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On the economics and politics of corporate finance and corporate control

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  • Hellwig, Martin

Abstract

The paper reviews and assesses our understanding of the relation between cor-porate finance and corporate control. It questions the significance of the notion that entrepreneurs or managers give up significant powers of control in order to obtain external finance, arguing instead that (a) entrepreneurs or managers are reluctant to give up control rights for finance and (b) such exchanges are not credible because entrepreneurs or managers have "residual" means of reneging on such exchanges if they want to. This view leads to a reassessment of the role of the financial system as channelling funds from firms with surplus cash to firms with "surplus" investment needs rather than channelling funds from hou-seholds to firms. The paper asks what agency problems and biases this involves, with particular focus on the scope for structural change when cash flows and investment opportunities are not well correlated. The last part of the paper discusses the politics of corporate control with a view to the natural alliance between (i) the political system supporting incumbent management's claims to retain control and (ii) corporate management with discretion over the use of "free cash flow" to provide funding for matters of political interest outside of regular public budgeting procedures.

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  • Hellwig, Martin, 1998. "On the economics and politics of corporate finance and corporate control," Papers 98-43, Sonderforschungsbreich 504.
    • Handle: RePEc:mnh:spaper:2867
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    Cited by:

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    2. Randall S. Kroszner, 1999. "Is the Financial System Politically Independent? Perspectives on the Political Economy of Banking and Financial Regulation," CRSP working papers 492, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    3. Randall S. Kroszner, 1999. "Is the Financial System Politically Independent? Perspectives on the Political Economy of Banking and Financial Regulation," University of Chicago - George G. Stigler Center for Study of Economy and State 151, Chicago - Center for Study of Economy and State.
    4. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross & Maksimovic, Vojislav, 2000. "Financial structure and economic development - firm, industry, and country evidence," Policy Research Working Paper Series 2423, The World Bank.
    5. Harilaos Mertzanis, 2011. "The effectiveness of corporate governance policy in Greece," Journal of Financial Regulation and Compliance, Emerald Group Publishing Limited, vol. 19(3), pages 222-243, July.
    6. Franz R. Hahn, 2002. "The Politics of Financial Development. The Case of Austria," WIFO Working Papers 187, WIFO.
    7. Henrik Cronqvist & Fredrik Heyman & Mattias Nilsson & Helena Svaleryd & Jonas Vlachos, 2009. "Do Entrenched Managers Pay Their Workers More?," Journal of Finance, American Finance Association, vol. 64(1), pages 309-339, February.
    8. Beck, Thorsten & Levine, Ross, 2002. "Industry growth and capital allocation:*1: does having a market- or bank-based system matter?," Journal of Financial Economics, Elsevier, vol. 64(2), pages 147-180, May.
    9. Erik Berglof & Ernst-Ludwig von Thadden, 1999. "The Changing Corporate Governance Paradigm: Implications for Transition and Developing Countries," William Davidson Institute Working Papers Series 263, William Davidson Institute at the University of Michigan.
    10. Florencio Lopez-de-Silanes, 2002. "The Politics of Legal Reform," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Spring 20), pages 91-152, January.
    11. Veronika Dolar & Césaire Meh, 2002. "Financial Structure and Economic Growth: A Non-Technical Survey," Staff Working Papers 02-24, Bank of Canada.
    12. Lazarides, Themistokles & Drmmpetas, Evaggelos, 2009. "Fallacies, Collapses, Crises. Now What?," MPRA Paper 17921, University Library of Munich, Germany.
    13. Zimmermann, Heinz & Beiner, Stefan & Drobetz, Wolfgang & Schmid, Markus, 2004. "Corporate Governance, Unternehmensbewertung und Wettbewerb : eine Untersuchung für die Schweiz," Working papers 2004/01, Faculty of Business and Economics - University of Basel.
    14. Stefan Beiner & Wolfgang Drobetz & Markus M. Schmid & Heinz Zimmermann, 2006. "An Integrated Framework of Corporate Governance and Firm Valuation," European Financial Management, European Financial Management Association, vol. 12(2), pages 249-283, March.
    15. Wolfgang Drobetz & Roger Fix, 2005. "What are the Determinants of the Capital Structure? Evidence from Switzerland," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 141(I), pages 71-113, March.
    16. Callaghan, Helen, 2007. "Insiders, outsiders and the politics of corporate governance: How ownership shapes party positions in Britain, Germany and France," MPIfG Discussion Paper 07/9, Max Planck Institute for the Study of Societies.
    17. Themistokles Lazarides & Elektra Pitoska, 2010. "Disclosure Factors of Executive Managers Remuneration: A Probit Model," American Journal of Economics and Business Administration, Science Publications, vol. 2(4), pages 341-349, November.
    18. Olubunmi Faleye & Emery Trahan, 2011. "Labor-Friendly Corporate Practices: Is What is Good for Employees Good for Shareholders?," Journal of Business Ethics, Springer, vol. 101(1), pages 1-27, June.
    19. Beck, Thorsten & Levine, Ross, 2000. "New firm formation and industry growth - does having a market- or bank-based system matter?," Policy Research Working Paper Series 2383, The World Bank.
    20. Kroszner, Randall S., 1999. "Is the Financial System Politically Independent? Perspectives on the Political Economy of Banking and Financial Regulation," Working Papers 151, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
    21. Beck, Thorsten, 2003. "Stock markets, banks, and economic development:theory and evidence," EIB Papers 2/2003, European Investment Bank, Economics Department.

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