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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We use data on ownership structures of large corporations in 27 wealthy economies to identify the ultimate controlling shareholders of these firms. We find that, except in economies with very good shareholder protection, relatively few of these firms are widely held, in contrast to Berle and Means’s image of ownership of the modern corporation. Rather, these firms are typically controlled by families or the State. Equity control by financial institutions is far less common. The controlling shareholders typically have power over firms significantly in excess of their cash f low rights, primarily through the use of pyramids and participation in management.

/pdf/corporate-ownership-around-the-world-1zjebm7ik6.pdf

Corporate Ownership Around the World

https://dash.harvard.edu/bitstream/handle/1/29407535/w2055%202.pdf?sequence=2

Management Ownership and Market Valuation: An Empirical Analysis

http://people.stern.nyu.edu/jmei/rsquare.pdf

The information content of stock markets: why do emerging markets have synchronous stock price movements?

This paper documents for a sample of 327 US acquisitions between 1975 and 1987 three forces that systematically reduce the announcement day return of bidding firms. The returns to bidding shareholders are lower when their firm diversifies, when it buys a rapidly growing target , and when the performance of its managers has been poor before the acquisition. These results are consistent with the proposition that managerial rather than shareholders' objectives drive bad acquisitions.

https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=979724

Do Managerial Objectives Drive Bad Acquisitions

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.

/pdf/corporate-governance-economic-entrenchment-and-growth-4e2ab431gn.pdf

Corporate Governance, Economic Entrenchment, and Growth

In a sample of 326 US acquisitions between 1975 and 1987, three types of acquisitions have systematically lower and predominantly negative announcement period returns to bidding firms. The returns to bidding shareholders are lower when their firm diversifies, when it buys a rapidly growing target, and when its managers performed poorly before the acquisition. These results suggest that managerial objectives may drive acquisitions that reduce bidding firms' values. THERE IS NOW CONSIDERABLE evidence that making acquisitions is a mixed blessing for shareholders of acquiring companies. Average returns to bidding shareholders from making acquisitions are at best slightly positive, and significantly negative in some studies (Bradley, Desai and Kim 1988, Roll 1986). Some have suggested that negative bidder returns are purely a consequence of stock financing of acquisitions that leads to a release of adverse information about acquiring firms (Asquith, Bruner, and Mullins 1987). In this case, negative bidder returns are not evidence of a bad investment. An alternative interpretation of poor bidder performance is that bidding firms overpay for the targets they acquire. In this paper, we present evidence that some types of bidders systematically overpay. There are at least two reasons why bidding firms' managers might overpay in acquisitions, thereby truly reducing the wealth of their shareholders as opposed to just revealing bad news about their firm. According to Roll (1986), managers of bidding firms are infected by hubris, and so overpay for targets because they overestimate their own ability to run them. Another view of overpayment is that managers of bidding firms pursue personal objectives other than maximization of shareholder value. To the extent that acquisitions serve these objectives, managers of bidding firms are willing to pay more for targets than they are worth to bidding firms' shareholders. Our view is that when a firm makes an acquisition or any other investment, its manager considers both his personal benefits from the investment and the consequences for the market value of the firm. Some investments are particularly attractive from the former perspective: they contribute to long term growth of the firm, enable the manager to diversify the risk on his human capital, or

/pdf/do-managerial-objectives-drive-bad-acquisitions-2fqfwvxq87.pdf

Randall Morck

Papers

Management Ownership and Market Valuation: An Empirical Analysis

The information content of stock markets: why do emerging markets have synchronous stock price movements?

Do Managerial Objectives Drive Bad Acquisitions

Corporate Governance, Economic Entrenchment, and Growth

Do Managerial Objectives Drive Bad Acquisitions