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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.

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.

Author(s): Francis, Bill; Hasan, Iftekhar; Song, Liang; et al.

Journal: Emerging Markets Review, Volume 15, Issue C, Pages 57-71, June 2013

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.

Author(s): Valentina Bruno and Stijn Claessens

Journal: Journal of Financial Intermediation, doi:10.1016/j.jfi.2009.10.001

Abstract: We investigate how company-level corporate governance practices and country-level legal investor protection jointly affect company performance. We find that in any legal regime there are a few specific governance practices that improve performance. Companies with good governance practices operating in stringent legal environments, however, show a valuation discount relative to similar companies operating in flexible legal environments. At the same time, a stronger country-level regime does not reduce the valuation discount of companies with weak governance practices. Our analysis suggests a threshold level of country development above which stringent regulation hurts the performance of well governed companies or has a neutral effect for poorly governed companies.

Author(s): Kose John, Lubomir Litov, and Bernard Yeung

Journal: The Journal of Finance, Volume 63 Issue 4, Pages 1679 - 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.

Author(s): Claessens, Stijn; Yurtoglu, B. Burcin

Journal: Emerging Markets Review, Volume 15, Issue C, Pages 1-33, June 2013

Abstract: This paper reviews recent research on corporate governance, with a special focus on emerging markets. It finds that better corporate governance benefit firms through greater access to financing, lower cost of capital, better performance, and more favorable treatment of all stakeholders. Numerous studies show these channels to operate at the level of firms, sectors and countries with causality increasingly often clearly identified. Evidence also shows that voluntary and market corporate governance mechanisms have less effect when a country's governance system is weak. Importantly, how corporate governance regimes change over time and how this impacts firms are receiving more attention recently. Less evidence is available on the direct links between corporate governance and social and environmental performance. The paper concludes by identifying issues requiring further study, including the special corporate governance issues of banks, and family-owned and state-owned firms, and the nature and determinants of public and private enforcement.

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.

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.

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.

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.

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).

Author(s): Rafael La porta , Florencio Lopez-De-Silanes , Andrei Shleifer, Robert Vishny

Journal: The Journal of Finance, Volume 57 Issue 3, Pages 1147 - 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.

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.

Author(s): Alzahrani, Mohammed; Lasfer, Meziane

Journal: Journal of Corporate Finance, Volume 18, Issue 4, Pages 745-762, September 2012

Abstract: We test the impact of taxes and governance systems on dividend payouts across countries. We show that, unlike previous studies, firms in strong investor protection countries pay lower cash dividends than in weak protection countries when the classical tax system is implemented, but they repurchase more shares to maximise their shareholders' after-tax returns. In weak protection countries, cash dividends and repurchases are low and less responsive to taxes. Our results suggest that when investors are protected, they weigh the tax cost of dividends against the benefit of mitigating the agency cost, but, when they are not, they accept whatever dividends they can extract, even when this entails high tax costs.

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.

Author(s): C. Fritz Foley and Robin Greenwood

Journal: Review of Financial Studies 2010 23(3):1231-1260; doi:10.1093/rfs/hhp069

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.

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.

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.

Author(s): Li, Wei-Xuan; Chen, Clara Chia-Sheng; French, Joseph J.

Journal: Emerging Markets Review, Volume 13, Issue 4, Pages 465-477, December 2012

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.

Author(s): Erik Berglöf, Anete Pajuste

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.

Author(s): Craig Doidge, G. Andrew Karolyi and René M. Stulz

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.

Author(s): Seyed Alireza Athari

Journal: Emerging Markets Review  

Abstract: This study investigates the relation between large foreign ownership (LFO) and the informativeness of stock prices in 40 markets. We show that LFO is positively related to price informativeness, measured by probability of informed trading (PIN) and price non-synchronicity (NONSYNC) which reflects firm-specific variations in stock returns. We also find a stronger association between stock returns and future earnings innovations for firms with higher LFO. Further analysis reveals that the effect of LFO on price informativeness is stronger in developed economies and markets with strong investor protection and a transparent information environment.

 

Author(s): Demirgüç-Kunt, Asli; Horváth, Bálint L.; Huizinga, Harry 

Journal: World Bank Economic Review 

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.