GLOBAL DIFFERENCES IN CORPORATE GOVERNANCE SYSTEMS THEORY AND IMPLICATIONS FOR REFORMS

Agreements on reforms of corporate governance, corporate law, and securities regulations, in order to augment the functioning of emerging equity markets, are complicated due to the fact that two different financial systems with some opposing features have evolved in the advanced economies, namely the insider system and the outsider system. The persistence of these systems are sought to be explained by introducing interactions between corporate governance, regulatory intervention, and capital markets into a model of evolutionary game theory. Resulting network effects are identified and analyzed. One major conclusion of the analysis is that, in the long run, reforms should be headed towards features of the outsider system because it operates better in integrated capital markets. However, attempts to achieve immediate transition into that direction can have detrimental effects, if the legal environment is not supportive enough for arm’s-length financing. Key words: corporate governance; corporate ownership; network effects; path dependence; corporate law; securities regulation