European corporate governance: Trading off liquidity against control

Ownership dispersion is a pre-requisite for liquid stock markets, but it entails a collective action problem: individual investors have no incentives to engage in direct monitoring. Legal devices can provide solutions along three dimensions. One, they can concentrate or dilute voting power. Two, they can affect liquidity. Three, they can give the right or wrong monitoring incentives. This paper shows how these devices are used and how they can depress liquidity. Legal constraints aimed at strengthening minority protection can reduce the scope for monitoring, destroy liquidity and even create incentives for minority abuse: for example one-share-one-vote restrictions encourage the formation of pyramidal holding companies. The search for solutions that concentrate voting power, provide liquidity and protect minorities continues. (C) 1999 Elsevier Science B.V. All rights reserved.