Pension and Corporate Governance Reforms: Are They Twins?

Abstract

This paper extends the small open economy, crime and punishment framework of corporate finance developed by Shleifer and Wolfenzon (2002) to determine the conditions that give rise to simultaneous pension and corporate governance reforms. The reforms are the outcome of a mutually beneficial agreement between two politically influential interest groups: the workers, who can block the pension reform, and the financial incumbents, who determine the level of investor protection. The twin reforms occur only if they cause substantial intermediation cost reductions and if the financial incumbents can internalize part of these cost reductions by shifting away from expensive international sources of funds to cheaper domestic ones. The pension reform must create a captive source of low cost funds for domestic publicly traded firms.