In both corporate finance and asset pricing empirical work, researchers are often confronted with panel data. In these data sets, the residuals may be correlated across firms and across time, and OLS standard errors can be biased. Historically, the two literatures have used different solutions to this problem. Corporate finance has relied on clustered standard errors, while asset pricing has used the Fama-MacBeth procedure to estimate standard errors. This paper examines the different methods used in the literature and explains when the different methods yield the same (and correct) standard errors and when they diverge. The intent is to provide intuition as to why the different approaches sometimes give different answers and give researchers guidance for their use.

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Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches

Earnings management and investor protection: an international comparison

In the last decade, economists have produced a considerable body of research suggesting that the historical origin of a country's laws is highly correlated with a broad range of its legal rules and regulations, as well as with economic outcomes. We summarize this evidence and attempt a unified interpretation. We also address several objections to the empirical claim that legal origins matter. Finally, we assess the implications of this research for economic reform.

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The Economic Consequences of Legal Origins

We estimate private benefits of control in 39 countries using 393 controlling blocks sales. On average the value of control is 14 percent, but in some countries can be as low as ‐4 percent, in others as high a +65 percent. As predicted by theory, higher private benefits of control are associated with less developed capital markets, more concentrated ownership, and more privately negotiated privatizations. We also analyze what institutions are most important in curbing private benefits. We find evidence for both legal and extra-legal mechanisms. In a multivariate analysis, however, media pressure and tax enforcement seem to be the dominating factors. THE BENEFITS OF CONTROL OVER corporate resources play a central role in modern thinking about finance and corporate governance. From a modeling device (Grossman and Hart (1980)) the idea of private benefits of control has become a centerpiece of the recent literature in corporate finance, both theoretical and empirical. In fact, the main focus of the literature on investor protection and its role in the development of financial markets (La Porta, Lopez-de-Salines, and Shleifer (2000)) is on the amount of private benefits that controlling shareholders extract from companies they run. In spite of the importance of this concept, there are remarkably few estimates of how big these private benefits are, even fewer attempts to document empirically what determines their size, and no direct evidence of their impact on financial development. All of the evidence on this latter point is indirect, based on the (reasonable) assumption that better protection of minority shareholders is correlated with higher financial development via its curbing of private benefits of control (La Porta et al. (1997)). The lack of evidence is no accident. By their very nature, private benefits of control are difficult to observe and even more difficult to quantify in a reliable

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Private Benefits of Control: An International Comparison

This paper examines the economic consequences of mandatory International Financial Reporting Standards (IFRS) reporting around the world. We analyze the effects on market liquidity, cost of capital, and Tobin's q in 26 countries using a large sample of firms that are mandated to adopt IFRS. We find that, on average, market liquidity increases around the time of the introduction of IFRS. We also document a decrease in firms' cost of capital and an increase in equity valuations, but only if we account for the possibility that the effects occur prior to the official adoption date. Partitioning our sample, we find that the capital-market benefits occur only in countries where firms have incentives to be transparent and where legal enforcement is strong, underscoring the central importance of firms' reporting incentives and countries' enforcement regimes for the quality of financial reporting. Comparing mandatory and voluntary adopters, we find that the capital market effects are most pronounced for firms that voluntarily switch to IFRS, both in the year when they switch and again later, when IFRS become mandatory. While the former result is likely due to self-selection, the latter result cautions us to attribute the capital-market effects for mandatory adopters solely or even primarily to the IFRS mandate. Many adopting countries make concurrent efforts to improve enforcement and governance regimes, which likely play into our findings. Consistent with this interpretation, the estimated liquidity improvements are smaller in magnitude when we analyze them on a monthly basis, which is more likely to isolate IFRS reporting effects.

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Mandatory IFRS Reporting around the World: Early Evidence on the Economic Consequences

https://www.nber.org/system/files/working_papers/w8538/w8538.pdf

Why are Foreign Firms Listed in the U.S. Worth More

https://www.nber.org/system/files/working_papers/w10726/w10726.pdf

Why do countries matter so much for corporate governance

At the end of 1997, the foreign companies listed in the U.S. have a Tobin's q ratio that exceeds by 16.5% the q ratio of firms from the same country that are not listed in the U.S. The valuation difference is statistically significant and largest for exchange-listed firms, where it reaches 37%. The difference persists even after controlling for a number of firm and country characteristics. We propose a theory that explains this valuation difference. We hypothesize that controlling shareholders of firms listed in the U.S. cannot extract as many private benefits from control compared to controlling shareholders of firms not listed in the U.S., but that their firms are better able to take advantage of growth opportunities. Consequently, the cross-listed firms should be those firms where the interests of the controlling shareholder are better aligned with the interests of other shareholders. The growth opportunities of cross-listed firms will be more highly valued than those of firms not listed in the U.S. both because cross-listed firms are better able to take advantage of these opportunities and because a smaller fraction of the cash flow of these firms is expropriated by controlling shareholders. We find that our theory explains the greater valuation of cross-listed firms. In particular, we find expected sales growth is valued more highly for firms listed in the U.S. and that this effect is greater for firms from countries with poorer investor rights.

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U.S. cross-listings and the private benefits of control: evidence from dual-class firms

This paper develops and tests a model of how country characteristics, such as legal protections for minority investors and the level of economic and financial development, influence firms' costs and benefits in implementing measures to improve their own governance and transparency. We show that the incentives to adopt better governance mechanisms at the firm level increase with a country's financial and economic development. Further, these incentives increase or decrease with a country's investor protection depending on whether firm-level governance mechanisms and country-level investor protection are substitutes or complements. When economic and financial development is poor, the incentives to improve firm-level governance are low because outside finance is expensive and the adoption of better governance mechanisms is expensive. Using international corporate governance and transparency ratings for a large sample of firms from around the world, we find evidence consistent with this prediction. Our main empirical result is that country characteristics explain much more of the variance in governance ratings ranging from 39% to 73%) than observable firm characteristics (ranging from 4% to 22%). Further, we show that firm characteristics explain almost none of the variation in governance ratings in less-developed countries and that access to global capital markets sharpens firms'incentives for better governance.

/pdf/why-do-countries-matter-so-much-for-corporate-governance-508xw4wcyu.pdf

Craig Doidge

Papers

Why are Foreign Firms Listed in the U.S. Worth More

Why do countries matter so much for corporate governance

Why are Foreign Firms Listed in the U.S. Worth More

U.S. cross-listings and the private benefits of control: evidence from dual-class firms

Why Do Countries Matter so Much for Corporate Governance