A Social Welfare Evaluation of Adopting New Standards of Corporate Governance. A CGE Appraisal For the Case of Argentina

Resumo

Current estimates of the effects of adopting stricter Corporate Governance practices refer basically to econometric cross-country studies that focus on gains in terms of growth. Are they convincing enough? It is necessary to take into account not only the potential gains in terms of the capital market workings, but also the scarcity of resources and structural characteristics of every economy. Costs could impinge upon inelastic factors and consumers, and not necessarily on shareholders. For example, corporate governance practicereforms could be human capital intensive and could possibly imply that the expected gains be more than offset by losses in the rest of the economy. Moreover, the impact of corporategovernance standards established across-the-board could have negative impact on small businesses and could influence economic activity and income distribution. Additionally, new standards (like Sarbanes-Oxley’s) could be added on top of normal and already existing standards, creating duplication of costs. This paper explores these issues using a ComputableGeneral Equilibrium model of the Argentine economy for 2003. Estimated costs for the economy are in the range of 0.23/0.39% of GDP. Our simulations suggest that costs andtheir distribution could have been underestimated. We also estimate necessary reductions in cost of capital to compensate those costs. But our results suggest that “Good” Corporate Governance should be qualified taking into account social welfare.