Poor Investor Protection Research Articles

Investor Protection and Liquidity of Cross-Listed Securities: Evidence from the ADR Market

Using 'American depository receipt' (ADR) data on various countries, this paper sets out to investigate the relationship between investor protection and firm liquidity. Since weak investor protection and poor economic prospects lead to greater expropriation by managers - and thus greater asymmetric information costs - liquidity providers will incur relatively higher costs and will therefore offer higher bid-ask spreads. Our empirical results demonstrate that the level of investor protection afforded to ADRs, as well as the quality of law enforcement, have significant effects on firm liquidity. This issue is further analyzed by investigating whether there is any increase in the vulnerability of ADRs of firms operating in countries with relatively poor investor protection mechanisms during a period of financial crisis. We explore this issue by examining whether net-selling pressure was any stronger on ADRs from countries with poor investor protection mechanisms during the period of the Asian financial crisis.

Asymmetric Information and the Choice of Corporate Governance Arrangements

This paper analyzes how asymmetric information affects which corporate governance arrangements firms choose when they go public. It is shown that such asymmetry might lead firms to adopting – through the design of securities and corporate charters -- corporate governance arrangements that are known to be inefficient both by public investors and by those taking firms public. When assets with higher value produce opportunities for higher private benefits of control, asymmetric information about the asset value of firms going public will lead some or all such firms to offer a sub-optimal level of investor protection. The results can help explain why charter provisions cannot be relied on to provide optimal investor protection in countries with poor investor protection, why companies going public in the US commonly include substantial antitakeover provisions in their charters, and why companies rarely restrict self-dealing or the taking of corporate opportunities more than is done by the corporate laws of their country. The analysis also identifies a potentially beneficial role that mandatory legal rules might play in the corporate area.

Corporate Governance, Investor Protection, and The Home Bias

If investors are poorly protected, it is optimal for firms to be closely held because selling shares to minority shareholders is otherwise too expensive. Empirically, most firms in countries with poor investor protection are closely held so that investors cannot hold the market portfolio. We show that the prevalence of closely held firms in countries with poor investor protection explains part of the home bias of U.S. investors. We construct an estimate of the world portfolio of shares available to investors who are not controlling shareholders (the world float portfolio). The world float portfolio differs sharply from the world market portfolio. In regressions explaining the portfolio weights of U.S. investors, the world float portfolio has a positive significant coefficient but the world market portfolio has no additional explanatory power. This result holds when we control for country characteristics. An analysis of foreign investor holdings at the firm level for Sweden confirms the importance of the float portfolio as a determinant of these holdings.

Erratum to “Governance with poor investor protection: evidence from top executive turnover in Italy”

Erratum to “Governance with poor investor protection: evidence from top executive turnover in Italy”

Governance with poor investor protection: evidence from top executive turnover in Italy

Abstract This paper studies the determinants of executive turnover and firm valuation as a function of ownership and control structure in Italy, a country that features low legal protection for investors, firms with controlling shareholders, and pyramidal groups. The results suggest that there is poor governance, as measured by a low sensitivity of turnover to performance and a low Q ratio, when (i) the controlling shareholders are also top executives, (ii) the control is fully in the hands of one shareholder and is not shared by a set of core shareholders, and (iii) the controlling shareholders own less than 50% of the firm's cash-flow rights.

The Role of Market Control on the Relation Between Ownership and Performance: Evidence from Turkish Market

The evidence of highly concentrated ownership structure in companies that have exposed themselves to market discipline illustrates a confusing structure of corporate governance. The disciplinary effect of the market is questioned in a context with concentrated ownership structure and poor investor protection. We explore whether the presence and magnitude of market control leads to differences in performance in the case of concentrated ownership structure. We explore how the presence and the magnitude of widely held ownership influence the different dimensions of performance in companies with concentrated ownership. We further investigate whether the differences in the identity of the controlling shareholder influences impact of market control on the performance of these firms. Companies trading in the Istanbul Stock Exchange as of 1999 constitute the sample of the study. The findings indicate the presence of a highly concentrated ownership structure in the Turkish market. The results of the regression analyses seem to indicate that the market control (dispersed ownership percentage) influences certain dimensions of performance but not in the expected direction. Market control does not seem to have any disciplinary effects on performance in concentrated companies. Identity of the controlling shareholder seems to have a profound effect on the performance. Controlling shareholders types that operate through a portfolio of other companies seem to have favorable influence on performance. Significant relationship between debt pressure and performance might be indicating the disciplinary pressure of the debt holders. The findings imply a potential disciplinary impact of stakeholders rather than shareholders or market. The study also provides supportive evidence for the impact of context on the relation between ownership and performance.

Governance with Poor Investor Protection: Evidence from Top Executive Turnover

This paper analyzes executive turnover and firm valuation in Italy, a country that features all the characteristics of the most common governance structure around the world, as described by La Porta, et al. (1999): low legal protection for investors, firms with large controlling shareholders and pyramidal groups. The main findings are that turnover is significantly lower and unaffected by performance when the controlling shareholder of the firm is also a top executive in the firm, while it is more sensitive to performance when control is, to some extent, contestable and when the controlling shareholder owns a larger fraction of the firm's cash-flow rights. The results on valuation are the mirror image of those on turnover: the firm's Q is lower for companies with the controlling shareholder as a top executive, larger when a voting syndicate controls the firm, and increases with the fraction of cash-flow rights owned by the controlling shareholder.

Sub-Optimal Acquisition Decisions Under a Majority Shareholder System: An Empirical Investigation

The high separation of ownership from control achieved in many Italian listed companies through the concurrent use of non-voting shares and stock pyramiding may favour acquisitions made to increase private benefits of the controlling shareholders rather than all the shareholders' wealth. A standard event study methodology is carried out on three different samples of acquisitions during 1989-1996 period in order to test the hypothesis. Firstly, we find evidence that poor performance is more likely to occur in acquiring firms where the separation of ownership from control (as measured by the o/c ratio) is higher. Moreover, value-enhancing transactions are found to be more likely embarked by acquirors smaller in size, with higher prior-performance and higher growth. Secondly, restricting the sample to aquirors with both voting and non-voting shares we show that the average cumulative abnormal returns (CARs) in a 60-day event window is +0.48 percent for the voting versus a significantly lower -4.41 percent for the non-voting shares. We explain this picture as evidence that on one side the average acquisition has been overpaid (as suggested by the negative sign of the non-voting shares). On the other side it reveals that the transaction was expected to lead to higher private benefits to the majority shareholders (as suggested by the revaluation of the vote component as difference between the two classes of shares). Finally, the market reaction to 19 acquisitions where both bidder and seller are held by the same controller clearly shows that the price is set so as to transfer wealth towards the companies located at the upper levels, where the ownership of the majority shareholders is less diluted. We interpret these findings as evidence that through the separation of ownership from control entrenched-majority shareholders owning only a minor fraction of cash flow rights may lead corporate wealth destroying investment decisions. Moreover, we show that the risk of expropriation seems to be the major principal-agent problem in a country characterised by poor legal investor protection, of which Italy may be an ideal archetype