Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/86277
Authors: 
Perotti, Enrico C.
von Thadden, Ernst-Ludwig
Year of Publication: 
2004
Series/Report no.: 
Tinbergen Institute Discussion Paper 04-091/2
Abstract: 
We allow the preference of a political majority to determine boththe corporate governance structure and the division of profits betweenhuman and financial capital. In a democratic society where financialwealth is concentrated, a political majority may prefer to restraingovernance by dispersed equity investors even if this reduces profits.The reason is that labor claims are exposed to undiversifiable risk, sovoters with small financial stakes may prefer lender (or large share-holder) dominance, as they choose lower risk strategies. The modelmay explain the great reversal phenomenon in the first half of the20th century (Rajan and Zingales, 2003), when some financially verydeveloped countries moved towards bank or state control as a finan-cially weakened middle class became concerned about income risk.We offer evidence using post WW1 inflationary shocks as the sourceof identifying exogenous variation.
Subjects: 
government policy and regulation
capital budgeting
investment policy
financing policy
capital and ownership structure
mergers
acquisitions
restructuring
corporate governance
JEL: 
G28
G31
G32
G34
Document Type: 
Working Paper

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