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Political Economy and Corporate Governance: a cross – country analysis of political systems, legal traditions and owner

Political Economy and Corporate Governance: a cross – country analysis of political systems, legal traditions and ownership structure. Renira C. Angeles. 14.10.2010. Background. Corporate governance: Owner, manager and the board Factor of production

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Political Economy and Corporate Governance: a cross – country analysis of political systems, legal traditions and owner

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  1. Political Economy and Corporate Governance: a cross – country analysis of political systems, legal traditions and ownership structure Renira C. Angeles 14.10.2010

  2. Background • Corporate governance: Owner, manager and the board • Factor of production • Agency problems (Jensen and Meckling 1976)

  3. Dependent variables Determinants of variations in: 1. Investor protection 2. Ownership concentration

  4. Base of this analysis • Investor protection and legal origins, N=49 (La Porta et al. 1997;1998;1999;2008) • Findings - LLSV legal rules protecting investors vary systematically among legal traditions - Common Law (US, UK, etc.): low investor protection - Civil Law (France): high investor protection Convincing? • Static • Assumes stock markets in low – protection countries ”doomed” to not expand

  5. Ownership concentration • Dispersed ownership UK, US (Berle and Means 1932)  WHY? • Ownership structure and legal origins (La Porta et al. 1998) N=49 Findings: • High protection, dispersed ownership • Low protection, concentrated ownership Convincing?

  6. Political determinants on investor protection and ownership structure Purpose of this analysis: • Propose a model of political determinants of investor protection and ownership structure  How can variations in electoral systems explain the observed variations in degree of investor protection and ownership structure? • Want a more adequate and precise analysis to get a deeper understanding of the variations • Insights from Tabellini and Persson (2002) • Left – right dimension Ljiphart (1984)

  7. Base – political determinants • The Political Economy of Corporate Governance (Pagano and Volpin 2005) • Analyze political determinants of investor protection • Investor protection exogenous • Pol.var. included: proportionality, left, right, district size*maj, threshold*PR

  8. Dependent variables Investor protection (Y1) • Antidirector rights index (ADRI) from LLSV (1998): - proxy by mail - shares not blocked before meeting - share of capital to call required to call an extraordinary meeting < 10 % - cumulative voting - oppressed minorities are protected

  9. Ownership structure (Y2) • 10 % cut-off point • 20 % cut-off point

  10. Independent variables • Legal Origins - Common Law (UK, US, New Zealand, Italy, Australia, etc.) - Civil Law (Austria, Germany, Switzerland, France, Greece, Finland et.) • Political variables - PR - Maj - Left

  11. Two analysis

  12. Analysis I Y1: Investor protection x1:Legal origins variables (countries aggregated in categories) x2:Political determinants

  13. Analysis II Y2: Ownership structure x1: Legal origins (countries aggregated in categories) x2: Political determinants

  14. Hypothesis Assumption legal model: Reforms in investor protection rare ( La Porta et al. 1998) • Common law  high protection  dispersed ownership • Civil law  low protection  concentrated ownership

  15. Political determinants • PR  low protection  concentrated ownership (Why? Greater proportionality, more representation, value government, coordinated and weak markets) • Maj  high protection  dispersed ownership (Why? Less government/welfare state, Liberal markets, less employee protection,)

  16. Empirical evidence

  17. Preliminaryliterature Jensen, Michael C. and William H. Meckling 1976. “Theory of the Firm: Managerial behavior, agency cost and ownership structure”. Journal of Financial Economics. 3 (4). pp. 305-360. La Porta, Rafael, FlorencioLopez-de-Silanes, Andrei Schleifer. 1999. ”Corporateownershiparoundthe World”. The Journal of Finance. 54 (2). pp. 471-517 La Porta, Rafael, FlorencioLopez-de-Silanes, Andrei Schleifer, Robert W. Vishny. 1998. ”Law and Finance”. The Journal ofPoliticalEconomy. 106 (6). pp. 1113 – 1155 Pagano, Marco and Paolo F. Volpin. 2005. The PoliticalEconomyofCorporateGovernance. The American EconomicReview. 95 (4). pp. 1005-1030

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