Could corporate governance practices enhance social welfare?

Abstract

The purpose of the article is to contribute to the quantitative evaluation of economy-wide corporate governance reforms. In the literature quantitative studies on this issue are not common. The computable general equilibrium (CGE) approach offers useful insights, which complement a partial equilibrium (firm level) analysis. In this study, corporate governance is assumed to be costly for those firms that implement it and we model it as an additional cost with spill-over on the rest of the economy through the price system. The model is simulated using 2006 macroeconomic data for Argentina. An additional internal audit body is required of firms implementing corporate governance (public firms) in the country. Auditors are thus the direct recipient of those costs and they provide the possibility of proxy corporate governance incremental expenses for public firms. Simulations assume different scenarios and potential benefits from corporate governance are considered too. The article models potential benefits in terms of reduced cost of capital and simulates various scenarios where: (1) there are no benefits, (2) cost of capital is reduced (permanently), (3) the reduction is temporary and (4) the volatility of the cost of capital is reduced.