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Financial Markets, Industry Dynamics, and Growth

Raoul Minetti, Pietro Peretto () and Maurizio Iacopetta ()

No 1252, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: 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.

New Economics Papers: this item is included in nep-dge
Date: 2015
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Working Paper: Financial markets industry dynamics and growth (2014) Downloads
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