The Indirect Relation between Corporate Governance and Financial Stability

Abstract

In the wake of last crises, there is an increased awareness regarding the role of a sound corporate governance framework for enhancing the financial stability. We believe, however, that the relationship between corporate governance and financial stability is an indirect one; companies are not obliged to pursue financial stability unless specific legislation or regulations require it. Interestingly, having such targets, large firms, especially those operating in the financial system, can lead to systemic risks, supporting financial contagion. Classical problems of corporate governance such as top management compensation, board composition, and independence of the director, agent theory or the correct valuation are problems envisaged to be analyzed when assessing how they affect financial stability.

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