Journal of Financial and Quantitative Analysis

Research Articles

Governance Problems in Closely Held Corporations

Venky Nagara1, Kathy Petronia2 and Daniel Wolfenzona3

a1 Ross School of Business, University of Michigan, 701 Tappan St., Ann Arbor, MI 48109,

a2 Broad College of Business, Michigan State University, 315 Eppley Center, East Lansing, MI 48824,

a3 Graduate School of Business, Columbia University, 3022 Broadway, New York, NY 10027, and NBER,


A major governance problem in closely held corporations is the majority shareholders’ expropriation of minority shareholders. As a solution, legal and finance research recommends that the main shareholder surrender some control to minority shareholders via ownership rights. We test this proposition on a large data set of closely held corporations. We find that shared-ownership firms report a substantially larger return on assets and lower expense-to-sales ratios. These findings are robust to institutionally motivated corrections for endogeneity of ownership structure. We provide evidence on the presence of governance problems and the effectiveness of shared ownership as a solution in settings characterized by illiquidity of ownership.

(Online publication April 19 2011)


We are especially grateful to Luc Laeven (the referee), whose comments on the paper substantially improved the exposition and analyses. We also thank Jill Fisch, Paul Malatesta (the editor), Andrei Shleifer, and seminar participants at INSEAD, University of Michigan, New York University (NYU), Massachusetts Institute of Technology, and the 2007 NYU/Penn Conference on Law and Finance.