Hostname: page-component-cd9895bd7-gvvz8 Total loading time: 0 Render date: 2024-12-25T08:21:03.510Z Has data issue: false hasContentIssue false
  • English
  • Français

Corporate Governance, Finance, and the Real Sector

Published online by Cambridge University Press:  02 November 2012

Paolo Fulghieri  and
Matti Suominen
Paolo Fulghieri
Affiliation:
[email protected], Kenan-Flagler Business School, University of North Carolina, Campus Box 3490, Chapel Hill, NC 27599, Centre for Economic Policy Research (CEPR), and European Corporate Governance Institute (ECGI)
Matti Suominen
Affiliation:
[email protected], Aalto University, PL 1210, Helsinki 00101, Finland
Get access Rights & Permissions [Opens in a new window]

Abstract

We present a theory of the linkages between corporate governance, corporate finance, and the real sector of an economy. Using a structural model of industry equilibrium with endogenous entry, we show that poor corporate governance leads to low levels of competition, and to firms with high insider ownership and leverage. In contrast, good corporate governance promotes the adoption of more efficient technologies and development of sectors more exposed to moral hazard. We use our model to study equity market liberalization, and we show that liberalizations facilitate entry and adoption of more productive technologies, especially in countries with good corporate governance.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 47 , Issue 6 , December 2012 , pp. 1187 - 1214
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2012

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Aggarwal, R.; Erel, I.; Stulz, R.; and Williamson, R.. “Differences in Governance Practices between U.S. and Foreign Firms: Measurement, Causes, and Consequences.” Review of Financial Studies, 22 (2009), 3131–3169.CrossRefGoogle Scholar
Aghion, P., and Bolton, P.. “An Incomplete Contracts Approach to Financial Contracting.” Review of Economic Studies, 59 (1992), 473–494.CrossRefGoogle Scholar
Agrawal, A. K. “The Impact of Investor Protection Law on Corporate Policy and Performance: Evidence from the Blue Sky Laws.” Journal of Financial Economics, forthcoming (2012).Google Scholar
Albuquerque, R., and Schroth, E.. “The Determinants of the Block Premium and of Private Benefits of Control.” ECGI Working Paper No. 202 (2008).CrossRefGoogle Scholar
Alchian, A. A. “Uncertainty, Evolution, and Economic Theory.” Journal of Political Economy, 58 (1950), 211–221.CrossRefGoogle Scholar
Allen, F.; Bartiloro, L.; and Kowalewski, O.. “Does Economic Structure Determine Financial Structure?” Working Paper, University of Pennsylvania (2007).CrossRefGoogle Scholar
Allen, F., and Gale, D.. “Corporate Governance and Competition.” In Corporate Governance, Vives, X., ed. Cambridge, UK: Cambridge University Press (2000).Google Scholar
Almeida, H. V., and Wolfenzon, D.. “A Theory of Pyramidal Ownership and Family Business Groups.” Journal of Finance, 61 (2006), 2637–2680.CrossRefGoogle Scholar
Becht, M.; Bolton, P.; and Roell, A.. “Corporate Governance and Control.” In Handbook of the Economics of Finance, Vol. I, No. 1, Constantinides, G. M., Harris, M., and Stulz, R. M., eds. Amsterdam: Elsevier (2003).Google Scholar
Bekaert, G.; Harvey, C. R.; and Lundblad, C.. “Does Financial Liberalization Spur Growth?” Journal of Financial Economics, 77 (2005), 3–55.CrossRefGoogle Scholar
Bekaert, G.; Harvey, C.; and Lundblad, C.. “Financial Openness and Productivity.” World Development, 39 (2011), 1–19.CrossRefGoogle Scholar
Bolton, P., and Scharfstein, D. S.. “A Theory of Predation Based on Agency Problems in Financial Contracting.” American Economic Review, 80 (1990), 93–106.Google Scholar
Boone, A. L.; Field, L. C.; Karpoff, J. M.; and Raheja, C. G.. “The Determinants of Corporate Board Size and Composition: An Empirical Analysis.” Journal of Financial Economics, 85 (2007),66–101.CrossRefGoogle Scholar
Booth, L.; Aivazian, V.; Demirgüç-Kunt, A.; and Maksimovic, V.. “Capital Structure in Developing Countries.” Journal of Finance, 56 (2001), 87–130.CrossRefGoogle Scholar
Brander, J. A., and Lewis, T. R.. “Oligopoly and Financial Structure: The Limited Liability Effect.” American Economic Review, 76 (1986), 956–970.Google Scholar
Bruno, V., and Claessens, S.. “Corporate Governance and Regulation: Can There Be Too Much of a Good Thing?” Journal of Financial Intermediation, 19 (2010), 461–482.CrossRefGoogle Scholar
Cestone, G., and White, L.. “Anticompetitive Financial Contracting: The Design of Financial Claims.” Journal of Finance, 58 (2003), 2109–2141.CrossRefGoogle Scholar
Chemmanur, T. J., and Fulghieri, P.. “Reputation, Renegotiation, and the Choice between Bank Loans and Publicly Traded Debt.” Review of Financial Studies, 7 (1994), 475–506.CrossRefGoogle Scholar
Coles, J. L.; Daniel, N. D.; and Naveen, L.. “Boards: Does One Size Fit All?” Journal of Financial Economics, 87 (2008), 329–356.CrossRefGoogle Scholar
Coles, J. L.; Lemmon, M. L.; and Meschke, J. F.. “Structural Models and Endogeneity in Corporate Finance: The Link between Managerial Ownership and Corporate Performance.” Journal of Financial Economics, 103 (2012), 149–168.CrossRefGoogle Scholar
Coles, J. L.; Lemmon, M.; and Wang, Y.. “The Joint Determinants of Managerial Ownership, Board Independence, and Firm Performance.” Working Paper, Arizona State University, University of Utah, and Chinese University of Hong Kong (2009).CrossRefGoogle Scholar
Demirgüç-Kunt, A., and Maksimovic, V.. “Law, Finance, and Firm Growth.” Journal of Finance, 53 (1998) 2107–2137.CrossRefGoogle Scholar
Diamond, D. W. “Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt.” Journal of Political Economy, 99 (1991), 689–721.CrossRefGoogle Scholar
Doidge, C.; Karolyi, G. A.; and Stulz, R. M.. “Why Do Countries Matter So Much for Corporate Governance?” Journal of Financial Economics, 86 (2007), 1–39.CrossRefGoogle Scholar
Durnev, A., and Kim, E. H.. “To Steal or Not to Steal: Firm Attributes, Legal Environment and Valuation.” Journal of Finance, 60 (2005), 1461–1493.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Testing Trade-Off and Pecking Order Predictions about Dividends and Debt.” Review of Financial Studies, 15 (2002), 1–33.CrossRefGoogle Scholar
Fan, J. P. H.; Titman, S.; and Twite, G.. “An International Comparison of Capital Structure and Debt Maturity Choices.” Journal of Financial and Quantitative Analysis, 47 (2012), 23–56.CrossRefGoogle Scholar
Fershtman, C., and Judd, K. L.. “Equilibrium Incentives in Oligopoly.” American Economic Review, 77 (1987), 927–940.Google Scholar
Fujita, M.; Krugman, P.; and Venables, A. J.. The Spatial Economy: Cities, Regions, and International Trade. Cambridge, MA: MIT Press (1999).CrossRefGoogle Scholar
Giroud, X., and Mueller, H. M.. “Corporate Governance, Product Market Competition, and Equity Prices.” Journal of Finance, 66 (2011), 563–600.CrossRefGoogle Scholar
Gupta, N., and Yuan, K.. “On the Growth Effect of Stock Market Liberalizations.” Review of Financial Studies, 22 (2009), 4715–4752.CrossRefGoogle Scholar
Hail, L., and Leuz, C.. “International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regulation Matter?” Journal of Accounting Research, 44 (2006), 485–531.CrossRefGoogle Scholar
Hart, O., and Moore, J.. “Debt and Seniority: An Analysis of the Role of Hard Claims in Constraining Management.” American Economic Review, 85 (1995), 567–585.Google Scholar
Hart, O., and Moore, J.. “Default and Renegotiation: A Dynamic Model of Debt.” Quarterly Journal of Economics, 113 (1998), 1–41.CrossRefGoogle Scholar
Jensen, M. C. “The Agency Costs of Free Cash Flow: Corporate Finance and Takeovers.” American Economic Review, 76 (1986), 323–329.Google Scholar
Jensen, M. C., and Meckling, W. H.. “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” Journal of Financial Economics, 3 (1976), 305–360.CrossRefGoogle Scholar
John, K., and Kedia, S.. “Institutions, Markets and Growth: A Study of Comparative Corporate Governance.” Working Paper, New York University (2003).Google Scholar
John, K.; Litov, L.; and Yeung, B.. “Corporate Governance and Risk-Taking.” Journal of Finance,63 (2008), 1679–1728.CrossRefGoogle Scholar
Klapper, L.; Laeven, L.; and Rajan, R.. “Business Environment and Firm Entry: Evidence from International Data.” CEPR Working Paper No. 4366 (2004).CrossRefGoogle Scholar
Klapper, L. F., and Love, I.. “Corporate Governance, Investor Protection and Performance in Emerging Markets.” Journal of Corporate Finance, 10 (2004), 703–728.CrossRefGoogle Scholar
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A.; and Vishny, R. W.. “Legal Determinants of External Finance.” Journal of Finance, 52 (1997), 1131–1150.CrossRefGoogle Scholar
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A.; and Vishny, R. W.. “Law and Finance.” Journal of Political Economy, 106 (1998), 1113–1155.CrossRefGoogle Scholar
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A.; and Vishny, R. W.. “Investor Protection and Corporate Governance.” Journal of Financial Economics, 58 (2000), 3–27.CrossRefGoogle Scholar
Lehn, K. M.; Patro, S.; and Zhao, M.. “Determinants of the Size and Composition of U.S. Corporate Boards: 1935–2000.” Financial Management, 38 (2009), 747–780.CrossRefGoogle Scholar
Levine, R. “Financial Development and Economic Growth: Views and Agenda.” Journal of Economic Literature, 35 (1997), 688–726.Google Scholar
Linck, J. S.; Netter, J. M.; and Yang, T.. “The Determinants of Board Structure.” Journal of Financial Economics, 87 (2008), 308–328.CrossRefGoogle Scholar
MacKay, P., and Phillips, G. M.. “How Does Industry Affect Firm Financial Structure?” Review of Financial Studies, 18 (2005), 1433–1466.CrossRefGoogle Scholar
Maksimovic, V. “Capital Structure in Repeated Oligopolies.” Rand Journal of Economics, 19 (1988), 389–407.CrossRefGoogle Scholar
Maksimovic, V., and Zechner, J.. “Debt, Agency Costs, and Industry Equilibrium.” Journal of Finance, 46 (1991), 1619–1643.CrossRefGoogle Scholar
Ottaviano, G.; Tabuchi, T.; and Thisse, J.-F.. “Agglomeration and Trade Revisited.” International Economic Review, 43 (2002), 409–435.CrossRefGoogle Scholar
Pagano, M., and Roell, A.. “The Choice of Stock Ownership Structure: Agency Costs, Monitoring and the Decision to Go Public.” Quarterly Journal of Economics, 113 (1998), 187–225.CrossRefGoogle Scholar
Poitevin, M. “Financial Signalling and the ‘Deep-Pocket’ Argument.” Rand Journal of Economics,20 (1989), 26–40.CrossRefGoogle Scholar
Rajan, R. G., and Zingales, L.. “What Do We Know about Capital Structure: Some Evidence from International Data.” Journal of Finance, 50 (1995), 1–19.CrossRefGoogle Scholar
Rajan, R. G., and Zingales, L.. “Financial Dependence and Growth.” American Economic Review,88 (1998), 559–586.Google Scholar
Rajan, R. G., and Zingales, L.. “The Great Reversals: The Politics of Financial Development in the Twentieth Century.” Journal of Financial Economics, 69 (2003), 5–50.CrossRefGoogle Scholar
Riordan, M. H. “How Do Capital Markets Influence Product Market Competition?” Review of Industrial Organization, 23 (2003), 179–191.CrossRefGoogle Scholar
Robb, A., and Robinson, D.. “The Capital Structure Decisions of New Firms.” Review of Financial Studies, forthcoming (2012).Google Scholar
Rossi, S., and Volpin, P. F.. “Cross-Country Determinants of Mergers and Acquisitions.” Journal of Financial Economics, 74 (2004), 277–304.CrossRefGoogle Scholar
Salop, S. C. “Monopolistic Competition with Outside Goods.” Bell Journal of Economics, 10 (1979), 141–156.CrossRefGoogle Scholar
Shleifer, A., and Vishny, R. W.. “A Survey of Corporate Governance.” Journal of Finance, 52 (1997), 737–783.CrossRefGoogle Scholar
Shleifer, A., and Wolfenzon, D.. “Investor Protection and Equity Markets.” Journal of Financial Economics, 66 (2002), 3–27.CrossRefGoogle Scholar
Stigler, G. J. “The Economies of Scale.” Journal of Law and Economics, 1 (1958), 54–71.CrossRefGoogle Scholar
Stulz, R. M. “Managerial Discretion and Optimal Financing Policies.” Journal of Financial Economics, 26 (1990), 3–27.CrossRefGoogle Scholar
Stulz, R. M. “The Limits of Financial Globalization.” Journal of Finance, 60 (2005), 1595–1638.CrossRefGoogle Scholar
Suominen, M. “Industry Equilibrium with Moral Hazard and Outside Financing: Implications for Market Integration.” European Economic Review, 48 (2004), 1227–1241.CrossRefGoogle Scholar
Titman, S., and Wessels, R.. “The Determinants of Capital Structure Choice.” Journal of Finance,43 (1988), 1–19.CrossRefGoogle Scholar
Vives, X.Oligopoly Pricing: Old Ideas and New Tools. Cambridge, MA: MIT Press (1999).Google Scholar
Williams, J. T. “Financial and Industrial Structure with Agency.” Review of Financial Studies,8 (1995), 431–474.CrossRefGoogle Scholar
Supplementary material: PDF

Fulghieri supplementary material

Fulghieri supplementary material

Download Fulghieri supplementary material(PDF)
PDF 118.3 KB