Existing studies establish a strong cross-country correlation between income and democracy but do not control for factors that simultaneously affect both variables. We show that controlling for such factors by including country fixed effects removes the statistical association between income per capita and vari- ous measures of democracy. We present instrumental-variables estimates that also show no causal effect of income on democracy. The cross-country corre - lation between income and democracy reflects a positive correlation between changes in income and democracy over the past 500 years. This pattern is con - sistent with the idea that societies embarked on divergent political-economic development paths at certain critical junctures. (JEL D7�, E�1)

Income and Democracy

We survey institutional investors to better understand their role in the corporate governance of firms. Consistent with a number of theories, we document widespread behind-the-scenes intervention as well as governance-motivated exit. These governance mechanisms are viewed as complementary devices, with intervention typically occurring prior to a potential exit. We further find that long-term investors and investors that are less concerned about stock liquidity intervene more intensively. Finally, we find that most investors use proxy advisors and believe that the information provided by such advisors improves their own voting decisions.

/pdf/behind-the-scenes-the-corporate-governance-preferences-of-5ijmvrsg04.pdf

Behind the scenes: the corporate governance preferences of institutional investors

Value Maximization, Stakeholder Theory, and the Corporate Objective Function

Given the cross-sectional and temporal variation in their liquidity, emerging equity markets provide an ideal setting to examine the impact of liquidity on expected returns. Our main liquidity measure is a transformation of the proportion of zero daily firm returns, averaged over the month. We find that it significantly predicts future returns, whereas alternative measures such as turnover do not. Consistent with liquidity being a priced factor, unexpected liquidity shocks are positively correlated with contemporaneous return shocks and negatively correlated with shocks to the dividend yield. We consider a simple asset-pricing model with liquidity and the market portfolio as risk factors and transaction costs that are proportional to liquidity. The model differentiates between integrated and segmented countries and time periods. Our results suggest that local market liquidity is an important driver of expected returns in emerging markets, and that the liberalization process has not fully eliminated its impact.

/pdf/liquidity-and-expected-returns-lessons-from-emerging-markets-3cv5ae1ln8.pdf

Liquidity and Expected Returns: Lessons From Emerging Markets

Propensity score matching (PSM) has become a popular technique for estimating average treatment effects (ATEs) in accounting research. In this study, we discuss the usefulness and limitations of PSM relative to more traditional multiple regression (MR) analysis. We discuss several PSM design choices and review the use of PSM in 86 articles in leading accounting journals from 2008–2014. We document a significant increase in the use of PSM from zero studies in 2008 to 26 studies in 2014. However, studies often oversell the capabilities of PSM, fail to disclose important design choices, and/or implement PSM in a theoretically inconsistent manner. We then empirically illustrate complications associated with PSM in three accounting research settings. We first demonstrate that when the treatment is not binary, PSM tends to confine analyses to a subsample of observations where the effect size is likely to be smallest. We also show that seemingly innocuous design choices greatly influence sample composi...

Propensity Score Matching in Accounting Research

Do institutional investors drive corporate social responsibility? International evidence

This paper explores both the role of institutional investors in firms’ corporate social responsibility choices and the impact of social norms on these investors. Using a decade of firm-level environmental and social (E&S) performance data from 41 countries, we find that institutional ownership is positively associated with firm-level E&S performance, with multiple tests suggesting a causal relationship. The impact of institutional investors on firms’ E&S commitments is greatest for foreign investors based in countries with strong social norms regarding E&S, which are predominantly European. Tests that segment by investor type show that these social norm effects hold even for institutional investor types that are subject to market discipline, such as investment advisors. Overall, our results indicate that institutional investors transplant their social norms into the firms they hold around the world.

/pdf/do-institutional-investors-drive-corporate-social-2f1pw8nb9e.pdf

Do Institutional Investors Drive Corporate Social Responsibility? International Evidence

We examine the impact of country-level political rights on the cost of debt for corporate bonds issued by firms incorporated in 39 countries. Similar to, but separate from, the relation for creditor rights, greater political rights are associated with lower yield spreads. A one standard deviation increase in political rights is associated with an 18.6% decline in bond spreads. We find evidence that political and legal institutions are substitutes; marginal improvements in political rights produce greater reductions in the cost of debt for firms from countries with weaker creditor rights. We examine potential factors through which political rights may affect the cost of debt and find that greater freedom of the press provides an important channel for reducing bond risks. Moreover, debt of firms with cross-listed equity trades at a premium in U.S. markets, but this relation appears to be more consistent with improved visibility than with bonding effects.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1406430_code291846.pdf?abstractid=1091008&mirid=1

Political Rights and the Cost of Debt

Political rights and the cost of debt

Using a sample of non-U.S. firms from 43 countries, we investigate whether laws and regulations as well as votes cast by U.S. institutional investors are consistent with an effective shareholder voting process. We find that laws and regulations allow for meaningful votes to be cast as shareholder voting is both mandatory and binding for important elections. For votes cast, we find there is greater dissent voting when investors fear expropriation. Further, greater dissent voting is associated with higher director turnover and more M&A withdrawals. Our results suggest that shareholder voting is an effective mechanism for exercising governance around the world.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID2691711_code1956965.pdf?abstractid=1702546&mirid=1

Lukas Roth

Papers

Do institutional investors drive corporate social responsibility? International evidence

Do Institutional Investors Drive Corporate Social Responsibility? International Evidence

Political Rights and the Cost of Debt

Political rights and the cost of debt

Shareholder Voting and Corporate Governance Around the World