EOT Berglof_Pal_2007

EOT Berglof_Pal_2007 - Economics of Transition Volume 15(3...

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Economics of Transition Volume 15(3) 2007, 429–432 © 2007 The Authors Journal compilation © 2007 The European Bank for Reconstruction and Development. Published by Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main St, Malden, MA 02148, USA Blackwel Publishing Ltd Oxford, UK ECOT Economics of Transition 0967-0750 © 2007 The Authors XXX Editorial E ditorial Symposium on Corporate governance Erik Berglöf* and Sarmistha Pal** *EBRD. E-mail: [email protected] **CEDI, Brunel University. E-mail: [email protected] The importance of corporate governance for emerging market economies is now widely recognized. Yet the debate often focuses on issues more relevant to the more advanced economies, such as board composition, executive compensation, hostile takeovers and shareholder activism. In emerging markets bank finance still dominates and most firms are closely held, often by strong families, and government interference is a pervasive feature. As North (1990), Landes (1999) and others have argued, European nations achieved prosperity because they embraced institutions that encouraged private initiative and innovation. This included imposing constitu- tional constraints on the ability of the government to expropriate, protecting private property against predation by other private agents and ensuring that contracts could be enforced in independent and impartial courts of law. In emerging markets and even more in less developed economies these issues are paramount in our under- standing of present corporate governance challenges. Corporate governance mechanisms thus relate to economic and legal institutions that can be altered through the political process. Reform of corporate governance is often a complex process. Firstly, the literature is often controversial: even in advanced market economies like USA, UK or Germany, there is a great deal of disagreement over the desirability of existing governance mechanisms (Becht, Bolton and Röell, 2003; Shleifer and Vishny, 1997). Secondly, in many developing and transition economies, corporate governance mechanisms are weak or even non-existent. It is not obvious where and how to start building better governance arrangements. Thirdly, governance reforms imply a limitation of powers of some stakeholders, and in the long term it might even be in their interest to resist. Product market competition can sometimes substitute for weaknesses in corporate governance, but it is not a perfect substitute. While competition in principle forces firms to minimize costs and adopt rules (including some firm governance mechanisms)
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430 Editorial © 2007 The Authors Journal compilation © 2007 The European Bank for Reconstruction and Development and pushes them to raise external capital at lowest cost, there needs to be a mechanism ensuring that the firm responds. Corporate governance is meant to ensure that signals from input and output markets are channelled into corporate decision-making. Similarly, as highlighted in recent evidence from many developing and transition
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This note was uploaded on 08/29/2011 for the course ECON 201 taught by Professor K during the Spring '08 term at Susquehanna.

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EOT Berglof_Pal_2007 - Economics of Transition Volume 15(3...

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