Corporate governance and firm financing: The role of politics

Abstract

This paper offers an explanation for why firms in different countries rely more heavily on bank lending or securities markets. I argue that market financing is more common when the firm is competitive with its foreign counterparts, and when a right-wing political party controls government. If the firm is uncompetitive with foreign rivals, or if a left-wing political party controls government, then bank lending will be more common. Evidences across OECD countries as well as analysis of France and Japan across the twentieth century support the argument. There are clear implications for the kinds of technological innovation pursued by firms across different countries, as well as for international mergers and acquisitions.