Public bads and private firms: efficiency and sustainability with different allocations of voting rights

Research output: Contribution to journalArticleAcademicpeer-review

1 Citation (Scopus)

Abstract

A number of authors have proposed that firms can internalize externalities through their shareholders. This paper investigates this proposition, focusing on public bads. Theoretically it is, indeed, possible that shareholders decide that the firm reduces its public bads at the cost of profits, thereby increasing Pareto-efficiency. One of the factors which help determine the size of the reduction is the number of shareholders with a (very) small stake in the firm. The greater this number, the greater the reduction will tend to be. It is shown that the reduction in public bads can be reversed by takeovers, but under special conditions only while takeover defences may also be used. Unfortunately, there are a number of factors which significantly limit the internalization of external effects in practice. The paper also discusses a change in the legal share-voting system whereby the direct owners of the shares (i.e., the shareholders) no longer possess, in their capacity of direct owners, the legal right to vote at the General Meetings of firm owners. Instead, these rights become the property of the beneficial owners of the shares (i.e., the people who ultimately provided the money to buy the shares), but on the condition that they delegate their voting rights to a proxy voting institution. This institutional innovation may significantly increase the internalization of external effects among other things because many beneficial owners have a tiny stake in the firm.
Original languageEnglish
Pages (from-to)423-445
JournalEuropean journal of law and economics
Volume36
Issue number3
DOIs
Publication statusPublished - 2013

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shareholder
voting
sustainability
firm
efficiency
external effects
internalization
right to vote
Voting rights
Firm efficiency
Shareholders
Sustainability
Private firms
Public firm
Owners
profit
money
innovation

Keywords

  • METIS-278191
  • IR-88212

Cite this

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title = "Public bads and private firms: efficiency and sustainability with different allocations of voting rights",
abstract = "A number of authors have proposed that firms can internalize externalities through their shareholders. This paper investigates this proposition, focusing on public bads. Theoretically it is, indeed, possible that shareholders decide that the firm reduces its public bads at the cost of profits, thereby increasing Pareto-efficiency. One of the factors which help determine the size of the reduction is the number of shareholders with a (very) small stake in the firm. The greater this number, the greater the reduction will tend to be. It is shown that the reduction in public bads can be reversed by takeovers, but under special conditions only while takeover defences may also be used. Unfortunately, there are a number of factors which significantly limit the internalization of external effects in practice. The paper also discusses a change in the legal share-voting system whereby the direct owners of the shares (i.e., the shareholders) no longer possess, in their capacity of direct owners, the legal right to vote at the General Meetings of firm owners. Instead, these rights become the property of the beneficial owners of the shares (i.e., the people who ultimately provided the money to buy the shares), but on the condition that they delegate their voting rights to a proxy voting institution. This institutional innovation may significantly increase the internalization of external effects among other things because many beneficial owners have a tiny stake in the firm.",
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Public bads and private firms: efficiency and sustainability with different allocations of voting rights. / Prinz, Aloys; van der Burg, Tsjalle.

In: European journal of law and economics, Vol. 36, No. 3, 2013, p. 423-445.

Research output: Contribution to journalArticleAcademicpeer-review

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