Shareholder Protection and Outside Blockholders : Substitutes or Complements?

Should outside blockholders be more common in countries with weaker shareholder protection? I show that there can be a U-shape dependence of the outside ownership concentration on the quality of shareholder protection. This result is in line with the recent empirical evidence questioning the traditional law and finance view. In my model, a lower cost of private benefit extraction makes outside monitoring less desirable for an entrepreneur, hereby calling for a lower outside blockholder's share. However, a low blockholder's share may provoke collusion between the entrepreneur and the blockholder, which hampers raising funds from dispersed shareholders. This trade-off yields the described U-shape relationship