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has been cited by the following article:

• TITLE: Is Control Friction Always Hurting Outside Investors? Implications from a Theoretical Study

  AUTHORS: Du Du

  KEYWORDS: Control Friction, Control-Ownership Wedge, Investor Protection, Asset Allocation, Dividend Payout, Welfare Analyses

  JOURNAL NAME: Journal of Mathematical Finance, Vol.15 No.1, February 10, 2025

  ABSTRACT: We analyze the financial and welfare implications of corporate control frictions. Our dynamic stochastic model features control-ownership wedge where outside investors have imperfect control over the decisions of their firm, and a rich opportunity set available to the firm that allows it to trade unconstrainedly in financial markets. The model makes numerous predictions. A deterioration of the protection for outside investors initially depresses but later on raises the firm’s dividend payouts. The firm’s controlling agent exploits the control friction by over-investing and taking more aggressive positions in the stock market. The empire building motive of the controlling agent at a higher degree of control friction may actually drive up the firm valuation. The controlling agent generally gains from a lower degree of investor protection and the implied utility gains are higher for a lower investment risk, a lower degree of risk aversion, and a lower equity risk premium.