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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.

Suggested Citation

  • Enrico C. Perotti & Ernst-Ludwig von Thadden, 2004. "The Political Economy of Dominant Investors," Tinbergen Institute Discussion Papers 04-091/2, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20040091
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Enrico Perotti & Ernst-Ludwig von Thadden, 2005. "The Political Economy of Corporate Control," Tinbergen Institute Discussion Papers 05-102/2, Tinbergen Institute.

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    More about this item

    Keywords

    government policy and regulation; capital budgeting; investment policy; financing policy; capital and ownership structure; mergers; acquisitions; restructuring; corporate governance;
    All these keywords.

    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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