Recently the effect of corporate governance rules and the takeover process on the welfare of investors in the companies involved, as well as on that of society in general, has figured prominently in both academic and public debate. Corporate governance rules affect the ease with which takeovers occur both directly and indirectly through the availability and effectiveness of various antitakeover devices. This project develops a powerful general theory of corporate governance and corporate finance. The theory is used to derive new insights into a number of important issues about corporate control and takeovers that have been neglected by economists. The following specific questions are addressed: Why do most corporate charters provide that control contests are decided by a simple (50%) majority vote? Why are voting rights never attached to bonds even though it has never been illegal to do so? Why are voting rights generally not assigned to preferred stock? Why is the most prevalent assignment of voting rights to common stock that of assigning votes proportional to the cash flow claims? In particular, what are the welfare consequences of having classes of common stock with disparate voting rights? How can one explain simultaneously the design of the cash flow characteristics of a security and its voting rights assignment? That is, can the commonly observed securities, common stock with proportional votes and nonvoting bonds, be derived endogenously? What are the implications for capital structure of investigating the above issues? In particular, can an explanation of the design of securities and their voting rights also explain observed capital structure regularities? Is mandatory disclosure of intent to take over a firm optimal and, if so, at what point in the takeover process? In particular, should the rule requiring disclosure after accumulating a 5% equity stake be modified? Should incumbent management be allowed, either by the corporate charter or by regulations, to hold voting rights? Should corporations or regulatory agencies prohibit or encourage the use of such antitakeover devices as targeted share repurchase (greenmail), exclusionary tender offers, standstill agreements, poison pills, and golden parachutes?
