Agency conflicts, ownership concentration, and legal shareholder protection

This paper analyzes the interaction between legal shareholder protection, managerial incentives, and outside ownership concentration. Legal protection a¤ects both the expropriation of shareholders and the blockholder's incentives to monitor. Because of this latter e¤ect and its repercussion on managerial incentives, outside ownership concentration and legal shareholder protection can be both substitutes or complements. This holds irrespective of whether or not the large shareholder can reap private bene ts. Moreover, better legal protection may exacer- bate rather than alleviate the conflict of interest between large and small shareholders. In the extended framework with monetary incentives, ownership is fully dispersed when legal shareholder protection is strong. Otherwise, outside block ownership is optimal and is a substitute to legal protection when the law is of intermediate quality, while it is a complement when the law is poor.