Showing papers by "Andrei Shleifer published in 1997"
TL;DR: Corporate Governance as mentioned in this paper surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world, and shows that most advanced market economies have solved the problem of corporate governance at least reasonably well, in that they have assured the flows of enormous amounts of capital to firms, and actual repatriation of profits to the providers of finance.
Abstract: This article surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world. CORPORATE GOVERNANCE DEALS WITH the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment. How do the suppliers of finance get managers to return some of the profits to them? How do they make sure that managers do not steal the capital they supply or invest it in bad projects? How do suppliers of finance control managers? At first glance, it is not entirely obvious why the suppliers of capital get anything back. After all, they part with their money, and have little to contribute to the enterprise afterward. The professional managers or entrepreneurs who run the firms might as well abscond with the money. Although they sometimes do, usually they do not. Most advanced market economies have solved the problem of corporate governance at least reasonably well, in that they have assured the flows of enormous amounts of capital to firms, and actual repatriation of profits to the providers of finance. But this does not imply that they have solved the corporate governance problem perfectly, or that the corporate governance mechanisms cannot be improved. In fact, the subject of corporate governance is of enormous practical impor
10,954 citations
TL;DR: The authors showed that countries with poorer investor protections, measured by both the character of legal rules and the quality of law enforcement, have smaller and narrower capital markets than those with stronger investor protections.
Abstract: Using a sample of 49 countries, we show that countries with poorer investor protections, measured by both the character of legal rules and the quality of law enforcement, have smaller and narrower capital markets. These findings apply to both equity and debt markets. In particular, French civil law countries have both the weakest investor protections and the least developed capital markets, especially as compared to common law countries.
10,005 citations
TL;DR: In this paper, the authors argue that the textbook description of arbitrage does not describe realistic arbitrage trades, and moreover the discrepancies become particularly important when arbitrageurs manage other people's money.
Abstract: Textbook arbitrage in financial markets requires no capital and entails no risk. In reality, almost all arbitrage requires capital, and is typically risky. Moreover, professional arbitrage is conducted by a relatively small number of highly specialized investors using other people's capital. Such professional arbitrage has a number of interesting implications for security pricing, including the possibility that arbitrage becomes ineffective in extreme circumstances, when prices diverge far from fundamental values. The model also suggests where anomalies in financial markets are likely to appear, and why arbitrage fails to eliminate them. ONE OF THE FUNDAMENTAL concepts in finance is arbitrage, defined as "the simultaneous purchase and sale of the same, or essentially similar, security in two different markets for advantageously different prices" (Sharpe and Alexander (1990)). Theoretically speaking, such arbitrage requires no capital and entails no risk. When an arbitrageur buys a cheaper security and sells a more expensive one, his net future cash flows are zero for sure, and he gets his profits up front. Arbitrage plays a critical role in the analysis of securities markets, because its effect is to bring prices to fundamental values and to keep markets efficient. For this reason, it is extremely important to understand how well this textbook description of arbitrage approximates reality. This article argues that the textbook description does not describe realistic arbitrage trades, and, moreover, the discrepancies become particularly important when arbitrageurs manage other people's money. Even the simplest realistic arbitrages are more complex than the textbook definition suggests. Consider the simple case of two Bund futures contracts to deliver DM250,000 in face value of German bonds at time T, one traded in London on LIFFE and the other in Frankfurt on DTB. Suppose for the moment, counter factually, that these contracts are exactly the same. Suppose finally that at some point in time t the first contract sells for DM240,000 and the second for DM245,000. An arbitrageur in this situation would sell a futures contract in Frankfurt and buy one in London, recognizing that at time T he is perfectly hedged. To do so, at time t, he would have to put up some good faith money, namely DM3,000 in London and DM3,500 in Frankfurt, leading to a
3,358 citations
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TL;DR: The authors showed that countries with poorer investor protections, measured by both the character of legal rules and the quality of law enforcement, have smaller and narrower capital markets than those with stronger investor protections.
Abstract: Using a sample of 49 countries, we show that countries with poorer investor protections, measured by both the character of legal rules and the quality of law enforcement, have smaller and narrower capital markets. These findings apply to both equity and debt markets. In particular, French civil law countries have both the weakest investor protections and the least developed capital markets, especially as compared to common law countries.
1,370 citations
TL;DR: In this article, the authors developed a model in which the provider can invest in improving the quality of service or reducing cost, and applied it to understand the costs and benefits of prison privatization, and found that if contracts are incomplete, the private provider has a stronger incentive to engage in both quality improvement and cost reduction than a government employee.
Abstract: When should a government provide a service in-house, and when should it contract out provision? We develop a model in which the provider can invest in improving the quality of service or reducing cost. If contracts are incomplete, the private provider has a stronger incentive to engage in both quality improvement and cost reduction than a government employee has. However, the private contractor's incentive to engage in cost reduction is typically too strong because he ignores the adverse effect on noncontractible quality. The model is applied to understanding the costs and benefits of prison privatization.
1,366 citations
01 Jan 1997
TL;DR: The authors of as mentioned in this paper show that the countries that have had the healthiest public finances, the smallest unofficial economies, and the best records of growth are also the countries with the highest political control of economic life.
Abstract: THE ECONOMIES of eastern Europe and the former Soviet Union (FSU) escaped communism with a heavy burden. When central planning collapsed, they continued to suffer from widespread political control of economic activity. Such politicization had to be reduced significantly for small business formation and growth to begin. In recent years, some of these countries have succeeded much better than others in replacing political control with functioning market institutions. As this paper shows, they are also the countries that have had the healthiest public finances, the smallest unofficial economies, and the best records of growth. The politicization of economic life can usefully be thought of as the exercise by politicians of control rights over business. ' Such rights may include regulatory powers over privatized and private firms, the ability to regulate and restrict entry, control over the use of land and real estate that private businesses occupy, the determination and collection of taxes
1,133 citations
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TL;DR: The authors presented a parsimonious model of investor sentiment that is, of how investors form beliefs that is consistent with the empirical findings of underreaction and overreaction of stock prices to news.
Abstract: Recent empirical research in finance has uncovered two families of pervasive regularities: underreaction of stock prices to news such as earnings announcements; and overreaction of stock prices to a series of good or bad news. In this paper, we present a parsimonious model of investor sentiment that is, of how investors form beliefs that is consistent with the empirical findings. The model is based on psychological evidence and produces both underreaction and overreaction for a wide range of parameter values.
1,037 citations
TL;DR: In this paper, the authors examine the hypothesis that the superior return to so-called value stocks is the result of expectational errors made by investors and find that a significant portion of the return difference between value and glamour stocks is attributable to earnings surprises that are systematically more positive for value stocks.
Abstract: This article examines the hypothesis that the superior return to so-called value stocks is the result of expectational errors made by investors. We study stock price reactions around earnings announcements for value and glamour stocks over a 5-year period after portfolio formation. The announcement returns suggest that a significant portion of the return difference between value and glamour stocks is attributable to earnings surprises that are systematically more positive for value stocks. The evidence is inconsistent with a risk-based explanation for the return differential. MOST FINANCE RESEARCHERS AGREE that simple value strategies based on such ratios as book-to-market, earnings-to-price and cash flow-to-price have produced superior returns over a long period of time.' Interpreting these superior returns, however, has been more controversial. On one side, Fama-French (1992) argue that these superior returns represent compensation for risk along the lines of the Merton (1973) intertemporal capital asset pricing model (ICAPM) where portfolios formed on book-to-market ratios are interpreted as mimicking portfolios whose returns are correlated with relevant state variables representing consumption or production opportunities. On the other side, Lakonishok, Shleifer, and Vishny (LSV, 1994) contend that there is little evidence that high book-to-market and high cash-flow-to-price stocks are riskier based on conventional notions of systematic risk. LSV argue instead that value stocks have been underpriced relative to their risk and return characteristics for various behavioral and institutional reasons. A specific behavioral explanation pursued in more depth by LSV (1994) is that the superior return on value stocks is due to expectational errors made by investors. In particular, investors tend to extrapolate past growth rates too far into the future. Evidence going back to Little (1962) suggests that company
669 citations
TL;DR: In this article, a survey of 105 shop owners in Moscow and Warsaw showed that the reliance on private protection, as well as the burden of regulation and corruption, are much greater in Moscow than in Warsaw.
Abstract: Evidence from a survey of 105 shop-owners in Moscow and Warsaw shows that the reliance on private protection, as well as the burden of regulation and corruption, are much greater in Moscow. The evidence suggests that the `invisible hand' model of government better fits the Warsaw local government, and the`grabbing hand' model is more appropriate for Moscow. The evidence implies that the singular focus on the speed of economic reforms to understand the success of transition is misplaced, and that the quality of government may be as essential.
596 citations
TL;DR: The authors argue that the lack of turnover of old communist politicians, and the creation of inappropriate electoral and fiscal incentives for these politicians, may account for the poor performance of the Russian government, and suggest some strategies for improving the situation.
355 citations
TL;DR: In the United States, the two principal modes of producing local government services are in-house provision by government employees and contracting out to private suppliers, also known as privatization.
Abstract: In the United States, the two principal modes of producing local government services are in-house provision by government employees and contracting out to private suppliers, also known as privatization. We examine empirically how U.S. counties choose the mode of providing services. The evidence indicates that state clean-government laws and state laws restricting county spending encourage privatization, whereas strong public unions discourage it. This points to the important roles played by political patronage and taxpayer resistance to government spending in the privatization decision.
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TL;DR: In this article, the authors present a model of trade in which similar countries trade more with each other than with very different countries, and explain why high human capital countries have a comparative advantage at producing high quality goods, but are also rich enough to want to consume high quality.
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TL;DR: This article showed that countries with poorer investor protections, measured by both the character of legal rules and the quality of law enforcement, have smaller and narrower capital markets than those with stronger investor protections.
Abstract: Using a sample of 49 countries, we show that countries with poorer investor protections, measured by both the character of legal rules and the quality of law enforcement, have smaller and narrower capital markets. These findings apply to both equity and debt markets. In particular, French civil law countries have both the weakest investor protections and the least developed capital markets, especially as compared to common law countries.
TL;DR: The economies of Eastern Europe and the former Soviet Union (FSU) escaped communism with a heavy burden as mentioned in this paper, reflected in massive subsidization of state firms, heavy regulation of entry and operations of private firms, as well as punitive taxation by the government and - separately - by its agents (corruption).
Abstract: The economies of Eastern Europe and the former Soviet Union (FSU) escaped communism with a heavy burden. Despite the collapse of central planning, these economies continued to suffer from heavy political control of economic activity, reflected in massive subsidization of state firms, heavy regulation of entry and operations of private firms, as well as punitive taxation by the government and - separately - by its agents (corruption). Such politicization of the economy had to be reduced significantly for small business formation and growth to begin. In recent years, some countries have succeeded in depoliticizing their economies much better than others. As this paper shows, these are the countries that also had the best growth records.
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TL;DR: The economies of Eastern Europe and the former Soviet Union (FSU) escaped communism with a heavy burden as discussed by the authors, reflected in massive subsidization of state firms, heavy regulation of entry and operations of private firms, as well as punitive taxation by the government and - separately - by its agents (corruption).
Abstract: The economies of Eastern Europe and the former Soviet Union (FSU) escaped communism with a heavy burden. Despite the collapse of central planning, these economies continued to suffer from heavy political control of economic activity, reflected in massive subsidization of state firms, heavy regulation of entry and operations of private firms, as well as punitive taxation by the government and - separately - by its agents (corruption). Such politicization of the economy had to be reduced significantly for small business formation and growth to begin. In recent years, some countries have succeeded in depoliticizing their economies much better than others. As this paper shows, these are the countries that also had the best growth records.
Journal Article•
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TL;DR: This article presented a parsimonious model of investor sentiment that is, of how investors form beliefs that is consistent with the empirical findings of underreaction and overreaction of stock prices to news.
Abstract: Recent empirical research in finance has uncovered two families of pervasive regularities: underreaction of stock prices to news such as earnings announcements; and overreaction of stock prices to a series of good or bad news. In this paper, we present a parsimonious model of investor sentiment that is, of how investors form beliefs that is consistent with the empirical findings. The model is based on psychological evidence and produces both underreaction and overreaction for a wide range of parameter values.