We present a simple model of an entrepreneur going public in an environment with poor legal protection of outside shareholders. The model incorporates elements of Becker's (1968) "crime and punishment" framework into a corporate finance environment of Jensen and Meckling (1976). We examine the entrepreneur's decision and the market equilibrium. The model is consistent with a number of empirical regularities concerning the relation between investor protection and corporate finance. It also sheds light on the patterns of capital flows between rich and poor countries and on the politics of reform of investor protection.

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This paper investigates whether management ownership structures and large non-management blockholders are related to firm value across a sample of 1433 firms from 18 emerging markets. When a management group’s control rights exceed its cash flow rights, I find that firm values are lower. I also find that large non-management control rights blockholdings are positively related to firm value. Both of these effects are significantly more pronounced in countries with low shareholder protection. One interpretation of these results is that external shareholder protection mechanisms play a role in restraining managerial agency costs and that large non-management blockholders can act as a partial substitute for missing institutional governance mechanisms.

We use a sample of 800 firms in eight East Asian countries to study the effect of ownership structure on value during the region’s financial crisis. The crisis negatively impacted firms’ investment opportunities, raising the incentives of controlling shareholders to expropriate minority investors. During the crisis, cumulative stock returns of firms in which managers have high levels of control rights, but have separated their control and cash flow ownership, are 10 to 20 percentage points lower than those of other firms. The evidence is consistent with the view that ownership structure plays an important role in determining the incentives of insiders to expropriate minority shareholders. *Michael Lemmon and Karl Lins are Associate and Assistant Professors of Finance, respectively, at the

We present a model of succession in a ¢rm owned and managed by its founder. The founder decides between hiring a professional manager or leaving management to his heir, as well as on what fraction of the company to £oat on the stock exchange. We assume that a professional is a better manager than the heir, and describe how the founder’s decision is shaped by the legal environment. This theory of separation of ownership from management includes the Anglo-Saxon and the Continental European patterns of corporate governance as special cases, and generates additional empirical predictions consistent with cross-country evidence. MOST FIRMS IN THE WORLD are controlled by their founders, or by the founders ’ families and heirs. Such family ownership is nearly universal among privately held ¢rms, but is also dominant among publicly traded ¢rms. In Western Europe, South and East Asia, the Middle East, Latin America, and Africa, the vast majority of publicly traded ¢rms are family controlled (La Porta, Lopez-de-Silanes,

Using a sample of 495 project finance loan tranches (worth $151 billion) to borrowers in 61 different countries, we examine the relation between legal risk and debt ownership structure. The tranches exhibit high absolute levels of debt ownership concentration: the largest single bank holds 20.3% while the top five banks collectively hold 61.2% of a typical tranche. In countries with strong creditor rights and reliable legal enforcement, lenders create smaller and more concentrated syndicates to facilitate monitoring and low-cost contracting. When lenders cannot rely on legal enforcement mechanisms to protect their claims, they create larger and more diffuse syndicates as a way to deter strategic default. Key words: creditor rights, international corporate governance, bank lending, project finance, syndication JEL classification: G21, G32, F34, K33 EVIDENCE FROM THE GLOBAL SYNDICATED LOAN MARKET I.

This paper conducts powerful new tests of whether debt can mitigate the effects of agency and information problems. We focus on emerging market firms for which pyramid ownership structures create potentially extreme managerial agency costs. Our tests incorporate both traditional financial statement data and new data on global debt contracts. Our analysis is mindful of the potential endogeneity between debt, ownership structure, and value, and takes into account differences in the debt capacity of a firm’s assets in place and future growth opportunities. The results indicate that the incremental benefit of debt is concentrated in firms with high expected managerial agency costs that are also most likely to have overinvestment problems resulting from high levels of assets in place or limited future growth opportunities. Subsequent internationally syndicated term loans are particularly effective at creating value for these firms. Our results support the recontracting hypothesis that equity holders value compliance with monitored covenants, particularly when firms are likely to overinvest.

Abstract: New research suggests that cross-country differences in legal origin help explain differences in financial development. This paper empirically assesses two theories of why legal origin influences financial development. First, the “political ” channel stresses that (i) legal traditions differ in the priority they give to the rights of individual investors vis-à-vis the state and (ii) this has repercussions for the development of property rights and financial markets. Second, the “adaptability ” channel holds that (i) legal traditions differ in their ability to adjust to changing commercial circumstances and (ii) legal systems that adapt quickly to minimize the gap between the contracting needs of the economy and the legal system’s capabilities will foster financial development more effectively than would more rigid legal traditions. We use historical comparisons and cross-country regressions to assess the validity of these two channels. We find that legal origin matters for financial development because legal traditions differ in their ability to adapt efficiently to evolving economic conditions.

In recent years, comparative economics experienced a revival, with a new focus on comparing capitalist economies. The theme of the new research is that institutions exert a profound influence on economic development. We argue that, to understand capitalist institutions, one needs to understand the basic tradeoff between the costs of disorder and those of dictatorship. We then apply this logic to study the structure of efficient institutions, the consequences of colonial transplantation, and the politics of institutional choice.

Privatizations in developing countries that don’t embrace a governance perspective will disappoint. This paper introduces the concept of ‘governance chains ’ that can constrain the ‘grabbing hands ’ of public and private actors by providing information and accountability mechanisms for investors. Recently available empirical data from established firms from 49 countries around the world provides estimates of the relative importance and strength of ‘private ’ and ‘formal ’ governance chains. The framework and empirical benchmarks help to explain past privatization outcomes and suggest steps to be taken to get the most out of future privatization activity.