Andrei Shleifer Research Articles

Corporate Governance: A Relook into the Indian Banking System

The paper proposes to emphasise on the standard theories of corporate governance. It would highlight the unique problems facing corporate governance of financial intermediaries and blends this theoretical perspective with observations made in global context. The paper brings forth the aspect of agency theory that explains the corporate governance problem in terms of how equity and debt holders influence managers to act in the best interests of the providers of capital. This aspect finds absolute relevance in the management of public sector banks in India. This paper comes in the wake of certain policy measures that the central bank is likely to adopt in days to come. With the objective of having fewer number of bigger public sector banks in coming days, the need to study the importance and relevance of corporate governance issues pertaining to public sector banks needs no further emphasis. The paper deals with some of those issues. The organisation of the paper would be as follows: 1. A general introduction to corporate governance with added emphasis on the same in the banking and financial sector 2. A brief literature survey on the topic with added attention on: (i) A survey of corporate governance: Andrei Shleifer & Robert W. Vishny the journal of finance (ii) The Governance of the New Enterprise: Raghuram G. Rajan and Luigi Zingales (iii) ICRA Corporate Governance Survey: 2004 (iv) Necessity of Government intervention in banks 3. Core areas to be addressed in corporate governance 4. Corporate Governance and the Indian Banks with focus on the public sector entities.

Crime Reporting as a Measure of Institutional Development

Crime Reporting as a Measure of Institutional Development

Economic Analysis of Corruption: A Survey

Corruption is a persistent feature of human societies over time and space. The sale of parliamentary seats in 'rotten boroughs' in England before the Reform Act of 1832 and 'machine politics' in immigrant cities in the US at the turn of the 19th century are just two historical examples. Contemporaneous examples also abound and not only from developing countries such as Nigeria, India, and Philippines but also from transition economies such as Russia. Some of these and many other instances of corruption are extensively documented in The Politics of Corruption, edited by Robert Williams and associates. Its four volumes contain a large collection of articles published during the past 40 years in social science journals with contributions from political scientists, sociologists, anthropologists, law scholars, and a few economists including Andrei Shleifer and Robert W. Vishny. It is not surprising to find the work of Shleifer and Vishny represented in this interdisciplinary collection. As is evident from the collection of articles reprinted in The Grabbing Hand, they have, with various co-authors, made a large number of important contributions to the study of corruption and other government pathologies throughout the 1990s. Currently, the study of corruption is also high on the research agenda of international organisations such as the World Bank and the International Monetary Fund (IMF), and some of the most significant studies on corruption coming out of the IMF in recent years are collected in Governance,

From current-day Russia to Porfirio’s Mexico

Good economic institutions promote prosperity. Yet bad institutions can persist because they induce patterns of distribution that benefit certain groups, which accordingly have a vested interest in the status quo. InWithout a Map: Political Tactics and Economic Reform in Russia, Andrei Shleifer and Daniel Treisman show how politicians in Russia used a specific kind of deal, a mixture of expropriation and co-optation, to destroy these vested interests in the transition to a market economy. In this essay I show that there are close analogies between institutional change in contemporary Russia, and that which occurred in nineteenth-century Latin America, particularly in Mexico during thePorfiriato. After developing the analogy I draw some conclusions from the Mexican experience for the long-run implications of Shleifer-Treisman deals. The good news is that sustained economic growth is possible with the institutions that Russia seems to have developed. The bad news is that these may lead to extreme social conflict and ultimately revolution. I argue that there are two mitigating factors in Russia that provide grounds for optimism that revolution may be avoided. First, Russia is a democracy; second, the role of foreign investment is limited.

Review of Shleifer's Inefficient Markets

This excellent book provides the reader with a broad introduction to, and a powerful advocacy of, behavioral finance. In the tradition of the best of the Clarendon Lecture Series, Andrei Shleifer provides a clear context and motivation for a collection of his influential ideas in this field, emphasizing central themes that link together the wide scope of this work. Topics include: investor sentiment, the limits of arbitrage, the closed-end fund puzzle, positive feedback investment, and both market overreaction and underreaction to news, as well as general discussions on the motivation for this research and promising future directions.

Legal Determinants of World Cup Success

The matters theory advanced in a series of empirical works by Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny (LLSV), has become a centerpiece of recent corporate law debate. Using LLSV methodology, this Article examines the relation between legal protections and soccer success, using as the dependent variable the number of points each country has in the FIFA/Coca-Cola World Rankings. The statistically significant findings reported herein may or may not have implications of momentous import for various aspects of the human experience.

In Honor of Andrei Shleifer: Winner of the John Bates Clark Medal

Andrei Shleifer is the 1999 recipient of the John Bates Clark Medal, an award presented by the American Economic Association to an outstanding economist under the age of 40. The Clark medal citation singles out his contributions to three fields: corporate finance (corporate governance, law and finance), the economics of financial markets (deviations from efficient markets), and the economics of transition. One could add a fourth area, an early but then spurned love, macroeconomics (the role of increasing returns in cycles and growth). In each area that Andrei has touched, his contributions have shaped the basic paradigm and have triggered considerable follow-up research. The reason is that Andrei focuses on the big issues of economics. A recurring theme of his research is the respective role of markets, institutions, and governments. In his work, markets do not work perfectly and institutions are of the essence. But one should not trust governments always to do the right thing, be it in the design of institutions or in direct interventions. Governments are not perfect and sometimes they can be quite bad indeed. In the hands of others, such themes could lead to ideological blabber or to banal generalities. In Andrei’s hands, they don’t. In each case, Andrei focuses on a specific market, a specific institution, a specific mechanism. He writes down a simple model, very much in the old Chicago tradition, and uses it as a guide to the empirical evidence. He looks at the available evidence, often, as in his work on law and finance, assembling that evidence for the first time. The general lessons come from the accumulation of papers and evidence. This is why his work is so convincing, influential, and likely to endure.

Without a Map: Political Tactics and Economic Reform in Russia, by Andrei Shleifer and Daniel Treisman, Cambridge, MA: MIT Press (2000). Reviewed by Marshall I. Goldman

Without a Map: Political Tactics and Economic Reform in Russia, by Andrei Shleifer and Daniel Treisman, Cambridge, MA: MIT Press (2000). Reviewed by Marshall I. Goldman

Book Reviews

Books reviewed:Andrei Shleifer and Daniel Treisman, Without a Map: Political Tactics and Economic Reform in RussiaGraeme Gill and Roger D. Marwick, Russia's Stillborn Democracy: From Gorbachev to YeltsinVladimir Mau, Russian Economic Reforms as Seen by an InsiderKate Hudson, European Communism since 1989: Towards a New European Left?Andrew Chadwick, Augmenting Democracy: Political Movements and Constitutional Reform during the Rise of Labour, 1900–1924Norman Fairclough, New Labour, New Language?David Coates, Models of CapitalismAlexander de Conde, Presidential Machismo: Executive Authority, Military Intervention, and Foreign RelationsBernard Crick, Essays on CitizenshipNick Pearce and Joe Hallgarten, (eds) Tomorrow's Citizens: Critical Debates in Citizenship and EducationChristian Joppke, Immigration and the Nation State: The United States, Germany and Great BritainRobert Geyer, Christine Ingebritsen and Jonathon W. Moses, (eds) Globalization, Europeanization and the End of Scandinavian Social Democracy?John Campbell, Margaret Thatcher, vol. 1: The Grocer's Daughter

Russian Privatization and Corporate Governance: What Went Wrong?

In Russia and elsewhere, proponents of rapid, mass privatization of state-owned enterprises (ourselves among them) hoped that the profit incentives unleashed by privatization would revive faltering, centrally planned economies. Instead, the Russian economy has shrunk steadily since 1991 and suffered a major collapse in 1998, which exposed deep structural flaws in the privatization effort. We offer here some partial explanations. First, rapid mass privatization of medium and large firms is likely to lead to massive self-dealing by managers and controlling shareholders unless (implausibly in the initial transition from central planning to markets) a country has a good infrastructure for controlling self-dealing. Russia accelerated the self-dealing process by selling control of many of its largest enterprises cheaply to crooks, who got the funds to buy the enterprises by skimming from the government, and transferred their skimming talents to the enterprises they acquired. Second, profit incentives to restructure privatized businesses and create new ones can be swamped by the burden on business imposed by a combination of (among other things) a punitive tax system, official corruption, organized crime, and an unfriendly bureaucracy. Third, while self-dealing will still occur (though perhaps to a lesser extent) if state enterprises aren’t privatized, since self-dealing accompanies privatization, it politically discredits privatization as a reform strategy and can undercut longer-term reform efforts. A principal lesson is that developing the infrastructure to control self-dealing is central to successful privatization of large firms -as important, and in the early stages, perhaps more important than privatization itself. Please address comments to: Professor Bernard Black Stanford Law School Stanford CA 94305 bblack@stanford.edu * We thank Kevin Covert, Richard Craswell, David Ellerman, Itzhak Goldberg, Dale Gray, Hugh Patton, Michael Klausner, Peter Murrell, John Nellis, Katarina Pistor, Andrei Shleifer, Alexander Yushkevich, and [to come], and participants in workshops at the American Law and Economics Association, an OECD Conference on Corporate Governance in Russia, an IMF Workshop on Comparative Corporate Governance in Developing and Transition Economies, Stanford Law School, and University of California Berkeley, Haas School of Business and [to come] for helpful discussions and comments. Special thanks to James Fenkner of Troika Dialog for the data on Russian market capitalization and comparable Western values for Russian companies reported in Part III of this article.

International Financial Crises: Causes, Prevention, and Cures

Dale Jorgenson has bestowed a great honor and no small challenge by inviting me to give this lecture: a great honor because of the distinguished list of economists who have preceded me; a challenge because of the standard they have set, and because there is no greater challenge for any economist than providing a coherent account of significant events to his scientific peers. I am sometimes asked by friends about the differences between academic life and life as a public official. There are many. Two stand out. First, as an academic, the gravest sin one can commit is to sign one’s name to something one did not write. As a public official it is a mark of effectiveness to do so as often as possible. Second, as an academic, if a problem is too hard and does not admit of a satisfactory solution, there is an obvious response: work on a different problem. That is not a luxury that one has in government. I have been reminded of this often in recent years as we have grappled with financial crises in a number of what had previously been considered emerging markets with unrestrained futures. Anyone who doubts the social importance of what economists do should consider the debates surrounding these crises. Hundreds of millions of people who expected rapidly rising standards of living have seen their living standards fall; hundreds of thousands if not millions of children have been forced to drop out of school and go to work; hundreds of billions of dollars of apparent wealth has been lost; the stability of large nations as nations has been called into question; and the United States has made its largest nonmilitary foreign-policyrelated financial commitments since the Marshall Plan. Almost all the issues involved in understanding, preventing, and mitigating these crises are the stuff of economics courses and research: fixed versus flexible exchange rates, moral hazard and multiple equilibria, speculation and liquidity, fiscal and monetary policies, regulation and competition. What economists think, say, and do has profound implications for the lives of literally billions of their fellow citizens. Whether it is discussing the role of derivatives in signaling exchange-rate commitments with Chinese Premier Zhu Rongji, or discussing an NBER working paper on inflation targeting with the Brazilian central bank governor Arminio Fraga, or discussing alternative approaches to bankruptcy law with Indonesia’s economic team, or optimal debt durations with the Mexican authorities, I am consistently struck by the impact of the kind of research discussed at the AEA meetings. The future well-being of the world’s people in large part will depend on how the ongoing process of global integration works out. This is a strong statement, but one that is supported by the global economy’s post-World War I failure and its post-World War II success. Central to global integration is financial integration: the flow of funds and of capital across international borders. And as the events of the late 1920’s and early 1930’s remind us, central to global disintegration can be international financial breakdowns. Today, I want to reflect on the issue of global financial integration in light of the dramatic and largely unpredicted events of recent years. It is perhaps a good time for reflection: there has been enough repair that priority can shift from * U.S. Department of the Treasury, 1500 Pennsylvania Avenue, Washington, DC 20005. This lecture reflects many things I have learned from experiences I have shared with colleagues in the United States government and governments around the world. I thank Brad DeLong, Marty Feldstein, Stephanie Flanders, Ken Rogoff, Andrei Shleifer, and Ted Truman for useful comments and suggestions. I am especially grateful to Nouriel Roubini and Stephanie Flanders for valuable discussions and assistance in the preparation of this lecture. The usual disclaimer applies.

The Purposes and Accountability of the Corporation in Contemporary Society: Corporate Governance at a Crossroads

MICHAEL BRADLEY [*] CINDY A. SCHIPANI [**] ANANT K. SUNDARAM [***] JAMES P. WALSH [****] INTRODUCTION Change is ubiquitous in contemporary society, and nowhere more so than in the operations of the large-scale, public corporation. Dramatic changes are underway, not only in the structure of activity in areas such as the nature of work and the nature of organizational form, but also in the product and financial markets and the regulatory environment within which corporations operate. The depth and rapidity of these changes compel a reassessment of the ability of various structures to cope and adapt. The consequences of these changes for have taken on an even greater sense of urgency in light of the transformations that have taken place in Eastern and Central Europe with the demise of the Soviet Union and with the economic convulsions of 1997 and 1998 in Southeast Asia. These events have brought into focus the nature of practices in those economies. The epic battle between capitalism and communism has largely been resolved in favor of capitalism -- at least for the foreseeable future. Similarly, the reform questions in Southeast Asia are increasingly centered on the transition from one form of capitalism to another. Academics, practitioners, and policymakers, however, have an ambiguous vision of the type of capitalism that would best serve the economic and political order emerging in these parts of the world. The particular form of capitalism that ultimate ly will develop is substantially predicated on the institutions that will arise from this social upheaval and the organizational structures that will evolve for the provision of goods and services. Understanding this process will require not only an understanding of the nature of the changes that are underway, but also a reassessment of the paradigms of and their ability to inform, respond to, and even shape such change. Traditionally, the phrase corporate governance invokes a narrow consideration of the relationships between the firm's capital providers and top managers, as mediated by its board of directors. [1] For example, Andrei Shleifer and Robert W. Vishny define as the process that deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment. [2] But is more than simply the relationship between the firm and its capital providers. Corporate also implicates how the various constituencies that define the business enterprise serve, and are served by, the corporation. Implicit and explicit relationships between the corporation and its employees, creditors, suppliers, customers, host communities -- and relationships among these constituencies themselves--fall within the ambit of a relevant definition of governance. As such, the phrase calls into scrutiny not only the definition of the form, but also its purposes and its accountability to each of the relevant constituencies. A basic goal of this article is to examine the changing nature of the business enterprise and its implications for the theory and practice of across the range of constituencies. The academic literature in law, economics, finance, strategy, and management presumes that problems are largely a result of the agency problems that arise from the separation of ownership and control in the largescale, public corporation. Perhaps the best example of this perspective is the famous article by Michael C. Jensen and William H. Meckling, [3] which, building upon the earlier works of Ronald Coase, [4] Oliver E. Williamson, [5] and Armen A. Alchian and Harold Demsetz, [6] posits that the incentives of managers to maximize shareholder value are proportional to the fraction of the firm's shares they hold in their personal portfolios. …

Kremlin Capitalism: Privatizing the Russian Economy, 1997, by Joseph R. Blasi, Maya Kroumova, and Douglas Kruse. foreword by Andrei Shleifer; with the research assistance of Daria Panina. Ithaca, NY: ILR Press. Reviewed by Dr. Tatyana G. Bogomazova

Kremlin Capitalism: Privatizing the Russian Economy, 1997, by Joseph R. Blasi, Maya Kroumova, and Douglas Kruse. foreword by Andrei Shleifer; with the research assistance of Daria Panina. Ithaca, NY: ILR Press. Reviewed by Dr. Tatyana G. Bogomazova

Advances in Behavioral Finance.

Preface xi Richard H. Thaler Acknowledgments xix List of Abbreviations xxiii Chapter 1: A Survey of Behavioral Finance by Nicholas Barberis and Richard H. Thaler 1 Part I: Limits to Arbitrage Chapter 2: The Limits of Arbitrage by Andrei Shleifer and Robert W. Vishny 79 Chapter 3: How Are Stock Prices Affected by the Location of Trade? by Kenneth A. Froot and Emil M. Dabora 102 Chapter 4: Can the Market Add and Subtract? Mispricing in Tech Stock Carve-outs by Owen A. Lamont and Richard H. Thaler 130 Part II: I Stock Returns and the Equity Premium Chapter 5: Valuation Ratios and the Long-run Stock Market Outlook: An Update by John Y. Campbell and Robert J. Shiller 173 Chapter 6: Myopic Loss Aversion and the Equity Premium Puzzle by Shlomo Benartzi and Richard H. Thaler 202 Chapter 7: Prospect Theory and Asset Prices by Nicholas Barberis, Ming Huang, and Tano Santos 224 Part III: Empirical Studies of Overreaction and Underreaction Chapter 8: Contrarian Investment, Extrapolation, and Risk by Josef Lakonishok, Andrei Shleifer, and Robert W. Vishny 273 Chapter 9: Evidence on the Characteristics of Cross-sectional Variation in Stock Returns by Kent Daniel and Sheridan Titman 317 Chapter 10: Momentum by Narasimhan Jegadeesh and Sheridan Titman 353 Chapter 11: Market Efficiency and Biases in Brokerage Recommendations by Roni Michaely and Kent L. Womack 389 Part IV: Theories of Overreaction and Underreaction Chapter 12: A Model of Investor Sentiment by Nicholas Barberis, Andrei Shleifer, and Robert W. Vishny 423 Chapter 13: Investor Psychology and Security Market Under- and Overreaction by Kent Daniel, David Hirshleifer, and Avanidhar Subrahmanyam 460 Chapter 14: A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets by Harrison Hong and Jeremy C. Stein 502 Part V: Investor Behavior Chapter 15: Individual Investors by Brad M. Barber and Terrance Odean 543 Chapter 16: Naive Diversification Strategies in Defined Contribution Savings Plans by Shlomo Benartzi and Richard H. Thaler 570 Part VI: Corporate Finance Chapter 17: Rational Capital Budgeting in an Irrational World by Jeremy C. Stein 605 Chapter 18: Earnings Management to Exceed Thresholds by Francois Degeorge, Jayendu Patel, and Richard Zeckhauser 633 Chapter 19: Managerial Optimism and Corporate Finance by J. B. Heaton 667 List of Contributors 685 Index 695

Russian Economic Reform at Risk. Ed. Anders Åslund. New York: Pinter, 1995. 206 pp.

Macroeconomic developments, Charles Wyplosz, INSEAD Paris, Jacques Delpla Macroeconomic policy in Russia, Boris Fedorov, MP Russian State Duma The political economy of reform, Sergie Vasiliev, Deputy Minister of the Economy, Russia The role of the west , Jeffrey Sachs, Harvard University The break-up of the ruble zone. Brigitte Granville, Royal Institute of International Affairs, London Restructuring Russia , Andrei Shleifer, Harvard University Achievements of privatisation, Anatoly Chubais, Privatisation Committee of Russia, Maria Vishnevskaya Rising mortality and its causes, Judith Shapiro, University of London Social safety net and enterprise restructuring, Richard Layard and Andrea Richter, London School of Economics Lessons from the Russian reform, Andrei Illarionov, Centre for Economic Reform, Moscow Politics of the Economic Reform, Anders Aslund, Stockholm Institute of Soviet and East European Economics.

BOOK REVIEWS

Book review in this Article Toward Competition in Local Telephony. By William J. Baumol and J. Gregory Sidak. Post‐Communist Reform: Pain and Progress. By Olivier Blanchard, Maxim Boycko, Marek Dabrowski, Rudiger Dornbusch, Richard Layard and Andrei Shleifer. Current Issues in Industrial Economics. Edited by John Cable. Production Frontiers. By Rolf Färe, Shawna Grosskopf and C. A. Knox Lovell. The Macroeconomics of Self‐Fulfilling Prophecies. By Roger E. A. Farmer. The Economic Development of Italy Since 1870. Edited by Giovanni Federico. The Repressed Economy: Causes, Consequences, Reform. By Deepak Lal. Advanced Industrial Economics. By Stephen Martin. From Classical Economics to Development Economics. Edited by Gerald M. Meier. Trade, Transfers and Development: Problems and Prospects for the Twenty‐First Century. Edited by S. Mansoob Murshed and Kunibert Raffer. Foundations of Analytical Marxism. Volumes I and II. Edited by John E. Roemer. Efficiency in the Public Sector. Edited by Alan Williams and Emilio Giardina.

On the Workability of Market Socialism

Contrary to the claim of Andrei Shleifer and Robert W. Vishny (1994), it is conceivable under market socialism to take firms out of the orbit of state control and that a less narrow theory of the state than theirs allows the possibility of democratic socialism mitigating problems of economic inefficiency better than capitalism.

ECONOMICS AND ORGANIZATIONAL INNOVATION

design seems to be spontaneously occurring in Russia. But far and away the most important core investors have been the people who have made a lot of money during the last two or three years, mostly in trading, in export and import business, in intermediating the trade between state enterprises. As in every developing country in the world, the first fortunes are accumulated through trade, and the people who made these fortunes then become investors in industrial companies. question always arises: Have these people gotten their money in legal ways? I cannot possibly understand why that is an interesting question. These people have accumulated their own fortunes. They are becoming long-term investors in these industrial enterprises. They have to be tough since they Hirshleifer: This session is on Economics and Organizational Innovation. sequence of speakers and their topics will be as follows: Michael Jensen on The Modern Industrial Revolution and Failure of Internal Control Systems; next will be Robert Hall, Does the Stock Market Send the Right Signals; number three will be Andrei Shleifer, Privatization and Governments, with special reference to Eastern Europe; and number four will be William Meckling on The Evolution of Organizational Forms. Jensen: Thanks, Jack. I want to make three points. First, I will try to convince you that we are in the middle of a full-fledged industrial revolution, that we have been for the last couple of decades, and that it will continue for a couple more. This has broad-reaching implications. It is the biggest change I think we have seen since the mid-19th century in the United States in what Al Chandler characterized as the second industrial revolution. This would be the third, brought about by massive changes in technology and revolutions in political economy that are taking place throughout the world. implications of these changes are dramatic and are very confusing for policy makers and even for many of us economists and financial economists who have puzzled with these issues for some time. These changes are associated with worldwide excess capacity in a large number of industries. We are having a substantial increase in the average productivity of labor but a decrease in the marginal productivity. There is downward pressure on wages, or at least a downward pressure on the rate of growth of wages, much like what happened in the 19th century. parallels between these two periods are really quite remarkable. Most important, all of this is making us better off in the aggregate. We cannot help but be better off in the aggregate as efficiency and productivity go up, but there are major pockets of pain and adjustment that must take place. And the policy implications of trying to wind our way through this without getting lost or sidetracked and shooting ourselves in the foot, are major. And third, I will talk about what this excess capacity means for downsizing and exit and how that has revealed, over the last couple of decades, what I believe is the massive failure of the internal control systems in modern corporations. There is major asymmetry between growth and decline. And to me this sets the agenda for the 1990s, how we think about making these organizations efficient. Let me now talk about what I have characterized as the third industrial revolution. If I were to pick a beginning date, I would pick 1973, with the 10-fold energy price increase of 1973 to 1979. Since then, we have had excess capacity in industry after industry--oils, chemicals, autos, tires, steel, computers, airlines, banking, financial services, retailing, real estate, construction, defense, telecommunications, metals, machinery, the list goes on--much as in the 19th century industrial revolution, which brought about mass manufacturing and distribution, also brought about massive excess capacity that could not be wrung out of the system through cartels, pools, or associations. …

Investment selection and individual portfolio management : Investor sentiment and the closed-end fund puzzle, by Charles M.C. Lee (University of Michigan), Andrei Shleifer (Harvard University), and Richard H. Thaler (Cornell University)


 
 
 This paper examines the proposition that fluctuations in discounts of closed- end funds are driven by changes in individual investor sentiment. The theory implies that discounts on various funds move together, that new funds get started when seasoned funds sell at a premium or a small discount, and that discounts are correlated with prices of other securities affected by the same investor sentiment. The evidence supports these predictions. In particular, we find that both closed-end funds and small stocks tend to be held by individual investors, and that the discounts on closed-end narrow when small stocks do well. The Journal of Finance, Vol. XLVI, No. 1 (March 1991), pp. 75109. (Reprinted withpermissionof The Journal of Finance.)
 
 

Why Do Universities Have Endowments?

Why Do Universities Have Endowments?