Rent Extraction Research Articles

The South African mining royalty regime: Considerations for modifying the system to balance its competing objectives

Mineral royalties are one of the oldest forms of mining taxation, and were initially introduced to extract economic rents from mining. Over time, the royalty regime has become more complex as it was identified as an important policy instrument that can achieve more multi-faceted outcomes. Such a multi-tiered approach in the use of the royalty instrument is also the case with South Africa. With South Africa's new mineral royalty regime now in place for ten years, it is perhaps time to assess its impact and effectiveness. To carry out this assessment, an econometric evaluative study was undertaken using four major commodities in South Africa, namely gold, platinum, iron ore, and coal. The study explored five different policy options for government to consider and tested them to determine the most favourable one that will realize the regime's policy objectives. After the assessment, two major options stood out. Hence, this paper seeks to highlight which of the two options is the most favourable for consideration by policymakers. Based on that study, we find that the current structure is effective, but also recommend that the factors in the formula for refined minerals be 'modified' to reduce the capped profitability ratio from the current 60% to 30% and the maximum royalty rate for refined minerals from 5% to 3%. The minimum rate of 0.5% during times of depressed mineral prices and no or low profitability will not be affected.

Green Commitment and Stock Price Crash Risk

The information obfuscation hypothesis states that managers use corporate green practices intentionally to obfuscate or disguise negative information and environmental misbehaviour to extract rents for personal career concerns. In contrast, signalling theory suggests that green-oriented firms deliver a positive signal to the market, favouring “green” investors. Such pro-environmental signals ultimately translate into enhanced financial performance and reduced risk of a price crash. Using Chinese listed firms as the research setting, we further investigate the relationship between corporate green commitment and stock price crash risk. The results show that solid green commitment significantly reduces stock price crash risk. The effect is more pronounced in non-state-owned firms and when the stock market is in a downturn. We also find mediating effects of external governance by institutional investors and media that transmit the impact of green commitment onto price crash risk. Our findings have important implications for corporate resilience against unexpected crises.

The nasty face of the liability of foreignness: MNCs and rent extraction

PurposeThis study aims to clarify the factors that act as a buffer to rent extraction from multi-national corporations (MNCs) in exchange relationships with the host country’s political actors.Design/methodology/approachThis study proposes a conceptual model of the factors that determine rent extraction by host country political actors from MNCs. The model identifies the sources of power the MNC can use to alleviate the power imbalance relative to the political actor to decrease rent extraction. Additionally, it identifies the factors that constrain the power-advantaged political actor, thus moderating the relationship between power imbalance and rent extraction.FindingsThis conceptual paper’s propositions remain for future empirical validation.Originality/valueThis study integrates insights from the international business literature and resource dependence theory (RDT) to identify the determinants of firm-specific rent extraction risk for MNCs. First, the model sheds light on the heterogeneity among MNCs in their susceptibility to rent extraction and their ability to manage their liability of foreignness in the host country. Second, by integrating the horizontal and vertical distribution of power in the political environment to analyze the power-dependence relationship between the MNC and host country political actors, the framework addresses a shortcoming of RDT and accounts for the dynamics of the external environment for MNCs managing their dependencies. This study also provides a basis for discussing the rent extraction MNCs face worldwide and lays the foundation for future empirical works.

When Ants Beset the Elephant: Rent Extraction and Resistance on China's E-commerce Platform

AbstractE-commerce in China has developed and expanded rapidly in recent years. Conflicts and confrontations have accumulated in parallel. Using Taobao e-marketplace – one pillar platform of the Alibaba group – as its case, this article aims to analyse the developmental logic and profit-seeking strategies of e-commerce capitalism in China and beyond. It also investigates how small online merchants responded to and resisted the particular rent-extractive and exclusive mechanisms designed by the platform. I attempt to identify the emerging responses from below to both the creative and destructive sides of this newest capitalist development in China. I argue that, despite the militancy and innovation involved in these movements, and despite the use of Maoist rhetoric borrowed from the past, the contentious collective actions (online or offline) organized by these small online merchants lack the solidarity, the shared identity and consciousness, and the powerful ideological language observed among the “traditional” working class in industrial capitalism, and hence they are more improvised, transient, and easily defeated.

Rentiers of the low-carbon economy? Renewable energy's extractive fiscal geographies

Progressive movements today call for transformative state-led investment in renewable energy and other climate infrastructures—in the United States, a vision that confronts inherited legacies of austerity. I argue that a significant obstacle is the neoliberal toolkit through which the US federal government subsidizes renewables, an indirect, highly opaque system of tax credits and incentives. For forty years, tax subsidies have ‘paid’ private financial players to invest in renewables, via allowing them to claim legal tax shelters against their other income. In this political economic analysis, I question, first, how US renewable energy acquired this peculiar form of public finance ‘through the tax code’, unique in the global industry. Second, I explore how the model has shaped US renewables financing, development, and ownership. I center two decisive moments: the California ‘wind rush’ in the 1980s, and the ongoing renewables boom of the last fifteen years. This history articulates financial experiments and tax sheltering scandals of the Reagan Administration with exploitation returned today in more organized (and lucrative) form, as ‘tax equity’ finance. Via tax equity, a handful of major US banks dominate financing for renewables and other politically embattled public goods. They exert a troubling ability to extract rents for their capital, gatekeep what projects get built and by whom, and stall US renewables development altogether. Today, the practice is increasingly strained by these and other problems—growing public costs, private capacity ceilings, and amplification of sectoral crises. Under Biden, it faces probable reform, but may need more comprehensive reimagination.

How does the market for corporate control impact tax avoidance? Evidence from international M&A laws

Income taxes are a major expense for profitable corporations, often totaling 25% or more of pretax income. This study exploits the market for corporate control to test competing agency-based and risk-based explanations of corporate tax planning. Exploiting the staggered enactment of M&A laws across countries that increased the threat of takeover as an exogenous shock that allows a powerful difference-in-differences design, we find a significant reduction in tax avoidance following the takeover law passage. Our analysis suggests that reduced private benefits consumption (i.e., rent extraction) by management, rather than managerial effort aversion or increased risk concerns associated with aggressive tax strategies, is the likely mechanism through which takeover laws impact tax avoidance. Collectively, our findings extend the literature by highlighting the role of the corporate control market in shaping cross-sectional variation in corporate tax avoidance.

Skill, Scale, and Value Creation in the Mutual Fund Industry

ABSTRACTWe develop a flexible and bias‐adjusted approach to jointly examine skill, scalability, and value‐added across individual funds. We find that skill and scalability (i) vary substantially across funds, and (ii) are strongly related, as great investment ideas are difficult to scale up. The combination of skill and scalability produces a value‐added that (i) is positive for the majority of funds, and (ii) approaches its optimal level after an adjustment period (possibly due to investor learning). These results are consistent with theoretical models in which funds are skilled and able to extract economic rents from capital markets.

Does corporate tax avoidance promote managerial empire building?

We examine the association between corporate tax avoidance and empire building using 35,060 firm-year observations from the United States (US) for the period 1991–2015. We build a composite empire building measure by conducting a factor analysis on four popular empire building proxies used in the literature. We find a positive association between this composite measure and the four proxies used to represent the tax avoidance of firms in our sample. As our results suggest, agency problems are inflicted upon firms employing tax avoidance strategies which, in turn, facilitate managerial rent extraction through aggressiveness in growth and the accumulation of assets. Furthermore, the relationship of corporate tax avoidance to managerial empire building is found to be more pronounced in firms with weak governance, poor monitoring mechanisms, greater Chief Executive Officer (CEO) power and weak corporate social responsibility (CSR) performance. We also find that empire building-motivated tax avoidance leads to lower firm valuation. Our results remain insensitive even when employing several robustness tests.

Urban green grabbing: Residential real estate developers discourse and practice in gentrifying Global North neighborhoods

In the movement towards building greener and more sustainable cities, real estate developers are increasingly embracing not only green building construction but broader strategies and action related to urban greening. To date, their motivations and role in this broader urban greening dynamic remains underexplored, yet essential to dissect how greening is sustained and real estate development legitimized in revitalizing neighborhoods. With an eye to better understand green urban capitalist development processes underway amidst financialized nature and urban growth, and the equity impacts they entail, we explore residential real estate developers urban greening discourses and practices. Through a novel dataset of 42 interviews with private and non-profit residential real estate developers in 15 mid-sized American, Western European and Canadian cities, we uncover three differentiated but interconnected discourses around (i) financial benefits, (ii) consumer- or investor-driven demand and (iii) social dimensions behind developers’ interest in urban greening. We argue that developers embark on urban green grabbing through “green” discursive and material value appropriation and rent extraction strategies. Urban green grabbing is conceptually useful in depicting who benefits and how/when developers extract additional rent, surplus value, social capital and/or prestige from locating new residential projects adjacent to new or up-and-coming green amenities. Our work contributes to debates about urban greening's perceived position as a value-producing and rent-extracting good from both a political economy and political ecology perspective.

Self-Selection into corruption: Evidence from the lab

We study whether opportunities to extract rents in a job affect the type of individuals who are attracted to it in terms of their underlying integrity. We do so in a laboratory experiment in which participants choose between two contracts that involve different tasks. We experimentally introduce the possibility of graft in one of them and study the sorting of subjects across contracts based on an incentivized measure of honesty. We find that the corruptible contract changes the composition of subjects attracting the most dishonest individuals and repelling the most honest ones. In addition, we observe extensive graft when the opportunity is available. Our results have clear policy implications to curb corruption.

Market discipline or rent extraction: Impacts of share trading by foreign institutional investors in different corporate governance and investor protection environments

Minority investors' reliance on market discipline can vary with different country-level investor protection and firm-level corporate governance environments, which affect both discipline and rent extraction incentives of foreign institutional investors (FIIs). Using data from 47 economies between 2009 and 2017, we find that firm value increases with FIIs aggressive trading but decreases with FIIs discreet trading. The positive and negative impacts of FIIs trading are strengthened when investor protection is stronger, but weakened when corporate governance is stronger. Our analysis enhances understanding of trade-offs of FIIs trading between discipline and rent extraction in different corporate governance and investor protection environments.

Dividend Smoothing and Firm Valuation

AbstractWe examine the relationship between dividend smoothing and firm valuation across 21 countries using several empirical methods and smoothing measures. Our main results show that dividends are capitalized at significantly larger values for high-smoothing firms than for low-smoothing firms. We also find that dividend-smoothing premiums are higher in countries with weak shareholder protection – suggesting that smoothing serves as a substitute mechanism to reduce agency costs. Overall, our findings support the view that managers use dividend smoothing predominantly as a bonding mechanism to reduce agency costs (Leary and Michaely (2011)), and not as a rent extraction mechanism (Lambrecht and Myers (2012)).

Information Asymmetry, Financial Intermediation, and Wealth Effects of Project Finance Loans

Abstract Using a unique hand-collected sample, we study market reactions to mining developers announcing project finance loans. We document a significant three-day abnormal return of 2.6% and a 3.4% reduction in abnormal bid-ask spread around loan approvals, consistent with information transfer from private lenders to equity holders and reduction in asymmetric information. Cross-sectional analysis reveals a negative association between announcement return and hedging requirements specified in loan contracts, which becomes insignificant after controlling for treatment effects of hedging. Specialist banks do not charge lower rates but are more likely to impose hedging requirements, consistent with rent extraction due to bargaining power. (JEL G30, G32)

The association between ownership concentration and payout behaviour: Evidence from South Africa

Orientation: The study investigated the association between ownership concentration and different payout methods of selected companies listed on the Johannesburg Stock Exchange (JSE) in South Africa for the financial reporting periods 2012 to 2019.Research purpose: The research objective was to investigate whether payout behaviour differed when low and high ownership concentration was compared.Motivation for the study: An understanding of the association between ownership concentration and payout policies is an important corporate governance aspect that could reveal the agency conflict between majority and minority shareholders. No previous South African empirical study has considered testing or investigating the two opposing agency-based hypotheses, namely the monitoring and rent extraction hypotheses, with reference to different payout methods.Research design, approach, and method: An empirical research design was followed, which is descriptive in nature. Descriptive statistics and a mixed-model analysis of variance were employed to describe the different payout methods – that is ordinary dividends, special dividends, capital distributions, additional shares, general share repurchases, and specific share repurchases – employed by companies listed on the JSE based on a distinction between low and high ownership concentration.Main findings: High ownership concentration was found to be associated with statistically significant lower ordinary dividends and capital distributions in support of the rent extraction hypothesis. Rent extraction highlights the agency conflict between majority and minority shareholders.Practical/managerial implications: Findings of the present study revealed agency conflicts that may be informative to those charged with corporate governance to help them resolve agency conflict.Contribution/value-add: This study is the first to consider the association between ownership concentration and payout behaviour in South Africa subsequent to the introduction of the dividends tax regime in 2012. The descriptive evidence submitted can serve as a basis for further explanatory research relating to ownership concentration and payout behaviour of companies.

Commodity taxes and rent extraction

Commodity taxes and rent extraction

The value of the city. Rent extraction, right to housing and conflicts for the use of urban space

The extent of residential alienation and urban inequalities made visible in the aftermath of the 2008 financial crisis shed light on processes of politico-economic transformations that altered the role of housing within society since the late 1970s. The focus on (re-)commodification and financialization has become central in the debate and opened up rich interdisciplinary strands of research on the impacts that these processes have on housing. Building on such a fertile academic body of work, it is paramount to contribute to the setting of the public agenda, putting housing issues at the heart of the political debate and policy actions. Introducing this special issue, the paper is firstly asserting the political dimension of housing. Secondly the issue of urban rent extraction is discussed as crucial, especially in the face of the disruptive effects of extensive processes of re-commodification and financialization of housing and land markets in a context of neoliberal urban policies. Thirdly, the Italian case is presented as extremely relevant when it comes to understanding the political dimension of housing, recalling the controversial debates and clashes developed along the 20th century and the current trends of a country confronted with intense processes of financialization of housing, with a significantly accelerated real-estate cycle transforming the residential landscape and resulting in the most intense building cycle of the last half-century. Finally, the dynamics of de-politicisation (and re-politicisation) of housing are recalled with reference to the contributions collected in this special issue.

Land speculation by villagers: Territorialities of accumulation and exclusion in peri-urban China

Speculation in land and real estate has become a chief means of revenue generation in cities across the world. The literature on speculative urbanism has discussed how the advent of land markets transformed government strategies and created new partnerships between state and capital for rent extraction. Far less attention, however, has been paid to grassroots practices of speculation among residents of peri-urban and rural areas, whose neighbourhoods are often dramatically transformed by the rapid appreciation in land prices brought about by urbanization. Based on fieldwork in a Chinese urban village, this paper demonstrates how land commodification gave rise to competitive territorialization and forms of "intimate exclusion" within the community. The boom in property prices amplified inequalities between villagers, as those with greater access to capital, authority and social networks were better positioned to reap gains from the market while those without land rights were excluded. The desire to capitalize on market gains furthermore sharpened intra-community conflicts, creating tensions between neighbours and family members over issues of ownership and distribution. By focusing on everyday practices of territorialization at the neighbourhood level, this paper sheds light on how land speculation and rentiership could contribute to deepened differentiation at the urban frontier.

A Nasty Face of Liability of Foreignness: MNCs and Rent Extraction

This paper provides a conceptual framework on contingency factors that determine rent extraction by host country political actors from MNCs. Using insights from resource dependence theory (RDT) and international business literature, the paper identifies the factors at different levels (MNC, dyad and political environment level) which determine rent extraction and aims to shed light in understanding why MNCs in a host country differ in their susceptibility vis-a-vis the political actors in terms of being subject to rent extraction and in their ability to manage their liability of foreignness. Moreover, by integrating the horizontal and vertical distribution of power in the political environment to the analysis of the power-dependence relation between the MNC and the political actors, it extends the resource dependence theory’s dyad-focused approach and addresses a shortcoming of RDT in taking into account the dynamics of the external environment of the firm.

Competition, Firm Financial Pressure, & Location Strategy: Evidence from the Micro-Mobility Industry

This paper examines the relationship between location traits, firm capabilities—including firm financial pressure—and expansion timing and location choice in a competitive environment. I first build a formal model of firm expansion and entry timing based on Cournot competition that is driven by heterogeneity in firm, location, and competitor traits. Using Monte-Carlo simulation, I identify firm best responses and Nash Equilibrium which serve as predictions for empirical inquiry. I then consider how changes in firm traits and location traits lead to different expansion outcomes including whether firms expand at all, whether firms enter a market early or later, and which geographical location firms choose. There are trade-offs to each expansion outcome. While similar firms will have similar monopoly and duopoly rents, as firm relative capabilities differ so too do their ability to extract rents. Staggered entry becomes more appealing as firm relative capabilities and financial conditions change. Additionally, expansion strategy becomes more nuanced when considering the interaction between firm, competitor, and location traits. For instance, I find that less capable firms prefer to expand after more capable firms, but pressure for revenues may push less capable firms to expand earlier than they would prefer. I discuss one set of propositions that can be explored given my empirical setting. I test predictions from the model using a unique hand-collected dataset of firm expansion in the micro-mobility industry including all firms operating scooter, bike, and moped share businesses in the U.S. Increased financing from venture capital funding and the increased quality and availability of platform technologies have led to rapid expansionary behavior in industries with a large start-up presence. The empirical results support some model predictions and illustrate the importance of different levels of data in explaining expansion strategy. The data also highlights several areas to extend the model.

Business Group Affiliation and the Risk of PAE Litigation

Using novel data on US public firms, this paper investigates the preferences of patent assertion entities (PAEs) to choose target companies. Drawing upon signaling theory, we argue that business group affiliation can be interpreted by PAEs as an informative attribute about the superior value creation capabilities of affiliated firms (compared to standalones). PAEs, as rent-seekers, could leverage this information to identify opportunities to extract rents. Consistent with our argument, we find that PAEs tend to sue more to companies having business affiliations than companies without such affiliations. However, business groups differ from one another in a range of observable attributes, generating differing opportunities from rent extractions. We also examine the role of three business group characteristics in conveying information to PAEs. The results show that the bigger the business group, the more attractive to PAEs. Likewise, the higher the technological overlap, the greater the probability of being sued. Our results also reveal that the organizational distance is not a key driver.