Financial Markets, Industry Dynamics, and Growth
55 Pages Posted: 28 Aug 2014
Date Written: August 27, 2014
We study the impact of corporate governance frictions in an economy where growth is driven both by the foundation of new firms and by the in-house investment of incumbent firms. Firms' managers engage in tunneling and empire building activities. Active shareholders monitor managers, but can shirk on their monitoring, to the detriment of minority (passive) shareholders. The analysis reveals that these conflicts among firms' stakeholders inhibit the entry of new firms, thereby increasing market concentration. Despite depressing investment returns in the short run, the frictions can however lead incumbents to invest more aggressively in the long run to exploit the concentrated market structure. By means of quantitative analysis, we characterize conditions under which corporate governance reforms boost or reduce welfare.
Keywords: Endogenous Growth, Market Structure, Financial Frictions, Corporate Governance
JEL Classification: E44, O40, G30
Suggested Citation: Suggested Citation