This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common law countries generally have the best, and French civil law countries the worst, legal protections of investors, with German and Scandinavian civil law countries located in the middle. We also find that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights.

Law and Finance

This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common-law countries generally have the strongest, and Frenchcivil-law countries the weakest, legal protections of investors, with German- and Scandinavian-civil-law countries located in the middle. We also find that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights.

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.

A Survey of Corporate Governance

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

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This paper documents that strategies which buy stocks that have performed well in the past and sell stocks that have performed poorly in the past generate significant positive returns over 3- to 12-month holding periods. We find that the profitability of these strategies are not due to their systematic risk or to delayed stock price reactions to common factors. However, part of the abnormal returns generated in the first year after portfolio formation dissipates in the following two years. A similar pattern of returns around the earnings announcements of past winners and losers is also documented

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Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency

Chapitre 8. Médias publics ou privés ? Les incidences sur la prospérité

The Closed End Fund Puzzle

The Conflict Between Managers and Shareholders Randall Morck, Andrei Shleifer, and Robert W. Vishny Economists since Adam Smith have been concerned that professional managers who own little equity in the companies they run have little incentive to serve their shareholders. This concern peaked during the Great Depression, rose again during the 1960s, and resurfaced in the 1980s with the advent of hostile takeovers. The recent concern has stimulated new empirical work asking whether managers indeed fail to serve their shareholders, and how financial markets discipline such managers. As a result of this work, we now know a lot more about the conflict between managers and shareholders than we did ten years ago. Is Low Ownership by Managers Indeed a Problem? Underlying the discussion of the conflict between managers and shareholders is the belief that managers who own few shares in firms they run do not maximize profits. But is this belief correct? Do the firms with lower management ownership indeed perform worse than firms with higher management ownership? For a sample of 371 Fortune 500 companies in 1980 we find that the answer is yes at low levels of management ownership.(1) Performance of firms with management ownership between 5 and 20 percent, as measured by profitability or by the ratio of market value to the replacement cost of assets, is indeed better than the performance of firms with management ownership between zero and 5 percent. This result is consistent with the standard view that ownership gives incentives for better performance. However, we also find that performance deteriorates as management ownership rises beyond 20 percent. This result suggests that managers who own controlling blocks of shares do not care so much about becoming even richer than they already are and use their complete control to pursue personal objectives that might well be different from value maximization. Managers of large public corporations typically own much less than 5 percent of their firms' total shares. The traditional concern that ownership levels are too low to guarantee top performance therefore is supported by the data. What Do Managers Do That Hurts Shareholders? Managers have many objectives that might lead them to make decisions that do not maximize value. Often they would like their firms to grow beyond what is profitable to provide opportunities for themselves and for other employees as well as to increase the scope of their control. Managers also try to reduce risk by diversifying or by having too little leverage, since they worry a great deal more about the firm's risk than do the shareholders. Some managers also buy lavish perquisites with company money, such as airplanes, or museums named after themselves, although such perquisites hardly can reduce the firm's value much. Understanding the managers' objectives helps us look for decisions that do not maximize value. For example, are acquisitions that are likely to serve the interest of managers indeed the ones that hurt the bidding firms' shareholders? Specifically, how do the stock prices of bidding firms change when they announce different types of acquisitions?(2) We find considerable support for the view that acquisitions that hurt the bidding firms' shareholders tend to serve managers. For example, bidders who buy rapidly growing firms tend to pay too much and so lose market value when they announce such acquisitions. Of course, pursuing growth is a well-known objective of managers. We also find that bidders who buy firms outside the lines of business in which they currently operate lose market value (particularly in the 1980s). Again, diversification is typically a managerial rather than a shareholder objective. Although the short-term market reaction is not always a good gauge of the wisdom of an acquisition, it is a telling fact that these short-run reactions are negative only when the managers are likely to benefit. …

The Conflict between Managers and Shareholders

We present an extrapolative model of bubbles In the model, many investors form their demand for a risky asset by weighing two signals?an average of the asset?s past price changes and the asset?s degree of overvaluation The two signals are in conflict, and investors ?waver? over time in the relative weight they put on them The model predicts that good news about fundamentals can trigger large price bubbles We analyze the patterns of cash-flow news that generate the largest bubbles, the reasons why bubbles collapse, and the frequency with which they occur The model also predicts that bubbles will be accompanied by high trading volume, and that volume increases with past asset returns We present empirical evidence that bears on some of the model?s distinctive predictions

Extrapolation and Bubbles

In the presence of aggregate demand spillovers, an imperfectly competitive firm's profit is positively related to aggregate income, which in turn rises with profits of all firms in the economy. This pecuniary externality makes a dollar of a firm's profit raise aggregate income by more than a dollar since other firms' profits also rise, and in this way gives rise to a "multiplier." Since such multipliers are ignored by firms making investment decisions, privately optimal investment decisions under uncertainty will not in general be socially optimal. Under reasonable conditions, investment is too low.

Andrei Shleifer

Papers

Chapitre 8. Médias publics ou privés ? Les incidences sur la prospérité

The Closed End Fund Puzzle

The Conflict between Managers and Shareholders

Extrapolation and Bubbles

The Efficiency of Investment in the Presence of Aggregate Demand Spillovers