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 provides a theory of diversification and financial structure of banks. It shows that by diversifying the bank portfolio and financing it with debt, the bank can commit to a higher level of monitoring. By linking the benefits of diversification to the costs, the paper derives an optimal size of the bank, which is bounded. The costs of diversification lie in the higher overload costs with which the banker is faced by monitoring more projects. The benefits of diversification lie in increasing the bank's owner's incentives to monitor the lenders.

This paper examines the impact of globalization on the cost of equity capital. We argue that the cost of equity capital decreases because of globalization for two important reasons. First, the expected return that investors require to invest in equity to compensate them for the risk they bear generally falls. Second, the agency costs which make it harder and more expensive for firms to raise funds become less important. The existing empirical evidence is consistent with the theoretical prediction that globalization decreases the cost of capital, but the documented effects are lower than theory leads us to expect. We discuss various reasons for why this is the case.

This study examines how ownership structure and conflicts of interest among shareholders under a poor corporate governance system affected firm performance before the crisis. Using 5,829 Korean firms subject to outside auditing during 1993-1997, the paper finds that firms with low ownership concentration show low firm profitability, controlling for firm and industry characteristics. Controlling shareholders expropriated firm resources even when their ownership concentration was small. Firms with a high disparity between control rights and ownership rights showed low profitability. When a business group transferred resources from a subsidiary to another, they were often wasted, suggesting that “tunneling ” occurred. In addition, the negative effects of control-ownership disparity and internal capital market inefficiency were stronger in publicly traded firms than in privately held ones. JEL classification code: G3 Key words: corporate governance, ownership, profitability, shareholder expropriation, business group *I am grateful to the participants at the 12 th Annual NBER Seminar on the East Asian Economics and the World congress meeting of the econometric society for comments on the earlier version of this paper. I am especially grateful to Simon Johnson and an anonymous referee for their valuable suggestions. Their helpful comments have greatly improved the paper. However, all remaining errors are mine.

We propose that dispersed outside ownership and the resulting managerial discretion come with costs but also with bene�ts. Even when tight control by shareholders is ex post ef�cient, it constitutes ex ante an expropriation threat that reduces managerial initiative and noncontractible investments. In addition, we show that equity implements state contingent control, a feature usually associated with debt. Finally, we demonstrate that monitoring, and hence ownership concentration, may con�ict with performance-based incentive schemes. I.

Joseph Stiglitz, and two anonymous referees. The rapidly growing literature studying the relationship between legal origin, investor protection, and finance has stimulated an important debate in academic circles. It has also generated a number of applied research projects and strong policy statements. This paper discusses the implications, in particular for developing and transition countries, from this literature. We conclude that its focus on the plight of small investors is too narrow when applied to these countries. We argue that this group is unlikely to play an important role in most developing and transition countries. External investors may still be crucial, but they are more likely to come in as strategic investors or creditors. The paper also proposes a broader paradigm including other stakeholders and mechanisms of governance in order to better understand the problems facing these countries and generate policy implications that compensate for the weaknesses of capital markets.

This paper studies how firms tie CEO compensation to firms' stock market performance. I demonstrate that in theory and in practice there is a tradeo# between giving CEOs incentives and forcing them to hold an un-diversified position in the firm. Unlike the results of the existing literature, market risk is not necessarily a cost of providing incentives. The cost of giving incentives is the potential loss of diversification for the CEO. As a result, CEO incentive decreases with firm-specific risk, but may not decrease with market risk. In performing the empirical tests, I also incorporate the recent critique by Prendergast (2000), which argues that the relation between risk and incentive level is unreliably estimated when we fail to consider the effect of risk on the benefit of giving incentives. I study both sides of the incentive-diversification tradeoff simultaneously. I am able to show that after controlling for the other side of the tradeoff, incentive increases with the CEOs' ability to affect firm value, and decreases with the firm-specific risk level of the firm.

We develop a theoretical model to describe and explain variation in corporate governance among advanced capitalist economies, identifying the social relations and institutional arrangements that shape who controls corporations, what interests corporations serve, and the allocation of rights and responsibilities among corporate stakeholders. Our “actor-centered ” institutional approach explains firm-level corporate governance practices in terms of institutional factors that shape how actors’ interests are defined (“socially constructed”) and represented. Our model has strong implications for studying issues of international convergence. Corporate governance concerns “the structure of rights and responsibilities among the parties with a stake in the firm ” (Aoki, 2000: 11). Yet the diversity of practices around the world nearly defies a common definition. Internationalization has sparked policy debates over the transportability of best practices and has fueled academic studies on the prospects of international convergence (Guillén, 2000; Rubach & Sebora, 1998; Thomas & Waring, 1999). What the salient national differences in corporate governance are and how they should best be conceptualized remain hotly debated (Gedajlovic & Shapiro,

In this paper I argue that corporate finance theory, empirical research, practical applications, and policy recommendations are deeply rooted in an underlying theory of the firm. I also argue that although the existing theories have delivered very important and useful insights, they seem to be quite ineffective in helping us cope with the new type of firms that is emerging. I outline the characteristics that a new theory of the firm should satisfy and how such a theory could change the way we do corporate finance, both theoretically and empirically. FOR A RELATIVELY YOUNG RESEARCHER like myself, there is a very strong tendency to look at the history of corporate finance and be overwhelmed by the giants of the recent past. A field that 40 years ago was little more than a collection of cookbook recipes that reflected practitioners ’ common sense is today a bona fide discipline, taught not only to future practitioners but also to doctoral students, both in business schools and in economic departments—a discipline whose ideas are now influencing other areas of economics, such as

Do outside directors on corporate boards make a difference in firm performance during institutional transitions? What leads to the practice of appointing outside directors in the absence of legal mandate? This article addresses these two important questions by drawing not only on agency theory, but also resource dependence and institutional theories. Taking advantage of China’s institutional transitions, our findings, based on an archival database covering 405 publicly listed firms and 1211 company–years, suggest that outsider directors do make a difference in firm performance, if such performance is measured by sales growth, and that they have little impact on financial performance such as return on equity (ROE). The results also document a bandwagon effect behind the diffusion of the practice of appointing outsiders to corporate boards. The article not only highlights the need to incorporate multiple theories beyond agency theory in corporate governance research, but also generates policy implications in light of the recent trend toward having more outside directors on corporate boards in emerging economies. Copyright © 2004 John Wiley & Sons, Ltd. Do outside directors on corporate boards make a difference in firm performance? Agency theory suggests that a board comprised of a greater proportion of outside directors, due to their presumed independence, may theoretically lead to better firm performance (Jensen and Meckling, 1976; Shleifer and Vishny, 1997). However, empirical researchers report that overall, there is little significant relationship between outside directors and firm performance (Dalton et al., 1998; Finkelstein and Hambrick, 1996). Consequently, Dalton et al. (1998: 285) argue that ‘consideration of multiple theories [beyond agency theory]... may lead to a more complete understanding. ’ We agree, and add that Key words: outside directors; firm performance; institutional transitions; China