The Privatization Wave: Reaction to Regulation or Move to Greater Efficiency? ^☆ ☆

Author gratefully acknowledges generous contributions about the legal conflicts inherent in the corporate form of organization, provided in the appendix of this chapter (see Kensinger & Poe, 2005).

Abstract

This chapter explores the advantages (for large investors) of directly owning productive assets, compared with indirect ownership through stock in corporations. Significant factors are agency costs and recent changes in the tax and regulatory environment. Recent corporate scandals have led to legislative and regulatory responses that significantly increase the monitoring costs and other burdens of becoming or remaining a public corporation. As a result, there has been a substantial increase in going-private transactions, particularly among smaller public companies. Acquisitions and minority equity positions that allow large corporations to join with smaller companies have also increased. The pressures to go private are not entirely new, however. This chapter, reflecting collaboration by professors of finance and business law, traces the legal concept that the corporation is an entity separate and apart from its owners, showing how the legal status of corporations hinders resolution of conflicts among the parties to the enterprise. Thus, there have long been fundamental flaws inherent in the corporation as the form of organization for certain activities. The current wave of Sarbanes–Oxley restructuring via private equity firms is part of a significant increase in direct ownership of major assets by institutional investors. Direct ownership prevents management expropriation of resources, and is preferable to corporate ownership whenever other alternatives for indemnification or liability limitation are available (such as insurance, limited partnerships, limited liability companies, etc.). Finally, the renewal of direct ownership is not a radical shift, but a return to long-established tradition in the organization of business activities.

Citation

Kensinger, J.W. (2014), "The Privatization Wave: Reaction to Regulation or Move to Greater Efficiency? ^☆ ☆

Author gratefully acknowledges generous contributions about the legal conflicts inherent in the corporate form of organization, provided in the appendix of this chapter (see Kensinger & Poe, 2005).

", Research in Finance (Research in Finance, Vol. 29), Emerald Group Publishing Limited, Leeds, pp. 119-151. https://doi.org/10.1108/S0196-3821(2013)0000029008