TY  - JOUR
AU  - Mahoney, Paul G
TI  - Trust and Opportunism in Close Corporations
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6819
PY  - 1998
Y2  - November 1998
DO  - 10.3386/w6819
UR  - http://www.nber.org/papers/w6819
L1  - http://www.nber.org/papers/w6819.pdf
N1  - Author contact info:
Paul G. Mahoney
School of Law
University of Virginia
580 Massie Road
Charlottesville, VA 22903
Tel: 434-924-3996
Fax: 434-924-7536
E-Mail: pgm9h@virginia.edu
M1  - published as Paul G. Mahoney. "Trust and Opportunism in Close Corporations," in Randall K. Morck, editor, "Concentrated Corporate Ownership" University of Chicago Press (2000)

AB  - The majority shareholder in a closely held corporation may use its control of the corporate machinery to appropriate wealth from the minority, and it is difficult for the majority to make a binding commitment not to do so.  This paper models the interaction between majority and minority shareholders as a trust game in which the majority is constrained by the possibility of non-legal sanctions, including family or social disapproval and loss of reputation.  The paper applies the analysis to the longstanding debate over appropriate exit rules for close corporation shareholders.  Where the parties are well-informed and rational and judicial valuations are unbiased, giving the minority the unconditional right to e cashed out should reduce majority opportunism without producing opportunistic behavior by the minority.  The paper suggests that the apparent failure of close corporation shareholders to bargain for such a right reflects the courts' success in using dissolution and fiduciary duty actions to deter majority misbehavior.
ER  -