Leveling of the playing field and corporate financing patterns around the world

Abstract

The level of parity between management of firms and their shareholders vary around the world. In many countries, the playing field is tilted in favor of management, which can withhold information or selectively choose when and how to release it. Self-interested managers may also expropriate from shareholders. The legal, judicial, and political systems are also often in favor of those with wealth and power, and interested parties with the resources to level the playing field may be absent or ineffective. These countries lack the monitors, from large institutional shareholders to financial analysts, to limit management's advantage over the shareholders.In this paper, we investigate how managers in these two regimes differ in their financing decisions. We posit that: a) when management has the upper hand, they will exploit their advantage by offering inferior or overvalued securities; and b) on the other hand, in countries wherein the playing field is more level, managers cannot expect to consistently gain against outside investors in rounds of financing. We find evidence in support of the hypothesis above. Firms in countries wherein management have the playing field advantage issue securities before a price reversal; i.e., at or near high. The same is not observed on a level playing field. Nevertheless, managers in both types could act behaviorally. Also consistent with the behavioral version of corporate financing, firms at times issue new equity in hot markets or when recent share prices are rising, regardless of the playing field.