https://scholar.harvard.edu/files/shleifer/files/ip_corpgov.pdf

Investor Protection and Corporate Governance

Earnings management and investor protection: an international comparison

This article disentangles the incentive and entrenchment effects of large ownership. Using data for 1,301 publicly traded corporations in eight East Asian economies, we find that firm value increases with the cash-flow ownership of the largest shareholder, consistent with a positive incentive effect. But firm value falls when the control rights of the largest shareholder exceed its cash-flow ownership, consistent with an entrenchment effect. Given that concentrated corporate ownership is predominant in most countries, these findings have relevance for corporate governance across the world.

Disentangling the Incentive and Entrenchment Effects of Large Shareholdings

We present a model of the effects of legal protection of minority shareholders and of cash-f low ownership by a controlling shareholder on the valuation of firms. We then test this model using a sample of 539 large firms from 27 wealthy economies. Consistent with the model, we find evidence of higher valuation of firms in countries with better protection of minority shareholders and in firms with higher cashf low ownership by the controlling shareholder. RECENT RESEARCH SUGGESTS THAT THE EXTENT of legal protection of investors in a country is an important determinant of the development of its financial markets. Where laws are protective of outside investors and well enforced, investors are willing to finance firms, and financial markets are both broader and more valuable. In contrast, where laws are unprotective of investors, the development of financial markets is stunted. Moreover, systematic differences among countries in the structure of laws and their enforcement, such as the historical origin of their laws, account for the differences in financial development ~La Porta et al. ~1997, 1998!!. How does better protection of outside investors ~both shareholders and creditors! promote financial market development? When their rights are better protected by the law, outside investors are willing to pay more for financial assets such as equity and debt. They pay more because they recognize that, with better legal protection, more of the firm’s profits would come back to them as interest or dividends as opposed to being expropriated by the entrepreneur who controls the firm. By limiting expropriation, the law raises the price that securities fetch in the marketplace. In turn, this enables more entrepreneurs to finance their investments externally, leading to the expansion of financial markets. Although the ultimate benefit of legal investor protection for financial development has now been well documented, the effect of protection on valuation has received less attention. In this paper, we present a theoretical and empirical analysis of this effect.

/pdf/investor-protection-and-corporate-valuation-3ztmq9vqep.pdf

Investor Protection and Corporate Valuation

https://personal.lse.ac.uk/FERREIRD/gender.pdf

Women in the boardroom and their impact on governance and performance

The authors examine patterns of media ownership in 97 countries around the world. They find that almost universally the largest media firms are controlled by the government or by private families. Government ownership is more pervasive in broadcasting than in the printed media. Government ownership is generally associated with less press freedom, fewer political and economic rights, inferior governance, and, most conspicuously, inferior social outcomes in education and health. The adverse effects of government ownership on political and economic freedom are stronger for newspapers than for television. The adverse effects of government ownership of the media do not appear to be restricted solely to instances of government monopoly. The authors present a range of evidence on the adverse consequences of state ownership of the media. State ownership of the media is often argued to be justified on behalf of the social needs of the disadvantaged. But if their findings are correct, increasing private ownership of the media--through privatization or by encouraging the entry of privately owned media--can advance a variety of political and economic goals, especially those of meeting the social needs of the poor.

Who Owns the Media

This paper measures corporate control benefits - the value that dominant vote-holders expropriate from a controlled company to the detriment of other shareholders. Control benefits are extracted from the total value of the votes in the control block, based on a baseline control contest model in the case of a dual-class firm. The study is based on a sample of 661 dual-class firms in 18 countries, using data for 1997. The determinants of control benefits are then explored in a consistent fashion across countries. We use measures of the general strictness of the legal environment, an index of takeover regulations, and a measure of power-concentrating Corporate Charter provisions, the probability of a control contest, and costs of holding the control block. We control for differences in the security value of the share classes, e.g. differences in dividend payments and liquidity. The value of control, or equivalently the total value of votes in the control block, ranges from about 0% in Denmark to 50% of firm market value in Mexico. Legal environment variables explain 75% of the cross-country variation in the value of control benefits.

https://papers.ssrn.com/sol3/Delivery.cfm?delivery_id=237809

The Value of Corporate Votes and Control Benefits: A Cross-country Analysis

We examine the evidence on expropriation of minority shareholders in publicly-traded companies in East Asia, by studying separately the effects of cash-flow and voting rights of the controlling shareholder on market valuation. Higher cash-flow rights are associated with higher valuation, consistent with the findings of Jensen and Meckling (1976) for the effects of concentration of management control in the United States. In contrast, concentration of control rights has a negative effect on firm value, consistent with Morck et al. (1988) and Shleifer and Vishny (1997). Separation of voting from cash-flow rightsthrough the use of dual-class shares, pyramiding, and cross-holdingsis especially associated with lower market values. We conclude that the risk of expropriation is the major principal-agent problem for public corporations in East Asia. 1 World Bank, World Bank and CEPR, Hong Kong University of Science and Technology, and the Chinese University of Hong Kong, respectively. Joseph P.H. Fan and Larry H. P. Lang gratefully acknowledge the Hong Kong UGC Earmarked grant for research support. The opinions expressed do not necessarily reflect those of the World Bank. We thank Lucian Bebchuk, Caroline Freund, Ed Glaeser, Tarun Khanna, Tatiana Nenova, Rene Stulz, Raghuram Rajan, two anonymous referees, seminar participants at the World Bank, the International Monetary Fund, the Federation of Thai Industries in Bangkok, the Korean Development Institute, the Korean Finance Institute, Vanderbilt University, University of Illinois, the 1999 NBER Summer Conference in Corporate Finance, and especially Andrei Shleifer for helpful comments. ∧ Corresponding author: tel. 202 473 4748, EM:sdjankov@worldbank.org

Expropriation of Minority Shareholders in East Asia

Corporate financing patterns around the world reflect countries' institutional environments. Weaknesses in the corporate sector have increasingly been cited as important factors in financial crises in both emerging markets and industrial countries. Analysts have pointed to weak corporate performance and risky financing patterns as major causes of the East Asian financial crisis. And some have argued that company balance sheet problems may also have played a role, independent of macroeconomic or other weaknesses, including poor corporate sector performance. But little is known about the empirical importance of firm financing choices in predicting and explaining financial instability. Firm financing patterns have long been studied by the corporate finance literature. Financing patterns have traditionally been analyzed in the Modigliani-Miller framework, expanded to incorporate taxes and bankruptcy costs. More recently, asymmetric information issues have drawn attention to agency costs and their impact on firm financing choices. There is also an important literature relating financing patterns to firm performance and governance. Several recent studies have focused on identifying systematic cross-country differences in firm financing patterns - and the effects of these differences on financial sector development and economic growth. They have also examined the causes of different financing patterns, particularly countries' legal and institutional environments. The literature has devoted little attention to corporate sector risk characteristics, however, aside from leverage and debt maturity considerations. Even these measures have been the subject of few empirical investigations, mainly because of a paucity of data on corporate sectors around the world. Building on data that have recently become available, Claessens, Djankov, and Nenova try to fill this gap in the literature and shed light on the risk characteristics of corporate sectors around the world. They investigate how corporate sectors' financial and operating structures relate to the institutional environment in which they operate, using data for more than 11,000 firms in 46 countries. They show that: - The origins of a country's laws, the strength of its equity and creditor rights, and the nature of its financial system can account for the degree of corporate risk-taking. - In particular, corporations in common law countries and market-based financial systems have less risky financing patterns. - Stronger protection of equity and creditor rights is also associated with less financial risk. This paper - a product of the Financial Sector Strategy and Policy Group, Financial Sector Vice Presidency - is part of a larger effort in the Bank to study the determinants of the riskiness of countries' corporate and financial systems.

https://papers.ssrn.com/sol3/Delivery.cfm/1024.pdf?abstractid=629121&mirid=1&type=2

Corporate Risk around the World

This paper shows that firm control value for Brazilian listed companies is directly affected by changes in the legal protection for minority shareholders, on a sample of dual-class firms. Control value increases more than twice in the second half of 1997 in response to Law 9457/1997 which weakens minority shareholder protection. Control values drop to pre-1997 levels in the beginning of 1999 in response to CVM Instruction 299/1999, which reinstates some of the minority protection rules scrapped by the previous legal change. The effect of legal changes on control value is robust, and is not due to underlying changes in the intensity of acquisition activity, or the economic downturn in the late 1990s. The behavior of voting and non-voting share prices during the period are consistent with the hypotheses that (1) majority shareholders share some of the control benefits with minority vote-holders, and (2) majority shareholders increase expropriation activity during the period, especially as concerns the value of non-voting equity.

Tatiana Nenova

Papers

Who Owns the Media

The Value of Corporate Votes and Control Benefits: A Cross-country Analysis

Expropriation of Minority Shareholders in East Asia

Corporate Risk around the World

Control Values and Changes in Corporate Law in Brazil