Corporate Governance, Strategy and Regulation


We introduce a micro-founded model that describes the evolution of compliance with corporate governance practices regulated by comply or explain (‘CorE’) standards. We show that a practice’s compliance level evolves as a diffusion process which converges to the practice’s efficacy at preventing losses. We use Chilean data to test the fit of our model. We find that efficacy levels and expected losses differ by practices’ categories. We emphasize the explanatory, predictive and normative reach of our theory. For instance, the model explains why the most managerially beneficial practices and those that avoid the greatest losses are not necessarily the most complied with. The model predicts the time required by a compliance level to converge to its steady state and estimates the benefits of a ‘CorE’ compliance system when it is compared to a mandatory compliance system. We discuss how stakeholders and regulators can shape compliance levels 


We document the effects that three different types of events: i) corporate scandals ii) hard legal reforms, and iii) soft legal reforms, have had on the Chilean market for corporate directors between 2008 and 2019. Like the effects generated by the sequence Enron-Worldcom-SOX, we find that the supply of corporate directors contracted due to increasing risks and workload faced by the profession. However, unlike the case of Enron-Worldcom-SOX the demand for corporate directors only changed marginally and the use of external directors remained almost constant. This is consistent with an overall result in which directors’ compensations significantly increased and the average size of the board marginally decreased. In addition, we found that hard legal reforms had several unexpected and probably unwanted effects, including a reduction in the use of committees and in the presence of independent directors. Finally, and perhaps surprisingly for a civil-law country, we show that a corporate scandal followed by a soft legal reform has the capacity to significantly increase directors’ efforts and accelerate changes in average board compositions.


In order to determine the market reaction to an announcement of a change in the audit firm, we carry out an event study between 2004 and 2013 that includes 130 publicly traded Chilean Companies. We rule out possible biases in the informational content of the event. We find that the market reacted positively when a company announced that it will keep its audit firm that year. This suggests that overall the costs associated to a change of an audit firm (start-up cost and know how loss) would dominate the benefits of the same change (reduction in the probability of a value destroying event such as a fraud or an error). We discuss the implications of this result for a potential implementation of a rule of mandatory rotation in a developing country such as Chile. We also discuss the possibility of identifying the specific costs and benefits behind the audit firm change.

Law and Economics


An important question in political economy is how an elected constitutional convention fails to understand the inclinations of the voters and approves a new constitution that is later rejected in referendum. In this article, we explore possible information asymmetry between legislators and voters to explain why a gap between the preferences of the median legislator and the median voter can lead to the prevalence of status quo in constitutional making. We show that rejection probability increases with uncertainty about voters’ preferences, regardless of whether these preferences are actually aligned or opposed to the legislator. Second, the expected distance between legislator and voters’ preferences does not monotonically link with approving constitutional proposals. Sometimes, as intuition commands, the correlation will be positive but, some other times, and contrary to intuition, it will be negative.


It is commonly argued that the case overload faced by higher courts (especially in civil law) can be reduced by restricting access to them. In this paper we prove that such restriction can also significantly reduce judicial uniformity among lower courts and alter litigation decisions as well as outcomes. To test our predictions we build a database of wrongful termination lawsuits that took place before and after the implementation of a reform to the Chilean labor justice system. This reform exogenously and drastically reduced access to higher courts. As we predict, this reduction increased the probability of a first-instance pro-plaintiff decision (by 36%); increased the percentage recovered by a plaintiff in court (by 27%) and reduced the probability of a settlement (by 16%). The Priest & Klein 50% hypothesis suggests that prior to the reform plaintiffs recovered too little. Policy implications follow.