Shleifer-and-Vishny--1997--a-survey-of-corporate-g

AmericanFinanceAssociationASurveyofCorporateGovernanceAuthor(s):AndreiShleiferandRobertW.VishnySource:TheJournalofFinance,Vol.52,No.2(Jun.,1997),pp.737-783Publishedby:BlackwellPublishingfortheAmericanFinanceAssociationStableURL::19/09/201022:38YouruseoftheJSTORarchiveindicatesyouracceptanceofJSTOR'sTermsandConditionsofUse,availableat://=black.EachcopyofanypartofaJSTORtransmissionmustcontainthesamecopyrightnoticethatappearsonthescreenorprintedpageofsuchtransmission.JSTORisanot-for-profitservicethathelpsscholars,researchers,andstudentsdiscover,use,andbuilduponawiderangeofcontentinatrusteddigitalarchive.Weuseinformationtechnologyandtoolstoincreaseproductivityandfacilitatenewformsofscholarship.FormoreinformationaboutJSTOR,[e-mail]ericanFinanceAssociationarecollaboratingwithJSTORtodigitize,preserveandextendaccesstoTheJournalofFinance.*ABSTRACTThisarticlesurveysresearchoncorporategovernance,withspecialattentiontotheimportanceoflegalprotectionofinvestorsandofownershipconcentrationincorpo-rategovernancesystemsaroundtheworld.CORPORATEGOVERNANCEDEALSWITHthewaysinwhichsuppliersoffinancetocorporationsassurethemselvesofgettingareturnontheirinvestment.Howdothesuppliersoffinancegetmanagerstoreturnsomeoftheprofitstothem?Howdotheymakesurethatmanagersdonotstealthecapitaltheysupplyorinvestitinbadprojects?Howdosuppliersoffinancecontrolmanagers?Atfirstglance,itisnotentirelyobviouswhythesuppliersofcapitalgetanythingback.Afterall,theypartwiththeirmoney,andhavelittletocon-tributetotheenterpriseafterward.Theprofessionalmanagersorentrepre-neurswhorunthefirmsmightaswellabscondwiththemoney.Althoughtheysometimesdo,usuallytheydonot.Mostadvancedmarketeconomieshavesolvedtheproblemofcorporategovernanceatleastreasonablywell,inthattheyhaveassuredtheflowsofenormousamountsofcapitaltofirms,andactualrepatriationofprofitstotheprovidersoffinance.Butthisdoesnotimplythattheyhavesolvedthecorporategovernanceproblemperfectly,orthatthecorporategovernancemechanismscannotbeimproved.Infact,thesubjectofcorporategovernanceisofenormouspracticalimpor-tance.Eveninadvancedmarketeconomies,thereisagreatdealofdisagree-mentonhowgoodorbadtheexistinggovernancemechanismsare.Forexam-ple,EasterbrookandFischel(1991)andRomano(1993a)makeaveryoptimisticassessmentoftheUnitedStatescorporategovernancesystem,whereasJensen(1989a,1993)believesthatitisdeeplyflawedandthatamajormovefromthecurrentcorporateformtomuchmorehighlyleveragedorgani-zations,similartoLBOs,isinorder.ThereisalsoconstanttalkofreplacingtheAnglo-SaxoncorporategovernancesystemswiththosepatternedafterGer-manyandJapan(see,forexample,Roe(1993)andCharkham(1994)).ButtheUnitedStates,Germany,Japan,andtheUnitedKingdomhavesomeofthebestcorporategovernancesystemsintheworld,andthedifferencesbetween*ShleiferisfromHarvardUniversity.VishnyisfromtheUniversityofChicago.PreparedfortheNobelSymposiumonLawandFinance,Stockholm,August1995.WearegratefultoOliverD.Hartformanyconversations,toDougDiamond,FrankEasterbrook,MiltonHarris,MartinHellwig,JamesHines,TorJonsson,SteveKaplan,RafaelLaPorta,FlorencioLopez-de-Silanes,RaghuRajan,DavidScharfstein,ReneStulz,andLuigiZingalesforcomments,andtotheNSFforfinancialsupport.737738TheJournalofFinancethemareprobablysmallrelativetotheirdifferencesfromothercountries.AccordingtoBarca(1995)andPagano,Panetta,andZingales(1995),Italiancorporategovernancemechanismsaresoundevelopedastosubstantiallyretardtheflowofexternalcapitaltofirms.Inlessdevelopedcountries,includ-ingsomeofthetransitioneconomies,corporategovernancemechanismsarepracticallynonexistent.InRussiatheweaknessofcorporategovernancemech-anismsleadstosubstantialdiversionofassetsbymanagersofmanyprivatizedfirms,andthevirtualnonexistenceofexternalcapitalsupplytofirms(Boycko,Shleifer,andVishny(1995)).Understandingcorporategovernancenotonlyenlightensthediscussionofperhapsmarginalimprovementsinrichecono-mies,butcanalsostimulatemajorinstitutionalchangesinplaceswheretheyneedtobemade.Corporategovernancemechanismsareeconomicandlegalinstitutionsthatcanbealteredthroughthepoliticalprocess-sometimesforthebetter.Onecouldtakeaviewthatweshouldnotworryaboutgovernancereform,since,inthelongrun,productmarketcompetitionwouldforcefirmstominimizecosts,andaspartofthiscostminimizationtoadoptrules,includingcorporategovernancemechanisms,enablingthemtoraiseexternalcapitalatthelowestcost.Onthisevolutionarytheoryofeconomicchange(Alchian(1950),Stigler(19