Working Paper: CEPR ID: DP3914
Authors: Enrico C. Perotti; Ernst-Ludwig von Thadden
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.
Keywords: bank-centred system; corporate governance; corporate investment; median voter; political economy; social insurance
JEL Codes: G28; G31; G32; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Political preferences (D72) | Corporate governance (bank vs. equity control) (G34) |
| Corporate governance (bank vs. equity control) (G34) | Corporate investment strategies (G31) |
| Distribution of financial wealth and human capital (D31) | Political preferences (D72) |
| Political preferences (D72) | Governance structures (bank vs. equity) (G32) |
| Political preferences (median voters) (D72) | Bank dominance over equity dominance (G21) |
| Wealthier individuals (D31) | Equity dominance (D63) |
| Political structure (H11) | Corporate governance outcomes (G38) |