The Political Economy of Investor Protection Open Access
Kerner, Andrew Michael (2009)
Abstract
Abstract The Political Economy of Investor Protection By Andrew Kerner Adequate legal protections for minority shareholders are a powerful determinant of capital market performance and economic growth, yet there is surprising variation across countries and across US states in the extent to which minority shareholders are protected from rent- seeking by corporate insiders. My dissertation seeks to explain this variation. On the basis of a formal model that builds on work by Grossman and Helpman (1996), Rogowski and Kayser (2002) and others, I hypothesize that the key drivers of corporate governance and securities law policies are 1) the vulnerability of incumbent governments to economic voting, which is itself a function of political institutions, 2) competitive pressures to attract investment capital by enacting shareholder-friendly laws and 3) the role of institutional investors, particularly large pension funds, in the lobbying process. I test my hypotheses in three substantively and methodologically distinct empirical chapters. The first of these chapters (chapter 4) features a series of large-N, cross-national statistical tests that evaluate the impact of political institutions, competitive diffusion and funded pension assets on the adoption and enforcement of insider trading laws and the extent of shareholder voting rights, My dissertation's remaining empirical chapters examine the role of pension funds in the policy making process in more detail and with more analytical clarity. The first of these chapters (chapter 5) is a statistical analysis of state employee retirement funds' impact on US-state-level anti-takeover legislation during the 1980s and early 1990s. The second of these chapters (chapter 6) is a qualitative, interview based case study exploring the role of Polish pension funds in a recent flurry of corporate governance and securities law reforms in that country. Like their American counterparts, these pension funds are extremely large. Relative to the size of the Polish stock market, the largest of them are 2- 3 times as large as the largest American pension funds. Unlike their American counterparts, however, Polish pension funds have been passive in corporate governance issues. I argue that the regulatory regime they face incentivizes these pension funds to be as passive as they have been.
Table of Contents
Table Of Contents
Chapter1 Introduction .......................................................................................................1
Towards A Political Explanation of Investor Protection....................................6
Argument And Contributions .......................................................................... 8
Plan of The Dissertation ................................................................................13
Chapter 2 Literature Review .............................................................. ............................16
Law and Finance Theory ................................................................................16
Interest Group Theories of Investor Protection ..............................................19
A Role For Labor? .........................................................................22
Lobby Formation ..........................................................................24
Putting The Pieces Together: Political Economy Models of Investor Protection .........................................................................................................................28
Public Interest Models of Investor Protection ................................................31
Summary .........................................................................................................34
Chapter 3 A Common Agency Model of Investor Protection ...........................................36
Formal Model Basics ......................................................................................37
Model ............................................................................................................41
Hypotheses ......................................................................................................46
Summary ........................................................................................................54
Chapter 4 Insider Trading Laws and Shareholder Voting Rights .....................................56
Shareholder Voting Rights ..............................................................................56
Sample ...........................................................................................66
Method ..........................................................................................68
Independent Variables ...................................................................69
Results ...........................................................................................76
Insider Trading Laws ......................................................................................85
Sample ...........................................................................................88
Method ...........................................................................................89
Independent Variables ...................................................................91
Insider Trading Law Adoption Results ..........................................95
Insider Trading Law Enforcement Results ..................................102
Summary .......................................................................................................107
Section II - A Closer Look at Pension Funds ................................................................109
Chapter 5 State Public Employee Retirement Systems and Anti-Takeover Laws ..........118
Corporate Ownership In The United States ..................................................121
Pension Funds, The Money Flood And The Four Stages of American Capitalism ...................................................................122
Firm Level Pension Fund Activism .............................................................132
Does Firm Level Shareholder Activism Work? ...........................135
Limitations On Public Fund Activism .........................................136
Pension Funds' Policy Implications .............................................................140
Anti-Takeover Laws ....................................................................140
The Politics of Anti-Takeover Laws ............................................143
Tests ..............................................................................................................147
Sample .........................................................................................148
Dependent Variables ....................................................................148
Method .........................................................................................148
Independent Variables .................................................................150
Results .......................................................................................150
Summary ......................................................................................................157
Chapter 6 An Application to Polish Pension Funds: Does Pension Reform lead to Corporate Governance Reform? .....................................................................................159
The Spread and Rationale of Pension Reform...............................................159
Strains on the System...................................................................159
Wave of Reform...........................................................................162
Benefits of Reform.......................................................................165
The Corporate Governance Channel............................................167
Pension Reform in Poland ............................................................................168
Security Through Diversity..........................................................171
Other Features of Polish Corporate Ownership............................175
OFE Pension Funds and Polish Corporate Governance................................177
Corporate Governance Hard Law In Poland ..............................177
Pension Fund Influence On Hard Law.........................................179
Corporate Governance Soft Law in Poland..................................180
Firm Level Pension Fund Activism...............................................................186
Why Isn't There A Larger Pension Fund Impact On Polish Corporate Governance?..................................................................................................192
Performance Incentives, Herd Behavior And Free Riding ..........193
Limits on Foreign Investment And Government Incentives To Retain Pension Fund Capital.......................................................201
Conclusion and Recommendations ...............................................................204
Chapter 7 Conclusion ......................................................................................................208
7.1 Outstanding Issues.................................................................................210
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