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The Political Economy of Dominant Investors

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  • Enrico C. Perotti

    ()
    (University of Amsterdam, and CEPR)

  • Ernst-Ludwig von Thadden

    (University of Lausanne, and CEPR)

Abstract

We allow the preference of a political majority to determine boththe corporate governance structure and the division of profits betweenhuman and financial capital. In a democratic society where financialwealth is concentrated, a political majority may prefer to restraingovernance by dispersed equity investors even if this reduces profits.The reason is that labor claims are exposed to undiversifiable risk, sovoters with small financial stakes may prefer lender (or large share-holder) dominance, as they choose lower risk strategies. The modelmay explain the "great reversal" phenomenon in the first half of the20th century (Rajan and Zingales, 2003), when some financially verydeveloped countries moved towards bank or state control as a finan-cially weakened middle class became concerned about income risk.We offer evidence using post WW1 inflationary shocks as the sourceof identifying exogenous variation.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 04-091/2.

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Date of creation: 23 Aug 2004
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Handle: RePEc:dgr:uvatin:20040091

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Web page: http://www.tinbergen.nl

Related research

Keywords: government policy and regulation; capital budgeting; investment policy; financing policy; capital and ownership structure; mergers; acquisitions; restructuring; corporate governance;

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References

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  2. Rajan, Raghuram G. & Zingales, Luigi, 2003. "The great reversals: the politics of financial development in the twentieth century," Journal of Financial Economics, Elsevier, vol. 69(1), pages 5-50, July.
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  15. Enrico C. Perotti & Ernst-Ludwig von Thadden, 2004. "The Political Economy of Dominant Investors," Tinbergen Institute Discussion Papers 04-091/2, Tinbergen Institute.
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Citations

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Cited by:
  1. Carney, Richard, 2007. "Deducing Varieties of Capitalism," MPRA Paper 5145, University Library of Munich, Germany.
  2. Enrico Perotti & Ernst-Ludwig von Thadden, 2005. "The Political Economy of Corporate Control," Tinbergen Institute Discussion Papers 05-102/2, Tinbergen Institute.
  3. Pagano, Marco & Volpin, Paolo, 2005. "Shareholder Protection, Stock Market Development and Politics," CEPR Discussion Papers 5378, C.E.P.R. Discussion Papers.
  4. Cespa, Giovanni & Cestone, Giacinta, 2004. "Corporate Social Responsibility and Managerial Entrenchment," CEPR Discussion Papers 4648, C.E.P.R. Discussion Papers.
  5. Matoussi, Hamadi & Jardak, Maha Khemakhem, 2012. "International Corporate Governance and Finance: Legal, Cultural and Political Explanations," The International Journal of Accounting, Elsevier, vol. 47(1), pages 1-43.

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