Why is ownership more concentrated in developing countries than in developed countries?
What will be an ideal response?
In many developed countries, the rule of law is strong enough to discipline managers through legal means, for example by takeovers and proxy contests or through contractual compensation plans. Concentrated ownership is one way in which agency problems are mitigated in developing countries. A block of stock is held by either a wealthy investor, a family, or a financial intermediary, which might be a bank, a holding company, a hedge fund or a pension fund. The large shareholder clearly has a vested interest in monitoring management and has the power to implement changes in management. Negative aspects of this approach include possible collusion between the large shareholder and the management to expropriate wealth from smaller shareholders and the fact that the stock may be more difficult to trade on the stock market if a substantial block of shares is withdrawn from the market but is still available to be sold should the large shareholder want to sell.
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What will be an ideal response?
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