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The Political Economy of Dominant Investors

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Author Info
Enrico C. Perotti () (Faculty of Economics and Econometrics, Universiteit van Amsterdam, and CEPR)
Ernst-Ludwig von Thadden (Université de Lausanne, and CEPR)

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Abstract

We allow the preference of a political majority to determine both the corporate governance structure and the division of profits between human and financial capital. In a democratic society where financial wealth is concentrated, a political majority may prefer to restrain governance by dispersed equity investors even if this reduces profits. The reason is that labor claims are exposed to undiversifiable risk, so voters with small financial stakes may prefer lender (or large share- holder) dominance, as they choose lower risk strategies. The model may explain the "great reversal" phenomenon in the first half of the 20th century (Rajan and Zingales, 2003), when some financially very developed 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 source of identifying exogenous variation.

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Publisher 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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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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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

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. 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. [Downloadable!] (restricted)
  2. Randall S. Kroszner & Philip E. Strahan, 2000. "Obstacles to Optimal Policy: The Interplay of Politics and Economics in Shaping Bank Supervision and Regulation Reforms," NBER Working Papers 7582, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Raghuram Rajan & Luigi Zingales, 2003. "The Emergence of Strong Property Rights: Speculation from history," NBER Working Papers 9478, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Rene M. Stulz, 2005. "The Limits of Financial Globalization," NBER Working Papers 11070, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Demirguc-Kunt, Asli & Levine, Ross, 1999. "Bank-based and market-based financial systems - cross-country comparisons," Policy Research Working Paper Series 2143, The World Bank. [Downloadable!]
  6. Franks, Julian R & Mayer, Colin & Rossi, Stefano, 2003. "The Origination and Evolution of Ownership and Control," CEPR Discussion Papers 3822, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  7. Randall S. Kroszner & Philip E. Strahan, 2000. "Obstacles to Optimal Policy: The Interplay of Politics and Economics in Shaping Bank Supervision and Regulation Reforms," CRSP working papers 512, Center for Research in Security Prices, Graduate School of Business, University of Chicago. [Downloadable!]
  8. Stulz, Rene M., 2005. "The Limits of Financial Globalization," Working Paper Series 2005-1, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
  9. Claessens, Stijn & Klapper, Leora F., 2002. "Bankruptcy around the world - explanations of its relative use," Policy Research Working Paper Series 2865, The World Bank. [Downloadable!]
    Other versions:
  10. Randall Morck & Masao Nakamura, 2000. "Japanese Corporate Governance and Macroeconomic Problems," Harvard Institute of Economic Research Working Papers 1893, Harvard - Institute of Economic Research. [Downloadable!]
  11. Colin Mayer, 1998. "Financial Systems and Corporate Governance: A Review of the International Evidence," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 154(1), pages 144-, March.
  12. Perotti, Enrico C & von Thadden, Ernst-Ludwig, 1998. "Dominant Investors and Strategic Transparency," CEPR Discussion Papers 1948, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  13. Gorton, Gary & Schmid, Frank A., 2000. "Universal banking and the performance of German firms," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 29-80. [Downloadable!] (restricted)
  14. Bruno Biais & Enrico Perotti, 2002. "Machiavellian Privatization," American Economic Review, American Economic Association, vol. 92(1), pages 240-258, March. [Downloadable!]
  15. Randall S. Kroszner, 2000. "Obstacles to Optimal Policy: The Interplay of Politics and Economics in Shaping Bank Supervision and Regulation Reforms," University of Chicago - George G. Stigler Center for Study of Economy and State 158, Chicago - Center for Study of Economy and State. [Downloadable!]
  16. Perotti, Enrico C. & Von Thadden, Ernst-Ludwig, 2003. "Strategic Transparency and Informed Trading: Will Capital Market Integration Force Convergence of Corporate Governance?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(01), pages 61-86, March. [Downloadable!]
    Other versions:
  17. Welch, Ivo, 1997. "Why Is Bank Debt Senior? A Theory of Asymmetry and Claim Priority Based on Influence Costs," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 10(4), pages 1203-36.
  18. Perotti, Enrico C & Volpin, Paolo, 2004. "Lobbying on Entry," CEPR Discussion Papers 4519, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  19. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December. [Downloadable!] (restricted)
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  20. 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. [Downloadable!] (restricted)
  21. J.H.H. Weiler, 2002. "Introduction," Journal of Common Market Studies, Blackwell Publishing, vol. 40(4), pages 555-562, November. [Downloadable!] (restricted)
  22. Dani Rodrik, 1998. "Why Do More Open Economies Have Bigger Governments?," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 997-1032, October. [Downloadable!] (restricted)
    Other versions:
  23. Gilles Saint-Paul, 2002. "The Political Economy of Employment Protection," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 672-701, June. [Downloadable!] (restricted)
    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Carney, Richard, 2007. "Deducing Varieties of Capitalism," MPRA Paper 5145, University Library of Munich, Germany. [Downloadable!]
  2. Marco Pagano & Paolo Volpin, 2005. "Shareholder Protection, Stock Market Development, and Politics," CSEF Working Papers 149, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
    Other versions:
  3. Giovanni Cespa & Giacinta Cestone, 2007. "Corporate Social Responsibility and Managerial Entrenchment," CSEF Working Papers 173, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
    Other versions:
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