Separating Ownership and Information

Abstract

This paper identifies an upside of the separation of ownership and control, typically the source of inefficiencies in the theory of the firm. Because insiders obtain private information by exercising control, the separation of ownership and control leads to a separation of ownership and information. We show that this separation is necessary for efficient trade in the market for corporate control. The analysis reveals how strategic communication between inside and outside shareholders facilitates takeovers by eliciting external bidders’ private information. Our results call into question mandatory disclosure requirements during takeovers. (JEL D21, D82, G32, G34)