Abstract
The authors examine how well several institutional and firm-level factors and their interactions explain firms'perceptions of property rights protection. Their sample includes private and public firms that vary in size from very small to large in 62 countries. Together, the institutional theories they investigate account for approximately 70 percent of the country-level variation, indicating that the literature is addressing first-order factors. Firm-level characteristics such as legal organization and ownership structure are comparable to institutional factors in explaining variation in property rights protection. A country's legal origin and formalism index predict property rights variation better than its openness to international trade, its religion, its ethnic diversity, natural endowments or its political system. However, these results are driven by the inclusion of former socialist economies in the sample. When the authors exclude the former socialist economies, legal origin explains considerably less than openness to trade and endowments. Examining a broader set of variables for robustness, they again find that when they exclude former socialist countries, legal origin explains comparatively little of the variation in perceptions of judicial efficiency, corruption, taxes and regulation, street crime, and financing.
Highlights
In modern corporate finance, it is taken as axiomatic that the firm is a ‘nexus of contracts’ (Jensen and Meckling (1976))
When we look at the proposed institutional factors at the country level, legal origin explains the most variation with 4.09% followed by religion with 1.64%
We examine how much of the variation in firms’ perceptions of property rights can be attributed to firm characteristics, such as size, ownership structure, industrial sector and organizational form, and how much to country level institutional variables
Summary
It is taken as axiomatic that the firm is a ‘nexus of contracts’ (Jensen and Meckling (1976)). Many of the predictions of corporate theory depend at some level on how well protected property rights assigned by these contracts really are. People may be less willing to invest and more willing to engage in opportunistic behavior if property rights are insecure. The seminal Law and Finance theory (La Porta, Lopez-de-Silanes, Shleifer and Vishny ( LLSV) (1998)) stressed the importance of legal traditions. Other influential work has taken a broader view, stressing Culture and Ethnic diversity (Stulz and Williamson (2003), Easterly and Levine (1997)), Endowments (Acemoglu, Johnson, and Robinson (2001)), Openness to trade (Rajan and Zingales (2003)), and Political power (Acemoglu (2003)).
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