Corporate Governance, Enforcement and Financial Development
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Corporate Governance, Enforcement and Financial Development

The Chinese Experience

Ding Chen

This important new book attempts to establish a fresh conceptual framework for the study of corporate governance by employing the new institutional economics of contract enforcement. This framework helps to clarify two critical issues including the role of law in financial development and whether there is an optimal corporate governance model that should be followed by countries attempting to develop their own stock markets.
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Chapter 1: Theoretical framework

Ding Chen

Extract

This chapter establishes the theoretical framework of this book. Section 1 provides a brief review of the concept and significance of corporate governance. Section 2 outlines the agency theory – the approach taken in this book to look at the corporate governance problem. Section 3 examines the various ways proposed in previous studies to dealing with the agency problem. Section 4 is the main body of this chapter. First, based on empirical evidence, it establishes the centrality of enforcement in corporate governance, at least in transition or developing countries. Second, relying on the insights of New Institutional Economics (NIE), it sets up an analytical framework for contract enforcement in general. It divides enforcement mechanisms into self-enforcement and third-party enforcement. The former could be further divided into self-enforcement mechanisms in a one-shot game and in a repeated game; the latter could be further divided into enforcement by a non-state third party and by a state. Specific mechanisms in each sub-category will be examined and a discussion regarding the relationship between private ordering and public ordering will also be included. Third, it applies this general analytical framework to the corporate context. Various corporate governance mechanisms like large shareholders, gatekeepers will be examined in this enforcement framework. The discussion between private ordering and public ordering will also be extended to the corporate context. Although corporate governance has become an extremely popular topic in the past two decades, there is no uniform definition of it. The many definitions could be generally grouped under two heads.

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