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Corporate Governance, Finance, and the Real Sector

Published online by Cambridge University Press:  02 November 2012

Paolo Fulghieri  and
Matti Suominen
Paolo Fulghieri
Affiliation:
paolo_fulghieri@unc.edu, Kenan-Flagler Business School, University of North Carolina, Campus Box 3490, Chapel Hill, NC 27599, Centre for Economic Policy Research (CEPR), and European Corporate Governance Institute (ECGI)
Matti Suominen
Affiliation:
matti.suominen@aalto.fi, Aalto University, PL 1210, Helsinki 00101, Finland
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Abstract

We present a theory of the linkages between corporate governance, corporate finance, and the real sector of an economy. Using a structural model of industry equilibrium with endogenous entry, we show that poor corporate governance leads to low levels of competition, and to firms with high insider ownership and leverage. In contrast, good corporate governance promotes the adoption of more efficient technologies and development of sectors more exposed to moral hazard. We use our model to study equity market liberalization, and we show that liberalizations facilitate entry and adoption of more productive technologies, especially in countries with good corporate governance.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 47 , Issue 6 , December 2012 , pp. 1187 - 1214
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2012

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