The Political Economy of Bank and Equity Dominance

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The Political Economy of Bank and Equity Dominance

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Perotti, Enrico C
von Thadden, Ernst-Ludwig

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Abstract

Legislation affects corporate governance and the return to human and financial capital. We allow the preference of a political majority to determine both the governance structure and the extent of labour rents. In a society where median voters have relatively more at stake in the form of human capital rather than financial wealth, they prefer a less risky environment even when this reduces profits, as labour rents are exposed to undiversifiable firm-specific risk. In general, labour and lenders prefer less corporate risk, since their claims are a concave function of firm profitability. This congruence of interests can lead the political majority to support bank over equity dominance. As share-holdings by the median voters increase, the dominance structure will move towards favoring equity markets with riskier corporate strategies and higher profits.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3914.

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Date of creation: May 2003
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Handle: RePEc:cpr:ceprdp:3914

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Find related papers by JEL classification:
G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

This paper has been announced in the following NEP Reports:

NEP-ALL-2004-06-13 (All new papers)
NEP-CFN-2003-07-13 (Corporate Finance)
NEP-POL-2004-06-13 (Positive Political Economics)

References listed on IDEAS
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Full references

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Michael Graff, 2005. "Law and Finance: Common-law and Civil-law Countries Compared," KOF Working papers 05-99, KOF Swiss Economic Institute, ETH Zurich. [Downloadable!]
Marco Pagano & Paolo F. Volpin, 2005. "The Political Economy of Corporate Governance," American Economic Review, American Economic Association, vol. 95(4), pages 1005-1030, September. [Downloadable!]
Other versions:
- Marco Pagano & Paolo Volpin, 1999. "The Political Economy of Corporate Governance," CSEF Working Papers 29, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 01 Jul 2005. [Downloadable!]
- Pagano, Marco & Volpin, Paolo, 2001. "The Political Economy of Corporate Governance," CEPR Discussion Papers 2682, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
Claessens, Stijn & Underhill, Geoffrey R D, 2005. "The Need for Institutional Changes in the Global Financial System: An Analytical Framework," CEPR Discussion Papers 4970, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
Donato Masciandaro, 2006. "E Pluribus Unum? Authorities' Design in Financial Supervision: Trends and Determinants," Open Economies Review, Springer, vol. 17(1), pages 73-102, January. [Downloadable!] (restricted)

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