TY - JOUR AU - Morck,Randall AU - Wolfenzon,Daniel AU - Yeung,Bernard TI - Corporate Governance, Economic Entrenchment and Growth JF - National Bureau of Economic Research Working Paper Series VL - No. 10692 PY - 2004 Y2 - August 2004 UR - http://www.nber.org/papers/w10692 L1 - http://www.nber.org/papers/w10692.pdf N1 - Author contact info: Randall Morck Faculty of Business University of Alberta Edmonton, CANADA T6G 2R6 Tel: 780/492-5683 Fax: 780/492-3325 E-Mail: randall.morck@ualberta.ca Daniel Wolfenzon Graduate School of Business Columbia University Uris Hall, Room 808 3022 Broadway New York, NY 10027 E-Mail: dw2382@columbia.edu Bernard Yeung Stern School of Business New York University 44 West 4th Street, Room 7-87 New York, NY 10012 Tel: 1 212 998 0425 Fax: 1 212 995 4221 E-Mail: byeung@stern.nyu.edu M1 - published as Morck, Randall, Daniel Wolfenzon and Bernard Yeung. "Corporate Governance, Economic Entrenchment, and Growth," Journal of Economic Literature, 2005, v43(3,Sep), 655-720. AB - Around the world, large corporations usually have controlling owners, who are usually very wealthy families. Outside the U.S. and the U.K., pyramidal control structures, cross shareholding and super voting rights are common. Using these devices, a family can control corporations without making a commensurate capital investment. In many countries, such families end up controlling considerable proportions of their countries'' economies. Three points emerge. First, at the firm level, these ownership structures vest dominant control rights with families who often have little real capital invested creating agency and entrenchment problem simultaneously. In addition, controlling shareholders can divert corporate resources for private benefits using transactions within the pyramidal group. The result is a poor utilization of resources. At the economy level, extensive control of corporate assets by a few families distorts capital allocation and reduces the rate of innovation. The result is an economy-wide misallocation of resources, and slower economic growth. Second, political influence is plausibly related to what one controls, rather than what one owns. The controlling owners of pyramids thus have greatly amplified political influence relative to their actual wealth. They appear to influence the development of both public policy, such as property rights protection and enforcement, and institutions like capital markets. We denote this phenomenon economic entrenchment. Third, we conceive of a relationship between the distribution of corporate control and institutional development that generates and preserves economic entrenchment as one equilibrium; but not the only one. Based on the literature, we identify key determinants of economic entrenchment. We also identify many gaps where further work exploring the political economy importance of the distribution of corporate control is needed. ER -