Corporate Governance, Law and Finance: an Analytical Model of Corporate Finance

Following the initial publication of La Porta et al. (1997) an ever growing number of researchers published empirical evidence on the influence of corporate governance rules on external financing. Whereas the empirical links have been researched extensively, suitable analytical models are still rare. This book extends Holmström and Tirole (1997)'s model of corporate finance to predict the influence of legal changes on outside funding. Finally, the book summarizes the empirical law and finance literature. I find that better corporate governance rules raise the number of firms that receive external financing as well as the amount of investment per firm. At last it is found that the aggregate investment shifts upwards once better corporate governance rules are introduced.