The benefits and costs of controlling shareholders: the rise and fall of Parmalat

When Parmalat Finanziaria SpA filed for bankruptcy protection in late December 2003, it was regarded as the biggest financial collapse in European corporate history and was quickly dubbed “Europe's Enron”. The collapse of Parmalat provides an ideal opportunity to examine the Italian corporate governance system. Parmalat also exhibits a particular agency problem that has received relatively little attention in the literature, namely the conflicts of interest between a controlling shareholder and minority shareholders. In the instance of Parmalat, the controlling shareholder also happens to be the founder, Chairman and CEO of the company. This paper investigates the incentives facing the controlling shareholders and the opportunistic behavior that resulted. Mismanagement, accounting irregularities and regulatory failure allowed this behavior to continue, and led to the company's bankruptcy.