Question

Many publicly traded companies are still controlled by their founders. Research shows that the share values of these companies often increase if the founder unexpectedly dies. Use the theory of the market for corporate control to explain this phenomenon.

Answer 1

The market for corporate governance requires public companies. Managers should make decisions that enhance shareholder's value rather than a personal view of value. If the manager makes a decision based on personal relationships and thoughts, the company will fail. If the shareholders do not agree with the decision, the shareholders value will decline as well. Therefore, when a public company is still controlled by its original founder, shareholders are careful about their decisions. Founders have a personal relationship with the business and, therefore, their love of business often blinds them. The founder's personal attachment often prevents successful startups from doing business, leading to lower investment decisions and creating a foundation that doesn't appeal to shareholders. Share values ​​often rise when an entrepreneur dies. Shareholders know that a person with a new perspective on operations will move on to be new CEO or President etc, and since there is no personal attachment, shareholder value is considered more. The new CEO or President etc is more accepting of corporate governance restrictions, which leads to higher share value.