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The Political Economy of Bank- and Market Dominance

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  • Enrico Perotti

    ()
    (University of Amsterdam, and CEPR)

  • Ernst Ludwig von Thadden

    (University of Lausanne, FAME, and CEPR)

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 labor 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 labor rents are exposed to undiversifiable firm-specific risk. In general, labor 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 shareholdings 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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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 04-012/2.

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Date of creation: 22 Jan 2004
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Handle: RePEc:dgr:uvatin:20040012

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Keywords: corporate governance; corporate finance; political economy; labor income; human capital; median voter;

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  2. Hermalin, Benjamin E. & Katz, Michael, 2000. "Corporate Diversification and Agency," Research Program in Finance, Working Paper Series qt0p34c640, Research Program in Finance, Institute for Business and Economic Research, UC Berkeley.
  3. Andrei Shleifer & Lawrence H. Summers, 1988. "Breach of Trust in Hostile Takeovers," NBER Chapters, in: Corporate Takeovers: Causes and Consequences, pages 33-68 National Bureau of Economic Research, Inc.
  4. Marco Pagano & Paolo Volpin, 2001. "The Political Economy of Finance," CSEF Working Papers 76, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  5. Stijn Claessens & Leora F. Klapper, 2005. "Bankruptcy around the World: Explanations of Its Relative Use," American Law and Economics Review, Oxford University Press, vol. 7(1), pages 253-283.
  6. Robert Carpenter & Laura Rondi, 2000. "Italian Corporate Governance, Investment, and Finance," Empirica, Springer, vol. 27(4), pages 365-388, December.
  7. Rajan, Raghuram G & Zingales, Luigi, 2001. "The Great Reversals: The Politics of Financial Development in the 20th Century," CEPR Discussion Papers 2783, C.E.P.R. Discussion Papers.
  8. Patrick Bolton & Howard Rosenthal, 2002. "Political Intervention in Debt Contracts," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1103-1134, October.
  9. Bruno Biais & Enrico Perotti, 2002. "Machiavellian Privatization," American Economic Review, American Economic Association, vol. 92(1), pages 240-258, March.
  10. Pagano, Marco & Volpin, Paolo, 2001. "The Political Economy of Corporate Governance," CEPR Discussion Papers 2682, C.E.P.R. Discussion Papers.
  11. Rodrik, Dani, 1996. "Why do More Open Economies Have Bigger Governments?," CEPR Discussion Papers 1388, C.E.P.R. Discussion Papers.
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Cited by:
  1. Fluck, Zsuzsanna & Mayer, Colin, 2005. "Race to the Top or Bottom? Corporate Governance, Freedom of Reincorporation and Competition in Law," CEPR Discussion Papers 5133, C.E.P.R. Discussion Papers.
  2. René M. Stulz, 2005. "The Limits of Financial Globalization," Journal of Finance, American Finance Association, vol. 60(4), pages 1595-1638, 08.
  3. Aggarwal, Raj & Goodell, John W., 2009. "Markets versus institutions in developing countries: National attributes as determinants," Emerging Markets Review, Elsevier, vol. 10(1), pages 51-66, March.
  4. Pagano, Marco & Volpin, Paolo, 2001. "The Political Economy of Corporate Governance," CEPR Discussion Papers 2682, C.E.P.R. Discussion Papers.
  5. Bruno Biais & Enrico Perotti, 2002. "Machiavellian Privatization," American Economic Review, American Economic Association, vol. 92(1), pages 240-258, March.
  6. Marco Pagano & Paolo Volpin, 2001. "The Political Economy of Finance," CSEF Working Papers 76, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  7. 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.
  8. Giovanni Cespa & Giacinta Cestone, 2002. "Stakeholder activism, managerial entrenchment and the congruence of interests between shareholders and stakeholders," Economics Working Papers 634, Department of Economics and Business, Universitat Pompeu Fabra.
  9. Michael Graff, 2005. "Law and Finance: Common-law and Civil-law Countries Compared," KOF Working papers 05-99, KOF Swiss Economic Institute, ETH Zurich.
  10. Harilaos Mertzanis, 2011. "The effectiveness of corporate governance policy in Greece," Journal of Financial Regulation and Compliance, Emerald Group Publishing, vol. 19(3), pages 222-243, July.
  11. Fogel, Kathy & Morck, Randall & Yeung, Bernard, 2008. "Big business stability and economic growth: Is what's good for General Motors good for America?," Journal of Financial Economics, Elsevier, vol. 89(1), pages 83-108, July.
  12. Chisari, Omar O. & Ferro, Gustavo, 2009. "Gobierno Corporativo: los problemas, estado actual de la discusión y un ejercicio de medición para Argentina
    [Corporate Governance: the problems, the current stage of the discussion and a measure
    ," MPRA Paper 15630, University Library of Munich, Germany.

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