E.-L. von Thadden
- The political economy of bank and equity dominance
- London: Centre for Economic Policy Research
- CEPR discussion paper
- Volume | Edition (Serie)
- Document type
- Faculty of Economics and Business (FEB)
- Amsterdam Business School Research Institute (ABS-RI)
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 favouring equity markets with riskier corporate strategies and higher profits.
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