This paper argues that the ownership structure of a firm acts as a commitment device to delegate a certain degree of authority from the shareholders to the management. While a dispersed ownership grants the management much discretionary power, a more concentrated one results in closer monitoring and hence less initiative by the manager. To the extent that managerial initiative beneficial for the shareholders there is a trade-off between the gains from monitoring and those from managerial activism. This trade-off is analysed successively in the case of aligned and conflicting shareholders' interests. In both cases the optimal size of the large shareholder's block balances the conflicting effects of monitoring. These results are applied to the analysis of fiduciary duty and signal manipulation providing new insights on traded subsidiaries and predation.
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