The Effect of Multiple Majority Shareholders on the Valuation of the Firms

In this paper I present the theoretical model of control structure of multiple majority (or large controlling) shareholders with equal voting rihgts in the economy with protection of minority shareholders law (the investor protection law) and shed light on how the presence of multiplicity of large controlling shareholders can influence on firm value with the imperfect investor protection. In modern world the theme of agency conflict between large controlling shareholders and minority shareholders spreads with a high rate. Controlling shareholders can use the set of available expropriation strategies and restrict the wealth of minorities. Each country has several laws of corporations which protect minority shareholders. However, firm valuation is differently effected by the agency problem between these two parties with the economy of investor protection. For every company it is quite important to establish how the relation between the protection of minority shareholders law and the control structure of the corporation influences on the firm value, which has also become the motivation of my work. I follow the assumptions of the empirical work of Mauri and Pajuste (2005). The presence of several large controlling shareholders leads to the competition for control power among them. I provide the new theoretical model which shed light on effects of the contestability (which is the competition among large controlling shareholders) on firm value in the economy with imperfect investor protection. This paper provides the significant importance of the contestability between majority shareholders, which means the large amount of controlling shareholders, in firm valuation. My theoretical model is newest which shows that even in the economy with imperfect investor protection firm value can increase if there is multiple large shareholders who contest for the power and, hence, have the incentives to reduce profit diversion.