Corporate Governance and Development

Corporate Governance and Development

Reform, Financial Systems and Legal Frameworks

The CRC Series on Competition, Regulation and Development

Edited by Thankom Gopinath Arun and John Turner

This book analyses the complex relationship between corporate governance and economic development by focusing on the reform of corporate governance, the role of the legal system, and the interconnections with the financial system.

Chapter 2: Gains and Losses of Adopting New Standards of Corporate Governance: A CGE Analysis of Argentina

Omar O. Chisari and Gustavo Ferro

Subjects: business and management, corporate governance, development studies, development economics, law and development, economics and finance, corporate governance, development economics, law - academic, law and development


Omar O. Chisari and Gustavo Ferro INTRODUCTION Practices of corporate governance in use at the international level, and in particular in the USA, have been presented as methods to facilitate access of less developed countries to the world savings supply. It is expected that by obtaining said access, welfare will be improved, particularly via higher growth rates. Cross-country econometric studies are the evidence habitually used to support this view. This chapter presents an alternative approach, a Computable General Equilibrium (CGE) cost/benefit evaluation for Argentina. This perspective is interesting because it focuses not only on the conjectural gains of higher standards of corporate governance, but also on endowment of factors of an economy and on its structural characteristics. Not all economies are able to provide the resources needed to reach higher standards of corporate governance in unlimited quantities at a reasonable price. Moreover, the benefits and increasing costs of auditing cannot be evenly distributed after taking into account relative price interactions that influence factor rewards and social welfare. For a small economy, open to both trade and capital flows, the cost of capital has an important exogenous component, depending on the rest of the world’s evaluation of its economic and financial health. Therefore, there are two relevant questions. First, what are the general equilibrium net results of extending more demanding corporate governance practices of a given cost to a subset of firms in a given economy? Second, what is the reduction in the cost of capital that is necessary to compensate...

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