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Financial markets industry dynamics and growth

Author

Listed:
  • Maurizio Iacopetta

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

  • Raoul Minetti

    (Michigan State University [East Lansing] - Michigan State University System)

  • Pietro Peretto

    (Duke University [Durham])

Abstract

We study the impact of corporate governance frictions in an economy where growth is driven both by the foundation of new firms and by the in-house investment of incumbent firms. Firms managers engage in tunneling and empire building activities. Active shareholders monitor man- agers, but can shirk on their monitoring, to the detriment of minority (passive) shareholders. The analysis reveals that these conflicts among firms stakeholders inhibit the entry of new firms, thereby increasing market concentration. Despite depressing investment returns in the short run, the frictions can however lead incumbents to invest more aggressively in the long run to exploit the concentrated market structure. By means of quantitative analysis, we characterize conditions under which corporate governance reforms boost or reduce welfare.

Suggested Citation

  • Maurizio Iacopetta & Raoul Minetti & Pietro Peretto, 2014. "Financial markets industry dynamics and growth," Sciences Po Economics Publications (main) hal-03429924, HAL.
    • Handle: RePEc:hal:spmain:hal-03429924
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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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