1. Introduction and Overview. 2. Detecting Influential Observations and Outliers. 3. Detecting and Assessing Collinearity. 4. Applications and Remedies. 5. Research Issues and Directions for Extensions. Bibliography. Author Index. Subject Index.

Regression Diagnostics: Identifying Influential Data and Sources of Collinearity

Earnings Management and Investor Protection: 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

We examine the effect of corporate social responsibility (CSR) on the cost of equity capital for a large sample of US firms. Using several approaches to estimate firms’ ex ante cost of equity, we find that firms with better CSR scores exhibit cheaper equity financing. In particular, our findings suggest that investment in improving responsible employee relations, environmental policies, and product strategies contributes substantially to reducing firms’ cost of equity. Our results also show that participation in two “sin” industries, namely, tobacco and nuclear power, increases firms’ cost of equity. These findings support arguments in the literature that firms with socially responsible practices have higher valuation and lower risk.

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Does Corporate Social Responsibility Affect the Cost of Capital

Outside the United States and the United Kingdom, large corporations usually have controlling owners, who are usually very wealthy families. Pyramidal control structures, cross shareholding, and super-voting rights let such families control corporations without making a commensurate capital investment. In many countries, a few such families end up controlling considerable proportions of their countries’ economies. Three points emerge. First, at the firm level, these ownership structures, because they vest dominant control rights with families who often have little real capital invested, permit a range of agency problems and hence resource misallocation. If a few families control large swaths of an economy, such corporate governance problems can attain macroeconomic importance—affecting rates of innovation, economywide resource allocation, and economic growth. If political influence depends on what one controls, rather than what one owns, the controlling owners of pyramids have greatly amplified political influence relative to their actual wealth. This influence can distort public policy regarding property rights protection, capital markets, and other institutions. We denote this phenomenon economic entrenchment, and posit a relationship between the distribution of corporate control and institutional development that generates and preserves economic entrenchment as one possible equilibrium. The literature suggests key determinants of economic entrenchment, but has many gaps where further work exploring the political economy importance of the distribution of corporate control is needed.

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Corporate Governance, Economic Entrenchment, and Growth

Business groups in emerging markets have the potential to create either value or agency problems. Using Korean mergers, we investigate the nature of business groups in emerging markets and examine whether Korean business groups (chaebols) add value to their member firms or provide the controlling shareholders with an opportunity for wealth transfer (tunneling). We show that chaebol-affiliated firms that performed well prior to the merger realize significantly negative announcement returns. We also find that chaebol bidders who acquired poorly performing targets within the same group and/or had concentrated equity ownership by owner-managers experience significantly negative abnormal returns. These types of mergers, however, have a significantly positive effect on the market value of the portfolio of other firms in the group. Our results support the tunneling view that firms belonging to business groups pay less attention to the maximization of individual firm value and make takeover decisions that are beneficial to only controlling shareholders.

Tunneling or Value Addition? Evidence from Mergers by Korean Business Groups

We examine whether firms belonging to Korean business groups ~chaebols! benefit from acquisitions they make or whether such acquisitions provide a way for controlling shareholders to increase their wealth by increasing the value of other group firms ~tunneling!. We find that when a chaebol-affiliated firm makes an acquisition, its stock price on average falls. While minority shareholders of a chaebolaffiliated firm making an acquisition lose, the controlling shareholder of that firm on average benefits because the acquisition enhances the value of other firms in the group. This evidence is consistent with the tunneling hypothesis. RECENT EMPIRICAL EVIDENCE SUGGESTS that business groups in developing countries can facilitate efficient allocation of capital and managerial resources. Khanna and Palepu ~1997, 2000! argue that business groups in developing countries mimic the beneficial functions of market mechanisms that are present only in advanced economies. When a particular market mechanism is not well developed or accessible, a business group can add value by providing member firms with alternative means of overcoming problems. For example, when a country’s external capital market is not well developed, the operation of an internal capital market within a business group enables those firms with the best projects within the group to obtain resources. 1 However, the structure of diversified business groups may create agency problems. In most business groups, ownership is highly concentrated, and

/pdf/tunneling-or-value-added-evidence-from-mergers-by-korean-b18nq7t2ws.pdf

Tunneling or Value Added? Evidence from Mergers by Korean Business Groups

This article proposes a new approach to evaluate contagion in financial markets. Our measure of contagion captures the coincidence of extreme return shocks across countries within a region and across regions. We characterize the extent of contagion, its economic significance, and its determinants using a multinomial logistic regression model. Applying our approach to daily returns of emerging markets during the 1990s, we find that contagion is predictable and depends on regional interest rates, exchange rate changes, and conditional stock return volatility. Evidence that contagion is stronger for extreme negative returns than for extreme positive returns is mixed.

/pdf/a-new-approach-to-measuring-financial-contagion-1pqzsxc5os.pdf

A new approach to measuring financial contagion

We examine whether differences in legal protection affect the size, maturity, and inter est rate spread on loans to borrowers in 48 countries. Results show that banks respond to poor enforceability of contracts by reducing loan amounts, shortening loan maturi ties, and increasing loan spreads. These effects are both statistically significant and economically large. While stronger creditor rights reduce spreads, they do not seem to matter for loan size and maturity. Overall, we show that variation in enforceability of contracts matters a great deal more to how loans are structured and how they are priced. THE EXTENT TO WHICH PROPERTY RIGHTS are protected in a country is an impor tant consideration in determining what loans are offered to firms, how these loans are structured, and how they are priced. Property rights protection af fects a lender's incentives to monitor and its ability to recontract. Declining credit quality often results in lenders raising interest rates, demanding more collateral, shortening loan maturity, and further restricting future activities. This recontracting is costly when property rights are poorly enforced. Poor en forcement lowers recovery rates and increases the time spent in repossessing collateral following default.' In addition to enforcement, the legal rights that lenders have in reorgani zation and liquidation procedures are also important. Differences in creditor rights matter to loan contracting because laws determine who controls the in solvency process and who has rights to the property of a bankrupt firm. How do differences in creditor rights and contract enforceability affect the amount banks lend to firms, the maturity of the loans they make, and the interest rate spreads they charge? Are laws and enforcement equally important to the loan

/pdf/creditor-rights-enforcement-and-bank-loans-572cpfh9zg.pdf

Creditor Rights, Enforcement, and Bank Loans

This paper proposes a new approach to evaluate contagion in financial markets. Our measure of contagion captures the co-incidence of extreme return shocks across countries within a region and across regions that cannot be explained by linear propagation models of shocks. We characterize the extent of contagion, its economic significance, and its determinants using a multinomial logistic regression model. Applying our approach to daily returns of emerging markets during the 1990s, we find that contagion, when measured by the co-incidence within and across regions of extreme return shocks, is predictable and depends on regional interest rates, exchange rate changes, and conditional stock return volatility. Evidence that contagion is stronger for extreme negative returns than for extreme positive returns is mixed.

/pdf/a-new-approach-to-measuring-financial-contagion-3j9ytzwd2d.pdf

Kee-Hong Bae

Papers

Tunneling or Value Addition? Evidence from Mergers by Korean Business Groups

Tunneling or Value Added? Evidence from Mergers by Korean Business Groups

A new approach to measuring financial contagion

Creditor Rights, Enforcement, and Bank Loans

A New Approach to Measuring Financial Contagion