Corporate Ownership And Compact Costs

Abstract

Using definitions borrowed from property law, this paper contend shareholders receive less than complete ownership because the contract written by the state is deficient. This suggests that an additional residual property benefit exists in the firm separate and apart from both equity-holders and bondholder claims. Thus, the value of the firm is V = E + D + r, where V, E, and D are the market values of the firm, equity, and debt, respectively, and r is a residual value. The authors refer to this “compact costs” since it stems from the state’s faulty title document, and it explains investors paying a premium seeking corporate control.