This article analyzes the effects that institutional design of the firm has on the allocation of control over the firm’s assets. The efficient allocation of control is a necessary condition for the optimal allocation of resources. Dynamic efficiency in resource allocation presupposes that control over firms will change hands when a given allocation becomes suboptimal.> Typically, changes in control are brought about through (successful) tender offers or block trades. With regard to takeovers, a firm may have two types of value to consider: First, there is the public value of the firm, which is the market value of the firm’s securities. Second, there may be a private value of the firm. The private value is the benefit an investor enjoys from exercising control over the firm. Private control benefits are most signficant for entrepreneurial start-ups, for established family-owned businesses, and for organizations where personal investors also pursue non-pecuniary goals, such as media groups or professional sports organizations.> Of the legal arrangements identified in the finance literature, the most significant for wealth-maximization in takeovers are the one share–one vote principle, majority rules, and mandatory tender offers. We analyze the implications of these three institutional arrangements in a simple textbook takeover model. The model helps in understanding the optimal design of a legal environment in which the market for corporate control promotes efficient allocation of capital.
