Level Of Shareholder Protection Research Articles

The association between accounting information and share prices in developing countries: does corruption matter

The extant value relevance literature documents that the association between accounting information and share prices differs from country to country. Numerous studies attempt to explain the observed differences and identify their determinants, such as the system of corporate governance, the level of shareholder protection, or differences in accounting standards. To date, there is no paper that explicitly addresses the influence of a country's state of development and the level of corruption on the value relevance of accounting information. We fill this gap, as our analysis indicates that accounting information is more value relevant in less developed countries and in countries with high levels of corruption. We argue that in developing countries with high levels of corruption, capital market participants rely in particular on accounting information to compensate for a lack of reliable alternative information sources.

The association between accounting information and share prices in developing countries: does corruption matter

The extant value relevance literature documents that the association between accounting information and share prices differs from country to country. Numerous studies attempt to explain the observed differences and identify their determinants, such as the system of corporate governance, the level of shareholder protection, or differences in accounting standards. To date, there is no paper that explicitly addresses the influence of a country's state of development and the level of corruption on the value relevance of accounting information. We fill this gap, as our analysis indicates that accounting information is more value relevant in less developed countries and in countries with high levels of corruption. We argue that in developing countries with high levels of corruption, capital market participants rely in particular on accounting information to compensate for a lack of reliable alternative information sources.

Shareholder Protection in China from a Numerical Comparative Law Perspective

The traditional approach in legal comparative research is doctrinal rule-based. A relatively recent breakthrough has been the use of econometric techniques in comparing the extent of success in different jurisdictions with respect to, for example, protecting shareholders. The meshing of legal research and econometrics is known as ‘leximetrics’ (Lele & Siems, 2007). One of the most prominent and widely cited use of leximetrics is the seminal study by La Porta and colleagues (1997, 1998 & 2000) on the correlation between shareholder protection and financial development. The study, though highly influential, has attracted various criticisms. Subsequent studies have sought to build on the study by coming up with improved research design. For example, using a panel dataset covering a range of developed and developing countries, researchers from the Cambridge Centre for Business Research have discovered that a significant upward movement in the level of shareholder protection was made by China between 1990 and 2013 (Armour et al., 2009; Siems, 2016). It has been suggested that between the period, China experienced the ‘biggest increase in shareholder protection’ amongst 30 countries studied, and China was amongst the top performers (along with France and Russia) in shareholder protection in 2013, performing even better than the UK and the US. At the same time, the World Bank’s (2017) Protecting Minority Investors Index, which forms part of its Doing Business Reports, has recently painted a rather opposite picture, in contrast to the positive assessment by the Centre for Business Research, by putting China in the 119th position out of 190 countries which indicates a very mediocre performance. This article seeks to address the question of whether and how the two studies, both employing leximetric techniques and examining an ostensibly similar issue, can point to discrepant results.

Ownership structure, investors’ protection and corporate valuation: the effect of judicial system efficiency in family and non-family firms

Research on the effect of ownership structure on firm performance shows no convergent evidence concerning the sign and form of the above-mentioned relationship. Similarly, there is no homogeneous evidence documenting family ownership concentration is always positively or negatively correlated with firm value, or irrelevant. This paper analyses whether and how the de facto investor protection provided by the judicial system affects the relationship between corporate performance and ownership structure in 1314 firms operating in four European countries (Germany, France, Italy, and Spain) over a five-year period, 2010–2014. Moreover, we analyse whether judicial system efficiency influences if and how family firms in the controlling coalition collude for expropriating minority shareholders. Our findings show that the level of shareholder protection, derived from judicial efficiency, is relevant to the relationship between ownership structure and firm performance, thus corroborating literature in that institutional contexts matter in explaining such relations. The results suggest the need for more efficient external mechanisms of corporate governance to facilitate investment in equity capital, thus decreasing the country risk perceived by investors.

Signaling, corporate governance, and the equilibrium dividend policy

Abstract The well-documented information content of dividends is contingent on the firm's corporate governance. Using cross-listing events, we find that firms reach a new equilibrium dividend policy after a shift in the level of shareholder protection and the direction of the dividend adjustment depends on the pre-cross-listing locus of control. Exchange-traded cross-listings can afford to decrease dividend payouts as they substitute dividends with better corporate governance. However, dividend distributions and the likelihood to pay dividends increase when cross-listings are controlled by insiders, supporting the signaling hypothesis. The cross-listing level and ownership structure convey useful information regarding future shifts in dividend payouts.

Disappearing Paradigms in Shareholder Protection: Leximetric Evidence for 30 Countries, 1990-2013

Scholars frequently claim that path dependency of the law, the influence of the US model of corporate governance, and the role of legal origin and the stage of legal development are key for a comparative understanding of shareholder protection. This article, however, suggests that these paradigms of comparative company law gradually seem to disappear. The basis for our assessment is an original leximetric dataset that measures the development of shareholder protection for 30 countries over the last 24 years. Using tools of descriptive statistics, time series and cluster analysis, our main findings are that all legal origins have now in average about the same level of shareholder protection, that paternalistic tools have overtaken enabling tools of protection, and that after the global financial crisis this area has become a less frequent object of law reforms.

Disappearing Paradigms in Shareholder Protection: Leximetric Evidence for 30 Countries, 1990–2013

Scholars frequently claim that the path dependency of the law, the influence of the US model of corporate governance, and the role of legal origin and the stage of legal development are key for a comparative understanding of shareholder protection. This article, however, suggests that these paradigms of comparative company law gradually seem to be disappearing. The basis for our assessment is an original leximetric dataset that measures the development of shareholder protection for 30 countries over the last 24 years. Using tools of descriptive statistics, time series and cluster analysis, our main findings are that all legal origins now have on average about the same level of shareholder protection, that paternalistic tools have overtaken enabling tools of protection, and that, after the global financial crisis, this area has become a less frequent object of law reforms.

Shareholder versus Stakeholder Protection and Interest-Group Politics

This paper develops a framework for analyzing how lobbying by interest groups affects the levels of both shareholder and stakeholder protection. We find that lobbying may lead the equilibrium level of shareholder protection to be suboptimal; the new result is that it may be too high, not just too low. We show that deregulation of lobbying increases the suboptimality of protection levels, while ownership concentration contributes to reduce it.

Law, politics and the governance of English and Scottish joint-stock companies, 1600–1850

This article examines the impact of law on corporate governance by means of a case study of joint-stock enterprise in England and Scotland before 1850. Based on a dataset of over 450 company constitutions together with qualitative information on governance practice, it finds little evidence to support the hypothesis that common-law regimes such as England were more supportive of economic growth than civil-law jurisdictions such as Scotland: indeed, levels of shareholder protection were slightly stronger in the civil-law zone. Other factors, such as local political institutions, played a bigger role in shaping organisational forms and business practice.

The Regulatory Effect on the Performance of Financial Analysts: Time Series from Two Different Legal Systems

The focus of this paper is the relationship between regulatory settings and financial analysts’ performance, which is examined by studying the level of shareholder protection and the performance of financial analysts in two countries with different legal origins. By using a newly constructed index to measure shareholder protection, we are able to analyze how changes in shareholder protection over time can affect analysts’ performance. By comparing two countries with different legal traditions (the United Kingdom (UK) and Sweden), we are also able to assess whether the underlying legal origin is an influential factor. The results show that increased shareholder protection improves forecast accuracy in both the UK and Sweden, supporting the idea that stronger shareholder protection regulations improve analysts’ performance whether the legal context is rooted in common law or Scandinavian civil law tradition. The findings also indicate that strengthened shareholder protection decreases forecast dispersion in Sweden and forecast bias in the UK, further supporting the idea that stronger shareholder protection improves analysts’ performance even though the results differed across legal contexts. We did, however, find a substitution effect in both countries: Strengthened shareholder protection makes analysts’ services less valuable to investors, thus leading to a reduction in the number of analysts. Our main conclusion is that changes in shareholder protection affect the performance of analysts irrespective of the country’s legal origin, i.e. common law or Scandinavian civil law. However, legal origin seems to have an impact on the magnitude of analysts’ performance based on changes in shareholder protection.

The impact of R&D on the value of European firms

The purpose of this paper is to provide additional research on the market valuation of R&D in Europe, and also to shed light on some firm and country characteristics which sensibly modulate the effect of R&D on firms’ value. The analysis is performed using a panel regression approach with fixed effects, including time and country effects, for years 2001–2007. Empirical results show that the effect of R&D expenditures is positive and significant across countries with the exception of Italian firms, confirming previous evidence on this topic. R&D is most highly valued for firms that operate in hi-tech sectors, whereas it remains negative for low-tech ones. Size generally presents negative returns to scale for these firms, indicating that small firms which operate in hi-tech industrial sectors are able to invest more efficiently in R&D. Firms that operate in low-tech industries can achieve consistent returns to scale due to their alternative investment in innovation. Well-developed loan and equity markets and a high level of shareholder protection have a positive effect on the market valuation of R&D. The empirical results we achieve offer an interesting point of view about the effect of R&D on firms’ performance across European financial markets.

Shareholder Protection and Stock Market Development in France (1852-2007)

This paper is the first long-run historical analysis of stock market development and minority shareholder protection in France (1852-2007). For this purpose, we constructed a unique time series of shareholder protection indices (anti-director rights and securities law) and relied on triangulated and extensive secondary time-series data on French stock market development. Our analysis indicates that, contrary to the predictions of the influential “Law and finance” theory, formal investor protection was not a crucial determinant of stock market development in France from 1852 to 2007. In addition, beyond its conceptual shortcomings, “Legal Origins” theory is not able to account consistently for the differences in levels of shareholder protection between Civil law France and Common law countries across the century. Finally, the evidence provided suggests that neither capital and trade openness alone nor the partisan orientation of governments were significant contributors to the development of French equity markets in the period considered. Rather, we suggest that a political explanation, which incorporates the preferences of social classes and interest groups, the distinct impact of political institutions and the consequences of complementarities among economic institutions, may be a better option in explaining the variance in stock market development in France over time.

The Level of Shareholder Protection and the Value Relevance of Accounting Numbers: Evidence from the European Union Before and After IFRS

This paper investigates the impact of the adoption of IFRS on the relative position of six European countries concerning the value relevance of accounting numbers and whether the level of shareholders protection is likely to influence this impact. This research provides evidence on the change from a context where accounting numbers are significantly more value relevant in the Anglo-Saxon countries than in Continental countries (pre-IFRS period) to a context where the value relevance of accounting numbers differs significantly between countries with different levels of shareholder protection (post-IFRS period). This finding suggests the importance of considering shareholder protection when promoting the adoption of IFRS around the world.

Accounting conservatism of cross-listing firms in the pre- and post-Sarbanes Oxley periods

Abstract This study investigates the level of accounting conservatism of a sample of cross-listed firms, American Depository Receipts (ADRs), during the pre- and post-Sarbanes Oxley (SOX) periods. After examining two proxies for accounting conservatism, Basu's [Basu, S. (1997). The conservatism principle and the asymmetric timeliness of earnings. Journal of Accounting and Economics 24(1), 3–37.] conservatism measure and abnormal accruals, we find that the SOX-exposed Levels II and III ADRs become more conservative during the post-SOX period while the SOX-unexposed Level I ADRs have no increase in the level of accounting conservatism. Further, we investigate whether such an increase in accounting conservatism is associated with different levels of shareholder protection in ADRs' home countries, and find that only Levels II and III ADRs from code law (weak shareholder protection) countries become more conservative and Levels II and III ADRs from common law (strong shareholder protection) countries have no change in accounting conservatism. These results suggest that SOX-exposed cross-listing firms from weak shareholder protection countries are most greatly influenced by the stringent requirements in SOX, and hence respond by increasing conservatism in their financial reporting.

What Companies Need to Know About International Cross‐Listing

This article addresses four questions about cross‐listing by non‐U.S. companies on a U.S. stock exchange: Why do companies cross‐list? Does a U.S. listing increase firm value? If so, what are the sources of the increased valuation? And finally, how has the Sarbanes‐Oxley Act (SOX) affected the value of a U.S. listing?Both managerial surveys and academic research show that companies list in the U.S. to increase visibility and share liquidity, to broaden their shareholder base, to gain access to cheaper financing and reduce the cost of capital, and, in some cases, to implement a global business strategy. Foreign companies also typically cross‐list after periods of strong market performance and experience a positive valuation effect around the time of listing, but then underperform the market in the period after the cross‐listing. On average, cross‐listed companies exhibit higher valuations than their home‐market peers, but with significant variation based on firm characteristics: The valuation premiums are larger for smaller companies with higher past sales growth, higher ROAs, and lower financial leverage. In the long run, the companies that show a permanent increase in valuation are those that succeed in expanding their U.S. shareholder base and improving their levels of shareholder protection. Finally, the evidence suggests that SOX, while perhaps deterring some would‐be overseas listings, has not seriously eroded the net benefits of a U.S. listing.

On the Fallacy of LLSV Revisited - Further Evidence About Shareholder Protection in Austria and the United Kingdom

La Porta, Lopez-de-Silanes, Shleifer and Vishny's Law and Finance, in particular its shareholder protection measures, have been heavily criticised from nearly every different standpoint, for example methodology, the choice of variables, the simplicity of the judgment or the disregard of board structures. Braendle was the first to move the critique forward by combining the wide range of objections to the index, whereas previous critiques had focused on separate objections only. Broadening the scope to encompass the range of objections he reconsidered the level of shareholder protection for Germany and the United States. The result was astonishing, after LLSVs score was reassessed and adjusted for differences between Civil and Common law in more detail. While the original score for Germany and the US was 0:5 and therefore suggested a very high level of shareholder protection in the latter, the reassessed score amounted to 4:4. This reconsideration as opposed to a single-tracked criticism challenged LLSVs thesis - which is seen as being so important throughout the legal, economic and political world - on a more profound level. This work accepts Braendle's invitation, introduces Law and Finance, summarizes and classifies the different objections made so far and finally reconsiders LLSVs shareholder protection measures for two further countries: Austria and the United Kingdom. The outcome is very similar to Braendle's work. The paper ends with three main conclusions: First and most important: LLSVs shareholder protection index is incorrect. The second conclusion drawn is that the differences between Common and Civil Law countries in shareholder protection are not as severe as suggested by Law and Finance. And third, research based on LLSVs shareholder protection index has to be reconsidered, because it rests upon inappropriate pre-requisites.

Cross-country determinants of mergers and acquisitions

We study the determinants of mergers and acquisitions around the world by focusing on differences in laws and regulation across countries. We find that the volume of M&A activity is significantly larger in countries with better accounting standards and stronger shareholder protection. The probability of an all-cash bid decreases with the level of shareholder protection in the acquirer country. In cross-border deals, targets are typically from countries with poorer investor protection than their acquirers’ countries, suggesting that cross-border transactions play a governance role by improving the degree of investor protection within target firms.

Cross-Country Determinants of Mergers and Acquisitions

We study the determinants of mergers and acquisitions around the world by focusing on differences in laws and regulation across countries. We find that the volume of M&A activity is significantly larger in countries with better accounting standards and stronger shareholder protection. The probability of an all-cash bid decreases with the level of shareholder protection in the acquirer country. In cross-border deals targets are typically from countries with poorer investor protection than acquirers, suggesting that cross-border transactions play a governance role by improving the degree of investor protection within target firms.

Effects of Law on Corporate Financing Practices - International Evidence from Convertible Bond Issues

Examining call protection terms offered by convertible bond issuers from countries with varying levels of shareholder protection and creditor protection provides an interesting previously unexplored method to observe whether firms adjust the design of their financing contracts depending on the nature of local law. The possibility of a forced conversion instituted by an early call is more threatening to investors in an economy where local laws provide less protection to shareholders. Likewise, in an economy where the legal infrastructure makes creditorship appealing, investors should prefer more debt-like contracts. I hypothesize that convertibles issued by firms from shareholder-friendly countries are more equity-like, and convertibles from creditor-friendly countries are more debt-like, and consequently the level of shareholder protection should be inversely related to call protection strength, and creditor protection should be positively related to it. I find strong evidence supportive of my hypothesis in a sample of 1,480 convertible bonds from 27 countries.

Capital Account Liberalization, Institutions and Financial Development: Cross Country Evidence

The empirical relationship between capital controls and the financial development of credit and equity markets is examined. We extend the literature on this subject along a number of dimensions. Specifically, we (1) investigate a substantially broader set of proxy measures of financial development; (2) create and utilize a new index based on the IMF measures of exchange restrictions that incorporates a measure of the intensity of capital controls; and (3) extend the previous literature by systematically examining the implications of institutional (legal) factors. The results suggest that the rate of financial development, as measured by private credit creation and stock market activity, is linked to the existence of capital controls. However, the strength of this relationship varies with the empirical measure used, and the level of development. These results also suggest that only in an environment characterized by a combination of a higher level of legal and institutional development will the link between financial openness and financial development be readily detectable. A disaggregated analysis indicates that in emerging markets the most important components of these legal factors are the levels of shareholder protection and of accounting standards.