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Corporate Governance and the Financing of Investment for Structural Change

  • Hellwig, Martin

    ()

    (Sonderforschungsbereich 504)

The paper puts forward the proposition that large corporations should be treated as financial institutions in their own right, as they use available earning from some activities to finance others, including new developments. With this view, it is suggested that the role of the financial system may be seen as channelling funds from activities earning cash to activities needing cash (rather than channelling fund from households to firms). Starting from a critical assessment of the literature on agency costs of internal finance, the paper discusses the pros and cons of having new activities financed within given corporate shells, with significant management autonomy; this is compared to a system where earnings are distributed and - at least partly - reinvested through organized markets. The political economy of decision making within existing corporate shells is identified as a major source of bias in decisions.

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File URL: http://www.sfb504.uni-mannheim.de/publications/dp00-32.pdf
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Paper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 00-32.

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Length: 25 pages
Date of creation: 10 Jul 2000
Date of revision:
Handle: RePEc:xrs:sfbmaa:00-32
Note: I am grateful for helpful comments from Colin Mayer and Georg Rich as well as research support from the Deutsche Forschungsgemeinschaft through Sonderforschungsbereich 504.
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  1. Mayer, Colin, 1987. "New Issues in Corporate Finance," CEPR Discussion Papers 181, C.E.P.R. Discussion Papers.
  2. Machauer, Achim & Weber, Martin, 1998. "Bank behavior based on internal credit ratings of borrowers," Journal of Banking & Finance, Elsevier, vol. 22(10-11), pages 1355-1383, October.
  3. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, vol. 34, pages 411.
  4. Jensen, Michael C, 1993. " The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems," Journal of Finance, American Finance Association, vol. 48(3), pages 831-80, July.
  5. Bhide, Amar, 1993. "The hidden costs of stock market liquidity," Journal of Financial Economics, Elsevier, vol. 34(1), pages 31-51, August.
  6. Olivier J. Blanchard & Florencio Lopez-de-Silane, 1993. "What do Firms do with Cash Windfalls?," NBER Working Papers 4258, National Bureau of Economic Research, Inc.
  7. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  8. Marco Becht & Fabrizio Barca, 2001. "The control of corporate Europe," ULB Institutional Repository 2013/13302, ULB -- Universite Libre de Bruxelles.
  9. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
  10. Wasserfallen, Walter & Wittleder, Christian, 1994. "Pricing initial public offerings: Evidence from Germany," European Economic Review, Elsevier, vol. 38(7), pages 1505-1517, August.
  11. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
  12. Corbett, Jenny & Jenkinson, Tim, 1996. "The Financing of Industry, 1970-1989: An International Comparison," Journal of the Japanese and International Economies, Elsevier, vol. 10(1), pages 71-96, March.
  13. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
  14. Corbett, Jenny & Jenkinson, Tim, 1997. "How Is Investment Financed? A Study of Germany, Japan, the United Kingdom and the United States," The Manchester School of Economic & Social Studies, University of Manchester, vol. 65(0), pages 69-93, Supplemen.
  15. Elston, Julie Ann, 1996. "Investment, Liquidity Constraints and Bank Relationships: Evidence from German Manufacturing Firms," CEPR Discussion Papers 1329, C.E.P.R. Discussion Papers.
  16. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  17. Sanford J. Grossman & Oliver D. Hart, 1980. "Takeover Bids, the Free-Rider Problem, and the Theory of the Corporation," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 42-64, Spring.
  18. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1987. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
  19. Michael C. Jensen, 1991. "Corporate Control And The Politics Of Finance," Journal of Applied Corporate Finance, Morgan Stanley, vol. 4(2), pages 13-34.
  20. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
  21. Mark J. Roe, 1997. "The Political Roots Of American Corporate Finance," Journal of Applied Corporate Finance, Morgan Stanley, vol. 9(4), pages 8-22.
  22. Mark Gertler & Simon Gilchrist, 1991. "Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms," NBER Working Papers 3892, National Bureau of Economic Research, Inc.
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