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Unbundling ownership and control

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We study optimal corporate control allocations under asymmetric information. We modify the canonical partnership dissolution model to allow for the endogenous determination of ex post ownership and control structures. Using a mechanism design approach, we fully characterize the optimal restructuring mechanism. This mechanism requires increasing the number of shares of the incumbent insider if he remains in control, while giving him a golden parachute that may include both stock and cash if he is deposed. The model exemplifies a novel explanation for the prevalence and persistence of the separation of ownership from control: efficiency in control contests is more easily achieved when ownership of cash flow rights is not concentrated in the hands of insiders. The model generates several novel empirical predictions.

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