The Political Economy of Corporate Governance

The Paper analyses the political decision that determines the degree of investor protection. We show that entrepreneurs and workers can strike a political agreement by which low investor protection is exchanged for high employment protection. This ‘corporatist’ agreement is feasible if the political system favours the formation of coalition governments. In contrast, ‘non-corporatist’ countries will feature high investor protection and low employment protection. The model also shows that the more diffused is share ownership, the higher the chosen degree of shareholder protection. Finally, the model predicts the frequency of mergers and acquisitions to be negatively correlated with employment protection. These predictions are shown to be consistent with OECD evidence.