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The Political Economy of Bank and Equity Dominance

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  • Perotti, Enrico C
  • von Thadden, Ernst-Ludwig

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.

Suggested Citation

  • Perotti, Enrico C & von Thadden, Ernst-Ludwig, 2003. "The Political Economy of Bank and Equity Dominance," CEPR Discussion Papers 3914, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3914
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Michael Graff, 2008. "Law and Finance: Common Law and Civil Law Countries Compared-An Empirical Critique," Economica, London School of Economics and Political Science, vol. 75(297), pages 60-83, February.
    3. 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.
    4. Masciandaro, Donato, 2007. "Divide et impera: Financial supervision unification and central bank fragmentation effect," European Journal of Political Economy, Elsevier, vol. 23(2), pages 285-315, June.
    5. Michael Graff, 2005. "Law and Finance: Common-law and Civil-law Countries Compared," KOF Working papers 05-99, KOF Swiss Economic Institute, ETH Zurich.
    6. Lee, Bong-Soo, 2012. "Bank-based and market-based financial systems: Time-series evidence," Pacific-Basin Finance Journal, Elsevier, vol. 20(2), pages 173-197.
    7. Dinc, I. Serdar, 2005. "Politicians and banks: Political influences on government-owned banks in emerging markets," Journal of Financial Economics, Elsevier, vol. 77(2), pages 453-479, August.
    8. 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.

    More about this item

    Keywords

    bank centered system; corporate governance; corporate investment; median voter; political economy; social insurance;

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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