Financial markets industry dynamics and growth
Résumé
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 man-
agers, 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.