Political Determinants of Corporate Governance: Corruption and Other Forms of Rent-seeking

Abstract

Corporate governance mechanisms can be seen as market and hierarchical institutions completing incomplete financial contracts. Since 'governance' is a rather vague concept, a variety of such mechanisms have been tried in various national settings, where they compete with and substitute for each other within the respective legal settings in a quest for a more efficient regime of financial intermediation. This objective implies a statistical endogeneity problem in much of the relevant empirical research in corporate governance, which has triggered a search for truly exogenous variables to explain the success of various national regimes. After 'legal origin' and 'institutions' have been advanced as possible answers, a central purpose of the paper is to offer the 'political regime' as another largely exogenous variable that shapes the legal order of a country, including its corporate governance regime. Political regimes are defined as constraints to the rent-seeking ambitions of politicians. The essay links stereotypical polar cases of political regimes both abstractly as well as through cases with corporate governance practices and financial sector structures in different countries. Modern corporate governance research has recognized that definition and enforcement of a country's legal order are fundamental pillars of a society's corporate governance regime and financial sector structure which ultimately contribute significantly to economic growth. This paper wishes to extend the causality chain backwards to political institutions as an explanatory variable to internationally observed variance in corporate governance and financial sector regime structures as well as economic performance.