Corporate Governance, Economic Entrenchment and Growth

By Randall K. Morck, Daniel Wolfenzon, Bernard Yeung. 2005

1,704 citations recorded by the source corpus.

Around the world, large corporations usually have controlling owners, who are usually very wealthy families. Outside the U.S. and the U.K., pyramidal control structures, cross shareholding and super voting rights are common. Using these devices, a family can control corporations without making a commensurate capital investment. In many countries, such families end up controlling considerable proportions of their countries'' economies. Three points emerge. First, at the firm level, these ownership structures vest dominant control rights with families who often have little real capital invested creating agency and entrenchment problem simultaneously. In addition, controlling shareholders can divert corporate resources for private benefits using transactions within the pyramidal group. The result is a poor utilization of resources. At the economy level, extensive control of corporate assets by a few families distorts capital allocation and reduces the rate of innovation. The result is an economy-wide misallocation of resources, and slower economic growth. Second, political influence is plausibly related to what one controls, rather than what one owns. The controlling owners of pyramids thus have greatly amplified political influence relative to their actual wealth. They appear to influence the development of both public policy, such as property rights protection and enforcement, and institutions like capital markets. We denote this phenomenon economic entrenchment. Third, we conceive of a relationship between the distribution of corporate control and institutional development that generates and preserves economic entrenchment as one equilibrium; but not the only one. Based on the literature, we identify key determinants of economic entrenchment. We also identify many gaps where further work exploring the political economy importance of the distribution of corporate control is needed.

Subfields: Accounting, Economics and Econometrics, Sociology and Political Science

View Paper: https://www.semanticscholar.org/paper/fec6bde48cabb548a801ac3305f4ffcc930fe332

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Citations in the corpus

Institutions and Organizational Structure: The Case of State-Owned Corporate Pyramids (2013, background): “Earlier papers argue that pyramidal structures allow a controlling owner to consume private benefits, for instance, by expropriating wealth from minority shareholders (Bebchuk 1999; Wolfenzon 1999; Bebchuk et al. 2000; Bertrand et al. 2002; Morck et al. 2004).”
Bank Supervision and Corruption in Lending (2006, background): “First, an enormous theoretical literature examines the role of banks, along with shareholders and other financiers, in easing financing constraints and exerting corporate governance (Shleifer and Vishny, 1997; Morck, Wolfenzon, and Yeung, 2005).”
Family Control of Firms and Industries (2010, neutral): “Theories of Family Control Theories of family control of firms and industries can be grouped into two broad sets: those in which family control is the optimal structure for both family and non-family shareholders, and those in which family control is optimal for family shareholders only (see Morck e”
Investor Protection and Interest Group Politics (2010, positive): “2 In a recent Journal of Economic Literature survey, Morck et al. (2005) stress the importance of developing formal political economy models of corporate governance arrangements and view this task as “a fascinating uncharted territory for creative theorists.”
How Well do Institutional Theories Explain Firms' Perceptions of Property Rights? (2005, background): “3 and the views that stress the importance of openness to trade and political variables (Rajan and Zingales (2003), Acemoglu (2003)), while not as strong, also do well.”
Business groups in China (2013, background): “” Granovetter (2005), Khanna and Yafeh (2007), and Morck et al. (2005) review the literature on business groups. Khanna and Palepu (2000a) argue that business groups serve as an organizational response to the weak institutional context of emerging economies. Financial transactions can be particularl”