The paper develops a simple model of corporate ownership structure in which costs and benefits of ownership concentration are analyzed. The model compares the liquidity benefits obtained through dispersed corporate ownership with the benefits from efficient management control achieved by some degree of ownership concentration. The paper reexamines the free‐rider problem in corporate control in the presence of liquidity trading, derives predictions for the trade and pricing of blocks, and provides criteria for the optimal choice of ownership structure.

The purpose of this note is to point out an error in a widely cited paper by Sharpe (1990) on long-term bank-…rm relationships and to provide a correct analysis of the problem. The model studies repeated lending under asymmetric information which leads to winner's-curse type distortions of competition. Contrary to the claims in Sharpe (1990), this game only has an equilibriuim in mixed strategies, which features a partial informational lock-in by …rms and random termination of lending relationships.

We study the problem of financial contracting and renegotiation between a firm and outside investors when the firm cannot commit to future payouts, but assets can be contracted upon. We show that a capital structure with multiple investors specializing in short-term and long-term claims is superior to a structure with only one type of claim, because this hardens the incentives for the entrepreneur to renegotiate the contract ex post. Depending on the parameters, the optimal capital structure also differentiates between state-independent and state-dependent longterm claims, which can be interpreted as long-term debt and equity. I. INTRODUCTIONMost firms have more than one investor and issue more than one type of financial claim. These claims differ, among other things, in maturity, payout contingencies, security interests, and priority in bankruptcy. Investors usually specialize in particular claims, e.g., by holding only short-term debt or only equity in a firm. In case firms are financially distressed, short-term creditors rarely forgive debt, while concessions often are made by subordinated long-term claim-holders. This paper attempts to explain these and other observations by asking how rational investors design capital structure; i.e., how they allocate rights to returns and what rules they specify to enforce these rights.We study the problem of a firm seeking to raise capital against the promise to pay investors back out of future returns. When these returns are not verifiable in court, the promise must be made credible. In practice, debt contracts often solve this problem by giving investors, in case repayment promises are not met, the right to liquidate or force the sale of assets that are easier to verify. Typically, such assets exhibit a certain degree of firm specificity, and hence are of less value outside the firm than for the generation of future returns within the firm. Therefore, as emphasized by Hart and Moore [1989, 1994] We show that in general the firm will choose to have more than one (class of) investor(s) and that investors separate their claims across time and states of nature, with one investor holding secured short-term claims and another junior long-term claims. If the firm is doing well in the short run, the short-term creditor is repaid, and long-term claim-holders receive all future returns. If the firm is unable to repay in the short run, the short-term creditor forces the firm to transfer or sell part of its assets. The maturity of her remaining claims is extended at the expense of some (not necessarily all) junior long-term claim-holders.The principal reason for this separation is that the ex post bargaining position of an investor with short-term claims is weaker if she also has long-term claims because she internalizes the impact of her actions on future revenues. On the other hand, separating outside claims over time creates an externality on the side of the short-term investor, which strengthens her bargaining power if the firm should attempt to default. Separation of claims a...

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