negotiation. In the optimal equilibrium, the firm’s reputation in the product market is linked to its behavior in the market for corporate control to provide proper incentive for the controlling shareholder to maintain a good firm reputation. Our analysis also identifies an endogenous cost of corporate control, and provides a rationale for the separation of ownership and control. We derive the optimal ownership structure and draw implications on the dynamics of control premium. JEL Classifications: L14, L15, D86