On the Economics and Politics of Corporate Finance and Corporate Control

Martin Hellwig

No 98-43, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

Abstract: The paper reviews and assesses our understanding of the relation between cor-porate finance and corporate control. It questions the significance of the notion that entrepreneurs or managers give up significant powers of control in order to obtain external finance, arguing instead that (a) entrepreneurs or managers are reluctant to give up control rights for finance and (b) such exchanges are not credible because entrepreneurs or managers have "residual" means of reneging on such exchanges if they want to. This view leads to a reassessment of the role of the financial system as channelling funds from firms with surplus cash to firms with "surplus" investment needs rather than channelling funds from hou-seholds to firms. The paper asks what agency problems and biases this involves, with particular focus on the scope for structural change when cash flows and investment opportunities are not well correlated. The last part of the paper discusses the politics of corporate control with a view to the natural alliance between (i) the political system supporting incumbent management's claims to retain control and (ii) corporate management with discretion over the use of "free cash flow" to provide funding for matters of political interest outside of regular public budgeting procedures.

Pages: 33 pages
Date: 1998-06-15
New Economics Papers: this item is included in nep-cdm, nep-cfn, nep-fin, nep-mic, nep-pke and nep-pub
Note: Financial Support from the Deutsche Forschungsgemeinschaft, is gratefully acknowleged.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

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Working Paper: On the economics and politics of corporate finance and corporate control (1998)
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