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Perotti, Enrico
von Thadden, Ernst Ludwig
Year of Publication: 
Series/Report no.: 
Tinbergen Institute Discussion Paper 04-012/2
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 labor 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 labor rents are exposed to undiversifiable firm-specific risk. In general, labor 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 shareholdings by the median voters increase, the dominance structure will move towards favoring equity markets with riskier corporate strategies and higher profits.
corporate governance
corporate finance
political economy
labor income
human capital
median voter
Document Type: 
Working Paper

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