Three essays on investor protection

This dissertation examines the main question of corporate finance: how shareholders of public companies elect and control directors. How do shareholders, being suppliers of capital and legal owners of public companies, ensure themselves that directors and managers do not waste or steal the capital? To investigate this question, we focus on corporate elections. In the first chapter, we analyze specific voting rules, straight and cumulative voting, and examine which type of voting would result in the social optimum. We model the election as a game in which dissatisfied shareholders form a coalition that challenges the incumbent directors and attempts to gain representation on the board. We show that corporate elections may bring about socially suboptimal outcomes when ineffient shareholders take over corporate boards and the main cause of such outcomes is private benefits of control. Thus, in order to improve outcomes of corporate elections, we call for policies that would limit powers of boards of directors and make them more accountable to shareholders. We also show that straight voting is superior to cumulative. In the second chapter, we ask why shareholders have different rights in different countries. We attempt to explain this phenomenon using asymmetric information when one side has informational advantage over the other: corporate directors are supposed to act in the best interests of shareholders but shareholders do not witness directors efforts and cannot make sure that directors are serving their interests. This problem, known in the literature as the agency problem, is resolved by investor protection that gives shareholders the power to oust directors when firms results are unsuccessful. The third chapter extends our analysis of investor protection and brings new insights. We find that investor protection serves two main objectives. First, it motivates directors to exert greater efforts. Second, it allows shareholders to save on directors compensation. This feature of investor protection may encourage shareholders to fire directors more often than they would if they did not save on directors' compensation. The third chapter strengthens asymmetric information as the main cause of investor protection