Corporate Governance, Economic Entrenchment and Growth

Posted: 27 May 2013 Last revised: 4 Jun 2013

See all articles by Randall Morck

Randall Morck

University of Alberta - Department of Finance and Statistical Analysis; National Bureau of Economic Research (NBER); European Corporate Governence Institute; Asian Bureau of Finance and Economic Research

Daniel Wolfenzon

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Bernard Yin Yeung

National University of Singapore - Business School

Multiple version iconThere are 3 versions of this paper

Date Written: January 4, 2005

Abstract

Outside the United States and the United Kingdom, large corporations usually have controlling owners, who are usually very wealthy families. Pyramidal control structures, cross shareholding, and super-voting rights let such families control corporations without making a commensurate capital investment. In many countries, a few such families end up controlling considerable proportions of their countries' economies. Three points emerge. First, at the firm level, these ownership structures, because they vest dominant control rights with families who often have little real capital invested, permit a range of agency problems and hence resource misallocation. If a few families control large swaths of an economy, such corporate governance problems can attain macroeconomic importance — affecting rates of innovation, economywide resource allocation, and economic growth. If political influence depends on what one controls, rather than what one owns, the controlling owners of pyramids have greatly amplified political influence relative to their actual wealth. This influence can distort public policy regarding property rights protection, capital markets, and other institutions. We denote this phenomenon economic entrenchment, and posit a relationship between the distribution of corporate control and institutional development that generates and preserves economic entrenchment as one possible equilibrium. The literature suggests key determinants of economic entrenchment, but has many gaps where further work exploring the political economy importance of the distribution of corporate control is needed.

Suggested Citation

Morck, Randall K. and Wolfenzon, Daniel and Yeung, Bernard Yin, Corporate Governance, Economic Entrenchment and Growth (January 4, 2005). Journal of Economic Literature, Vol. 43, No. 3, 2005; University of Alberta School of Business Research Paper No. 2013-246. Available at SSRN: https://ssrn.com/abstract=2269973

Randall K. Morck (Contact Author)

University of Alberta - Department of Finance and Statistical Analysis ( email )

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National Bureau of Economic Research (NBER)

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Daniel Wolfenzon

Columbia Business School - Finance and Economics ( email )

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National Bureau of Economic Research (NBER)

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United States

Bernard Yin Yeung

National University of Singapore - Business School ( email )

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BIZ 1 Level 6
Singapore, 119245
Singapore
65 6516 3075 (Phone)
65 6779 1365 (Fax)

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