E.-L. von Thadden
- The political economy of bank- and market dominance
- Lausanne: Université de Lausanne, École des HEC, Département d'Économétrie et d'Économie politique (DEEP)
- Cahiers de Recherches Économiques du Département d'Économétrie et d'Économie politique (DEEP)
- Volume | Edition (Serie)
- Document type
- Faculty of Economics and Business (FEB)
- Amsterdam Business School Research Institute (ABS-RI)
Legislation affects corporate governance and the protection of stakeholders versus investor claims. We allow the preference of a political majority to determine both the governance structure and the extent of stakeholder claims. 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 stakeholder rents are exposed to undiversifiable firm-specific risk. In general, stakeholders and lenders prefer less corporate risk, since their claims are a concave function of firm profitability. This congruence of interests will lead the political majority in such a society to support bank over equity dominance. As shareholdings by the median voters increase, the dominance structure will switch towards favoring equity markets with riskier corporate strategies and higher profits.
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