Interest Groups Theories of Investor Protection. The key insight made by political theories of investor protection is that investor protection has different distributional consequences for different groups in society. Thus, it makes little sense to think of high levels investor protection as being “good” in a broad, universal sense. Rather, these works ask: for whom is investor protection good and for whom is it bad? To the extent that effective interest group lobbies are able to form, those groups that benefit from high levels of investor protection should lobby for more of it, while those that are hurt by high levels of investor protection should lobby for less. Political outcomes, in this view, are a function of which group dominates the market for public policy. 8 This is not to say that such a refutation does not exist in the literature. Xxxxxxx (2008), for example, makes a particularly damning critique of law and finance theory, in which he argue that legal heritage lacks the statistical relationship to investor protection outcomes that La Porta et al. claim. The primary distributional conflict implied by corporate governance depends on the distribution of ownership within the firms. In a firm owned by a diffuse set of small shareholders - the so-called Xxxxx-Means firm, typified by ownership pattern in the United States and United Kingdom – corporate governance rules pit managers that prefer managerial autonomy over corporate strategy against owners that prefer to have meaningful oversight over the operations of firms that they own shares in. Strengthened corporate governance rules that increase the efficacy of this oversight can be used to deter managerial empire building, demand higher dividends, or to limit excessive managerial perquisites, such as exorbitantly high managerial wages and/or unjustified job security (ex. Xxxxxxxx and Xxxxxxxxxxx 2003; Xxxxxx 1986; Xxxx and Xxxxxx 2008; Xxxxxxxxx and Xxxxx 1983; La Porta et al. 2000). The historical record is replete with cases of managers operating under weak corporate governance rules that have used this autonomy to direct company funds towards investments that serve managerial, but not shareholder, interests (ex. Xxxxxxx et al. 2000; Xxxxxxx, Xxxxxxx and Xxxxxxxx 2001; Xxxxxxxx and Xxxxxxxxxxx 2003). In the closely held firm, the agency problems are slightly different. In a firm with a controlling shareholder, there is a strong expectation that the controlling shareholder will have a large impact on choosing the board of directors and take an a...
