European corporate governance: Trading off liquidity against control

Ownership dispersion is a pre-requisite for liquid stock markets, but it en tails a collective action problem: individual investors have no incentives to engage in direct monitoring. Legal devices can provide solutions along t hree dimensions. One, they can concentrate or dilute voting power. Two, the y 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 de press liquidity. Legal constraints aimed at strengthening minority protecti on can reduce the scope for monitoring, destroy liquidity and even create i ncentives for minority abuse: for example one-share-one-vote restrictions e ncourage the formation of pyramidal holding companies. The search for solut ions that concentrate voting power, provide liquidity and protect minoritie s continues. (C) 1999 Elsevier Science B.V. All rights reserved.