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603
Investor Protection and Corporate Governance
, 1999
"... Recent research on corporate governance has documented large differences between countries in ownership concentration in publicly traded firms, in the breadth and depth of financial markets, and in the access of firms to external finance. We suggest that there is a common element to the explanations ..."
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Cited by 590 (11 self)
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Recent research on corporate governance has documented large differences between countries in ownership concentration in publicly traded firms, in the breadth and depth of financial markets, and in the access of firms to external finance. We suggest that there is a common element to the explanations of these differences, namely how well investors, both shareholders and creditors, are protected by law from expropriation by the managers and controlling shareholders of firms. We describe the differences in laws and the effectiveness of their enforcement across countries, summarize the consequences of these differences, and suggest potential strategies of reform of corporate governance. We argue that the legal approach is a more fruitful way to understand corporate governance and its reform than the conventional distinction between bank-centered and market-centered financial systems.
Disentangling the Incentive and Entrenchment Effects of Large Shareholdings
- Journal of Finance
, 2002
"... This article disentangles the incentive and entrenchment effects of large owner-ship. Using data for 1,301 publicly traded corporations in eight East Asian econ-omies, we find that firm value increases with the cash-f low ownership of the largest shareholder, consistent with a positive incentive eff ..."
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Cited by 379 (11 self)
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This article disentangles the incentive and entrenchment effects of large owner-ship. Using data for 1,301 publicly traded corporations in eight East Asian econ-omies, we find that firm value increases with the cash-f low ownership of the largest shareholder, consistent with a positive incentive effect. But firm value falls when the control rights of the largest shareholder exceed its cash-f low ownership, con-sistent with an entrenchment effect. Given that concentrated corporate ownership is predominant in most countries, these findings have relevance for corporate gov-ernance across the world. THE EFFECTS OF OWNERSHIP STRUCTURES on the value of firms have been re-searched extensively, with the role of large investors receiving special atten-tion. Investors with large ownership stakes have strong incentives to maximize their firms ’ value and are able to collect information and oversee managers, and so can help overcome one of the principal–agent problems in the modern corporation—that of conf licts of interest between shareholders and man-
Investor Protection and Corporate Valuation
- Journal of Finance
, 2002
"... We present a model of the effects of legal protection of minority shareholders and of cash-flow ownership by a controlling shareholder on the valuation of firms. We then test this model using a sample of 539 large firms from 27 wealthy economies. ..."
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Cited by 355 (6 self)
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We present a model of the effects of legal protection of minority shareholders and of cash-flow ownership by a controlling shareholder on the valuation of firms. We then test this model using a sample of 539 large firms from 27 wealthy economies.
Investor Protection and Equity Markets.
- Journal of Financial Economics
, 2002
"... Abstract 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 (J. Political Econ. 106 (1968) 172) ''crime and punishment'' framework into a corporate finan ..."
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Cited by 272 (30 self)
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Abstract 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 (J. Political Econ. 106 (1968) 172) ''crime and punishment'' framework into a corporate finance environment of Jensen and Meckling (J. Financial Econ. 3 (1976) 305). 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. r
A rational expectations model of financial contagion
- Journal of Finance
, 2002
"... We develop a multiple asset rational expectations model of asset prices to explain financial market contagion. Although the model allows contagion through several channels, our focus is on contagion through cross-market rebalancing. Through this channel, investors transmit idiosyncratic shocks from ..."
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Cited by 227 (6 self)
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We develop a multiple asset rational expectations model of asset prices to explain financial market contagion. Although the model allows contagion through several channels, our focus is on contagion through cross-market rebalancing. Through this channel, investors transmit idiosyncratic shocks from one market to others by adjusting their portfolios ’ exposures to shared macroeconomic risks. The pattern and severity of financial contagion depends on markets ’ sensitivities to shared macroeconomic risk factors, and on the amount of information asymmetry in each market. The model can generate contagion in the absence of news, and between markets that do not directly share macroeconomic risks.
To steal or not to steal: firm attributes, legal environment, and valuation
- Journal of Finance
, 2005
"... Data on corporate governance and disclosure practices reveal wide within-country variation that decreases with the strength of investors ’ legal protection. A simple model identifies three firm attributes related to that variation: investment oppor-tunities, external financing, and ownership structu ..."
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Cited by 219 (8 self)
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Data on corporate governance and disclosure practices reveal wide within-country variation that decreases with the strength of investors ’ legal protection. A simple model identifies three firm attributes related to that variation: investment oppor-tunities, external financing, and ownership structure. Using firm-level governance and transparency data from 27 countries, we find that all three firm attributes are related to the quality of governance and disclosure practices, and firms with higher governance and transparency rankings are valued higher in stock markets. All rela-tions are stronger in less investor-friendly countries, demonstrating that firms adapt to poor legal environments to establish efficient governance practices. PREVIOUS STUDIES SHOW THAT BETTER LEGAL PROTECTION for investors is associated with higher valuation of the stock market (La Porta et al. (2002)), higher valuation of listed firms relative to their assets or changes in investments (Wurgler (2000)), and larger listed firms in terms of their sales and assets (Kumar, Rajan, and Zingales (1999)). Furthermore, industries and firms in better legal regimes rely more on external financing to fund their growth
Ferreting out tunneling: An application to Indian business groups
- Quarterly Journal of Economics
, 2002
"... Owners of husiness groups are oflen accused of expropriating minority shareholders hy tunneling resources from firms where they have low cash flow rights to firms where they have high cash flow rights. In this paper we propose a general methodology to measure the extent of tunneling activities. The ..."
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Cited by 196 (1 self)
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Owners of husiness groups are oflen accused of expropriating minority shareholders hy tunneling resources from firms where they have low cash flow rights to firms where they have high cash flow rights. In this paper we propose a general methodology to measure the extent of tunneling activities. The methodology rests on isolating and then testing the distinctive implications of the tunneling hjfpothesis for the propagation of earnings shocks across flrms within a group. When we apply our methodology to data on Indian business groups, we flnd a signiflcant amount of tunneling, much of it occurring via nonoperating components of proflt. I.
A cross-firm analysis of the impact of corporate governance on the East Asian financial crisis
, 2001
"... 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 ..."
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Cited by 188 (4 self)
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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.
Equity ownership and firm value in emerging markets
- Journal of Financial and Quantitative Analysis
, 2003
"... 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 ..."
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Cited by 187 (16 self)
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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.
