Research on Protecting Minority Investors

Doing Business considers the following list of papers on regulations affecting the protection of minority investors. Some papers—denoted with an asterisk (*)—use Doing Business data for their empirical analysis. If we've missed any important research, please let us know.


  • Changes to the ownership and control of East Asian corporations between 1996 and 2008: the primacy of politics

    Author(s) : Carney, Richard W; Child, Travers Barclay Journal : Journal of Financial Economics, Volume 107, Issue 2, Pages 494-513, February 2013 Abstract : We investigate changes to the ownership and control of East Asia's largest companies in 1996 and 2008. Newly compiled data for 1386 publicly traded companies at the end of 2008 are supplemented with existing data on 1,606 publicly traded companies at the end of 1996. Two main findings stand out. First, where status quo political arrangements persist, preexisting ownership arrangements go unchanged or become more entrenched. Where major political changes occurred, corporate ownership would undergo substantial changes. Second, the state has become increasingly important as an owner of domestic firms as well as foreign firms.

  • Corporate governance and risk-taking

    Author(s) : Kose John, Lubomir Litov, and Bernard Yeung Journal : The Journal of Finance, Volume 63 Issue 4,Pages1679-1728, 2008 Abstract : Better investor protection could lead corporations to undertake riskier but value-enhancing investments. For example, better investor protection mitigates the taking of private benefits leading to excess risk-avoidance. Further, in better investor protection environments, stakeholders like creditors, labor groups, and the government are less effective in reducing corporate risk-taking for their self-interest. However, arguments can also be made for a negative relationship between investor protection and risk-taking. Using a cross-country panel and a U.S.-only sample, we find that corporate risk-taking and firm growth rates are positively related to the quality of investor protection.

  • Do controlling shareholders' expropriation incentives imply a link between corporate governance and firm value? theory and evidence

    Author(s) : Bae, Kee-Hong; Baek, Jae-Seung; Kang, Jun-Koo; et al. Journal : Journal of Financial Economics, Volume 105, Issue 2, Pages 415-435, August 2012 Abstract : We develop and test a model that investigates how controlling shareholders' expropriation incentives affect firm values during crisis and subsequent recovery periods. Consistent with the prediction of our model, we find that, during the 1997 Asian financial crisis, Asian firms with weaker corporate governance experience a larger drop in their share values but, during the post-crisis recovery period, such firms experience a larger rebound in their share values. We also find consistent evidence for Latin American firms during the 2001 Argentine economic crisis. Our results support the view that controlling shareholders' expropriation incentives imply a link between corporate governance and firm value.

  • Financial contracts and the political economy of investor protection

    Author(s) : Sevcik, Pavel Journal : America Economic Journal - Macroeconomics, Volume 4, Issue 4, Pages 163-197, October 2012 Abstract : This paper studies the joint dynamics of investor protection and economic development in a political economy model with capital accumulation and occupational choice. Less investor protection implies higher costs of external financing for entrepreneurs. This excludes poorer agents from entrepreneurship, increasing the profits of the remaining entrepreneurs. The main determinants of investor protection policy preferences are the agent's net worth and the expected return from entrepreneurship. When the policy is chosen by the simple majority rule, the model generates several implications consistent with the observed variation of investor protection over time and across countries.

  • Firm value in crisis: effects of firm-level transparency and country-level institutions

    Author(s) : Ruben Enikolopov, Maria Petrova , Sergey Stepanov Journal : Journal of Banking & Finance Abstract : Recent empirical research suggests that country-level and firm-level governance institutions are substitutes with respect to their effect on firm value. In this paper we demonstrate that during a crisis these institutions may actually become complements. Specifically, we find that the decline in companies? valuation during the financial crisis of 2007?2009 was more sensitive to firm-level transparency in countries with stronger investor protection. We propose a theoretical model that reconciles our findings with the results in the literature. In our model, during ?normal times? strong firm-level governance is crucial to attract outside financing in countries with weak investor protection, but is less important in countries with good investor protection. During a crisis, however, investment opportunities decline even in countries with strong investor protection, and, as a result, relative importance of firm-level governance increases in such places.

  • Freedom of choice between unitary and two-tier boards: an empirical analysis

    Author(s) : François Belot, Edith Ginglinger, Myron B. Slovin, Marie E. Sushka Journal : Journal of Financial Economics Abstract : We examine board structure in France, which since 1966 has allowed firms the freedom to choose between unitary and two-tier boards. We analyze how this choice relates to characteristics of the firm and its environment. Firms with severe asymmetric information tend to opt for unitary boards; firms with a potential for private benefits extraction tend to adopt two-tier boards. Chief executive officer turnover is more sensitive to performance at firms with two-tier boards, indicating greater monitoring. Our results are broadly consistent with the Adams and Ferreira (2007) model and suggest that gains result from allowing freedom of contract about board structure.

  • Institutions and financial frictions: estimating with structural restrictions on firm value and investment

    Author(s) : Stijn Claessens, Kenichi Ueda, Yishay Yafeh Journal : Journal of Development Economics Abstract : Using an enhanced version of the standard investment model, we estimate how institutions affect financial frictions at the firm (micro) level and, through the required rate of return, at the country (macro) level. Based on some 78,000 firm?year observations from 40 countries over the period 1990?2007, we show that good shareholder rights lower financial frictions, especially for firms with large external finance relative to their capital stock (e.g., small, growing or distressed firms). However, creditor rights generally do not affect financial frictions. It thus appears that in explaining cross-country differences in firm investment, frictions related to shareholder rights (e.g., shirking or ?tunneling?) are more relevant than debt-related frictions (e.g., limited liability or collateral constraints).

  • Investor protection and corporate valuation

    Author(s) : Rafael La porta , Florencio Lopez-De-Silanes , Andrei Shleifer, Robert Vishny Journal : The Journal of Finance, Volume 57 Issue 3,Pages1147-1170, 2002 Abstract : We present a model of the effects of legal protection of minority shareholders and of cash-flow 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 cash-flow ownership by the controlling shareholder.

  • Investor protection and the coasian view

    Author(s) : Nittai K. Bergman and Daniel Nicolaievsky Journal : Journal of Financial Economics, Volume 84, Issue 3, June 2007, Pages 738-771 Abstract : The corporate charters of a sample of Mexican firms show that private firms often significantly enhance the legal protection offered to investors, but public firms rarely do so. We construct a model that endogenizes the degree of investor protection that firms provide, using as a springboard the assumption that legal regimes differ in their ability to enforce precisely filtering contracts that provide protection only in those cases where expropriation can occur. Our model generates predictions about the types of contracts that would be employed and the levels of investor protection that would prevail across different legal regimes in both private and public firms.

  • The effects of legal reforms on the ownership structure of listed companies

    Author(s) : Cuomo, Francesca; Zattoni, Alessandro; Valentini, Giovanni Journal : Industrial and Corporate Change, Volume 22, Issue 2, Pages 427-458, April 2013 Abstract : A general view in the corporate governance literature is that corporate ownership structures are rather stable in time and change slowly. However, even if changes in ownership structures are difficult due to path dependence, anecdotal evidence indicates that some sort of transition towards the US style corporate ownership could be occurring in civil-law countries. The aim of this article is to test the so-called "law and finance" view, which predicts that this convergence will only happen if the appropriate regulatory framework is in place. We test this prediction using longitudinal data from Italian listed companies, assessing the effects of recent legal reforms. Our results show that an increase in the protection of investors' rights is associated with a lower use of control enhancing mechanisms and a lower separation of control and cash flow rights, while it is less evident if it is associated with a more dispersed ownership. These findings carry important implications for theory and practice.

  • The evolution of corporate ownership after ipo: the impact of investor protection

    Author(s) : C. Fritz Foley and Robin Greenwood Journal : Review of Financial Studies 2010 23(3) Abstract : Panel data on corporate ownership in thirty-four countries between 1995 and 2006 reveal that newly public firms have concentrated ownership regardless of the level of investor protection. After listing, firms in countries with strong investor protection are more likely to experience decreases in ownership concentration; these decreases occur in response to growth opportunities, and they are associated with new share issuance. We conclude that ownership concentration falls after listing in countries with strong investor protection, because firms in these countries continue to raise capital and grow, diluting blockholders as a consequence.

  • The internal capital markets of business groups: evidence from intra-group loans

    Author(s) : David Buchuk, Borja Larrain , Francisco Muñoz, Francisco Urzúa Journal : Journal of Financial Economics Abstract : We study business groups? internal capital markets using a unique data set on intra-group lending in Chile (1990?2009). In line with groups? financing advantage, firms that borrow internally have higher investment, leverage, and return on equity (ROE) than other firms. At the margin, controlling shareholders have higher cash-flow rights in borrowing firms than in lending firms. However, there is no robust evidence of minority shareholders losing out from intra-group loans as tunneling predicts. Our evidence is consistent with the idea that strict regulation and disclosure requirements for intra-group loans, which are features of the Chilean market, reduce the risk of expropriation in pyramids.

  • The life cycle of family ownership: international evidence

    Author(s) : Julian Franks, Paolo Volpin, Hannes F. Wagner Journal : Review of Financial Studies,Volume 25, Issue 6, Pages 1675-1712, 2012 Abstract : We show that in countries with strong investor protection, developed financial markets, and active markets for corporate control, family firms evolve into widely held companies as they age. In countries with weak investor protection, less developed financial markets, and inactive markets for corporate control, family control is very persistent over time. While family control in high investor protection countries is concentrated in industries that have low investment opportunities and low merger and acquisition (M&A) activity, the same is not so in countries that have low investor protection, where the presence of family control in an industry is unrelated to investment opportunities and M&A activity.

  • What do firms disclose and why? enforcing corporate governance and transparency in Central and Eastern Europe

    Author(s) : Erik Bergl Journal : Oxford Review of Economic Policy, Volume 21, Issue 2, Pages 178-197. Abstract : While specific corporate-governance rules are often controversial, most observers agree on the need to disclose who owns and controls a firm and what governance arrangements are in place. This paper examines such disclosure in a sample of 370 companies listed on stock exchanges in Central and Eastern Europe. The data show widespread non-disclosure of even the most basic elements of corporate-governance arrangements, despite existing regulation. The level of disclosure varies substantially across firms, and there is a strong country effect in what companies disclose. Overall, what is disclosed depends on the legal framework and practice in a given country, but it does not correlate with firms? financial performance. On the other hand, financial performance is strongly related with how easily available the information is to the public. In particular, information is more available in larger firms, firms with lower leverage, higher market-to-book ratios, and more concentrated ownership.

  • Why do countries matter so much for corporate governance?

    Author(s) : Craig Doidge, G. Andrew Karolyi and Ren Journal : Journal of Financial Economics, Volume 86, Issue 1, October 2007, Pages 1-39 Abstract : 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 find 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.

  • How Does Long-Term Finance Affect Economic Volatility?

    Author(s) : A general view in the corporate governance literature is that corporate ownership structures are rather stable in time and change slowly. However, even if changes in ownership structures are difficult due to path dependence, anecdotal evidence indicates that some sort of transition towards the US style corporate ownership could be occurring in civil-law countries. The aim of this article is to test the so-called "law and finance" view, which predicts that this convergence will only happen if the appropriate regulatory framework is in place. We test this prediction using longitudinal data from Italian listed companies, assessing the effects of recent legal reforms. Our results show that an increase in the protection of investors' rights is associated with a lower use of control enhancing mechanisms and a lower separation of control and cash flow rights, while it is less evident if it is associated with a more dispersed ownership. These findings carry important implications for theory and practice. Journal : Demirgüç-Kunt, Asli; Horváth, Bálint L.; Huizinga, Harry Abstract : World Bank Economic Review

  • Contractual resolutions of financial distress

    Author(s) : Gennaioli, Nicola; Rossi, Stefano Journal :  Review of Financial Studies, Volume 26, Issue 3, Pages 602-634, March 2013 Abstract : Panel data on corporate ownership in thirty-four countries between 1995 and 2006 reveal that newly public firms have concentrated ownership regardless of the level of investor protection. After listing, firms in countries with strong investor protection are more likely to experience decreases in ownership concentration; these decreases occur in response to growth opportunities, and they are associated with new share issuance. We conclude that ownership concentration falls after listing in countries with strong investor protection, because firms in these countries continue to raise capital and grow, diluting blockholders as a consequence.

  • Credit constraints as a barrier to the entry and post-entry growth of firms

    Author(s) :  Philippe Aghion, Thibault Fally and Stefano Scarpetta Journal :  Economic Policy, Volume 22 Issue 52, Pages 731 - 779, 2007 Abstract : We study business groups? internal capital markets using a unique data set on intra-group lending in Chile (1990?2009). In line with groups? financing advantage, firms that borrow internally have higher investment, leverage, and return on equity (ROE) than other firms. At the margin, controlling shareholders have higher cash-flow rights in borrowing firms than in lending firms. However, there is no robust evidence of minority shareholders losing out from intra-group loans as tunneling predicts. Our evidence is consistent with the idea that strict regulation and disclosure requirements for intra-group loans, which are features of the Chilean market, reduce the risk of expropriation in pyramids.

  • Do implicit barriers matter for globalization?

    Author(s) :  Carrieri, Francesca; Chaieb, Ines; Errunza, Vihang Journal :  Review of Financial Studies, Volume 26, Issue 7, Pages 1694-1739, July 2013 Abstract : We show that in countries with strong investor protection, developed financial markets, and active markets for corporate control, family firms evolve into widely held companies as they age. In countries with weak investor protection, less developed financial markets, and inactive markets for corporate control, family control is very persistent over time. While family control in high investor protection countries is concentrated in industries that have low investment opportunities and low merger and acquisition (M&A) activity, the same is not so in countries that have low investor protection, where the presence of family control in an industry is unrelated to investment opportunities and M&A activity.

  • Equity issue-specific versus broad regulatory protections against expropriation risk: international evidence from SEOS

    Author(s) :  Gupta, Manu; Prakash, Puneet; Rangan, Nanda K. Journal :  Journal of International Money and Finance, Volume 35, Issue C, Pages 146-166, June 2013 Abstract : This paper examines the hypotheses that liquidity improves corporate governance, and better governance enhances valuation of Russian firms. We find a positive causal relationship between measures of liquidity and corporate governance. Additionally, we document the strong positive impact of corporate governance on valuation. Our results are economically significant. For example, we document that a 10% decrease in the proportion of zero return days implies a 0.34% increase in transparency and disclosure, which in turn leads to a 9.6% increase in firm valuation. Our research findings shed light on the important role of liquidity in improving corporate governance and valuation. (C) 2012 Elsevier B.V. All rights reserved.

  • Escape from New York: the market impact of loosening disclosure requirements

    Journal : Journal of Financial EconomicsVolume 95, Issue 2, February 2010, Pages 129-147 Abstract : While specific corporate-governance rules are often controversial, most observers agree on the need to disclose who owns and controls a firm and what governance arrangements are in place. This paper examines such disclosure in a sample of 370 companies listed on stock exchanges in Central and Eastern Europe. The data show widespread non-disclosure of even the most basic elements of corporate-governance arrangements, despite existing regulation. The level of disclosure varies substantially across firms, and there is a strong country effect in what companies disclose. Overall, what is disclosed depends on the legal framework and practice in a given country, but it does not correlate with firms? financial performance. On the other hand, financial performance is strongly related with how easily available the information is to the public. In particular, information is more available in larger firms, firms with lower leverage, higher market-to-book ratios, and more concentrated ownership.

  • Internal capital market and dividend policies: evidence from business groups

    Author(s) :  N/A Journal :  The Review of Financial Studies Abstract : This study examines the dividend policy behavior of Islamic and conventional banks operating in Arab markets. These banks operate in an environment of Sharia law and low levels of investor protection. Our results support the substitution agency model of dividends for Islamic banks, and Islamic banks use the dividend policy as a substitute mechanism for alleviating relatively more significant agency problems and higher risks of expropriation by insiders. In these markets, conventional banks operate in a more competitive environment and experience relatively less significant agency problems. In contrast to Islamic banks, conventional banks follow the outcome agency model of dividends.

  • Large foreign ownership and stock price informativeness around the world

    Author(s) : He, Wen; Li, Donghui; Shen, Jianfeng; et al. Journal :  Journal of International Money and Finance, Volume 36, Issue C, Pages 211-230, 2013 Abstract : This paper investigates the determinants of the investment activity of Sovereign Wealth Funds (SWFs) at a macro level, with special emphasis on the possible reaction to a financial crisis in a potential target economy. The analysis relies upon a specially built proprietary database, which encompasses 1,903 acquisition deals spanning the period 1995–2010 and involving 29 out of the 79 existing SWFs. According to a three-step modelling approach, we find that this class of investors prefers to invest in countries with a higher degree of economic development, larger and more liquid financial markets, institutions that offer better protection of legal rights, and a more stable macroeconomic environment. Most importantly, and in stark contrast with the existing empirical literature on other major institutional investors, SWFs seem to engage in ‘contrarian’ investment behaviour, i.e. increasing their acquisitions in countries where crises hit. The results are shown to be valid if we consider both the likelihood of a country being the target of SWFs' investments and the amount SWFs choose to invest in each country. Capital flows stemming from SWFs' acquisition activity worldwide may therefore have a stabilizing effect on local markets during periods of financial turmoil, protecting the targeted countries from foreign shocks instead of propagating them globally.

  • "The Distribution of Legal Traditions around the World: A Contribution to the Legal Origins Theory"

    Author(s) : Daniel Oto-Peralías and Diego Romero-Ávila Journal : The Journal of Law and Economics, University of Chicago Abstract : "The distribution of the common law was conditioned by a colonial strategy sensitive to the colonies’ level of endowments, exhibiting a more effective implantation of the legal system in initially sparsely populated territories with a temperate climate. This translates into a negative relationship of precolonial population density and settler mortality with legal outcomes for common law countries. By contrast, the implantation of the French civil law was not systematically influenced by initial conditions, which is reflected in the lack of such a relationship for this legal family. The common law does not generally lead to superior legal outcomes to the French civil law when precolonial population density and/or settler mortality are high. The form of colonial rule in British colonies is found to mediate between precolonial endowments and postcolonial legal outcomes."

  • Corporate governance and regulation: can there be too much of a good thing?

    Author(s) :  Valentina Bruno and Stijn Claessens Journal :  Journal of Financial Intermediation, doi:10.1016/j.jfi.2009.10.001 Abstract : Controlling for country-level governance, we investigate how firms' corporate governance influences financing constraints. Using firm-level corporate governance rankings across 14 emerging markets, we find that better corporate governance lowers the dependence of emerging market firms on internally generated cash flows, and reduces financing constraints that would otherwise distort efficient allocation of investment and destroy firm value. Additionally and more importantly, firm-level corporate governance matters more significantly in countries with weaker country-level governance. This suggests substitutability between firm-specific and country-level governance in determining a firm's investment sensitivity to internal cash flows. (C) 2012 Elsevier B.V. All rights reserved.