In a sample of 398 firms from Indonesia, Korea, Malaysia, the Philippines, and Thailand, firm-level differences in variables related to corporate governance had a strong impact on firm performance during the East Asian financial crisis of 1997 to 1998. Significantly better stock price performance is associated with firms that had indicators of higher disclosure quality (ADRs and auditors from Big Six accounting firms), with firms that had higher outside ownership concentration, and with firms that were focused rather than diversified. The results suggest that individual firms have some power to preclude expropriation of minority shareholders if legal protection is inadequate. JEL classification: G15; G32; G34 Keywords: Financial crises; Corporate governance; Disclosure; Ownership structure; Diversification I am grateful to Simon Johnson, Sendhil Mullainathan, David Scharfstein, and Jeremy Stein for advice and encouragement, and to Simeon Djankov, Kristin Forbes, Ken French, Kathy Kahle, S.P. Kothari, Grant McQueen, Andrei Shleifer, Keith Vorkink, Marc Zenner, an anonymous referee, and seminar participants at Brigham Young University, MIT, Texas A&M University, the University of Illinois at Urbana-Champaign, and the University of Pittsburgh for helpful comments. I thank Simeon Djankov for making data available that is used in Panel C of Table 3. This paper is a revised version of a chapter of my MIT Ph.D. thesis. All errors are mine. E-mail address: todd.mitton@byu.edu 0304-405X/00/$-see front matter 2002 Elsevier Science S.A. All rights reserved 1 1.

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

Using a sample of over 1000 firms from seven emerging markets in 1995, we find that diversified firms trade at a discount of approximately 7 % compared to single-segment firms. Diversified firms are also less profitable than single-segment firms, but lower profitability only explains part of the discount. We find a discount only for those firms that are part of industrial groups, and for diversified firms with management ownership concentration between 10 % and 30%. The discount is most severe when management control rights substantially exceed their cash flow rights. Our results do not support internal capital market efficiency in economies with severe capital market imperfections. 1 Our paper examines the costs and benefits of corporate diversification in emerging markets. We use the Worldscope database to study seven emerging markets (Hong Kong, India, Indonesia, Malaysia, Singapore, South Korea, and Thailand) and compare the value of diversified and focused firms within each country. Given the greater level of information asymmetry and other market imperfections in these economies, corporate diversification could impact firm value in two ways. One hypothesis is that the use of internal capital markets could lead to higher values for diversified firms. Our second hypothesis is that minority shareholders can be more easily expropriated in diversified firms, which implies a lower

We survey two generations of research on corporate governance systems around the world, concentrating on countries other than the United States. The first generation of international corporate governance research is patterned after the US research that precedes it. These studies examine individual governance mechanisms – particularly board composition and equity ownership – in individual countries. The second generation of international corporate governance research recognizes the fundamental impact of differing legal systems on the structure and effectiveness of corporate governance and compares systems across countries. We would like to thank Orlin Dimitrov and David Offenberg for valuable research assistance. International Corporate Governance: A Survey 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.

We provide a rationale for the use of pyramidal ownership (the control of a firm through a chain of ownership relations) that departs from the traditional argument of separating ownership and control. With a pyramidal structure a family uses a firm it already controls to set up a new firm. This allows the family to access the entire stock of retained earnings of the firm it controls and to share the security benefits of the new firm with the other existing shareholders of the original firm. Therefore, pyramids are more attractive when internal funds are important (e.g., due to the poorly functioning capital markets) and when the security benefits of the new firm are low; conditions that we show hold in an environment with poor investor protection. We also analyze the creation of family business groups (a collection of multiple firms under the control of a single family). Business group flourish when external markets are poorly developed because, in such cases, internal resources from the existing firms provide the family with a financing advantage vis-a-vis other competing entrepreneurs. Thus, the model predicts that in countries with poor investor protection family business groups should be common and they should be organized as pyramids. Because our model departs from the traditional argument for pyramids as a device to separate ownership and control, it can differentiate between pyramids and dual class shares even in situations in which the same deviation from one share-one vote can be achieved with either method. Unlike the traditional argument, our model is consistent with recent empirical evidence that some pyramidal firms are associated with small deviations between ownership and control. We also argue that pyramids can be an efficient organizational structure for the family if the availability of internal funds is sufficiently important, even though pyramids are associated with high levels of cash flow diversion. Other predictions of the model are consistent with systematic and anecdotal evidence on pyramidal business groups.

for their outstanding research assistance and professional management of the two-year-long data collection process.

First, this paper specifies a structural model of the firm, the standard principal-agent model augmented with an investment decision, and then uses that model to conduct empirical work on the connection between performance and ownership. We calibrate the model exactly to data on managerial ownership and the level of investment in productive assets from Execucomp and Compustat. For each firm-year observation, this generates estimates of structural productivity parameters for both investment and managerial input. Based on variation in these exogenous parameters, we find that Tobin’s Q and managerial ownership exhibit the patterns documented in McConnell and Servaes (1990). Thus, our augmented principal-agent model can explain the hump-shaped empirical relation between performance and managerial ownership. No additional factors, such as managerial entrenchment overtaking incentive alignment at high ownership levels, are required. Second, the calibration creates a data panel for which we know the underlying structural model and appropriate empirical specification. This allows us to quantify the statistical and economic importance of specification error and endogeneity in empirical work. Including firm fixed effects or controls for firm size (investment or sales) adds explanatory power, but the spurious relation between Q and managerial ownership typically remains. In this setting, standard approaches to the

We construct and analyze a comprehensive list of dual-class firms in the United States and use this list to investigate the relationship between insider ownership and firm value. Our data has two useful features for this valuation analysis. First, since dual-class stock separates cash-flow rights from voting rights, we can separately identify the impact of each. Second, we address endogeneity concerns by using exogeneous predictors of dualclass status as instruments. While other data sets have provided one of these features, our data set is the first to provide both. We find robust evidence that firm value is increasing In recent years, researchers have demonstrated the powerful role of shareholder rights. The stream of research on this topic finds that the strength of shareholder rights at a company is associated with stock returns, valuations, operating performance, the

Dual-class common stock allows for the separation of voting rights and cash flow rights across the different classes of equity. We construct a large sample of dual-class firms in the United States and analyze the relationships of insider’s cash flow rights and voting rights with firm value, performance, and investment behavior. We find that relationship of firm value to cash flow rights is positive and concave and the relationship to voting rights is negative and convex. Identical quadratic relationships are found for the respective ownership variables with sales growth, capital expenditures, and the combination of R&D and advertising. Our evidence is consistent with an entrenchment effect of voting control that leads managers to underinvest and an incentive effect of cash flow ownership that induces managers to pursue more aggressive strategies