Expropriation Risk Research Articles

Changes in political affinity and firms’ subsidiary investments

Firms’ foreign investments are to a large extent influenced by the political environment in their foreign locations. A recent stream of literature has focused on the bilateral relations between countries as antecedents of multinational firms’ new investments. So far, this literature has not examined changes in existing investments due to the ongoing development of political relations. Thus, we investigate the effect of changes in countries’ bilateral political affinity on multinational firms’ foreign subsidiary investments. Political affinity is defined as the extent to which countries have similar national interests in global affairs. We argue that firms' decision to increase or decrease subsidiary investments is significantly influenced by political risk embedded in the political relationship between home country and subsidiary country. Changes in political affinity between a firm's home and subsidiary country can lead to increased subsidiary coordination costs and heightened expropriation risk. Analyzing 1606 US public firms and their ties to 142 different subsidiary countries from 2000 to 2015, we find that a positive (negative) change in political affinity leads to an increase (decrease) in firms' foreign subsidiary investment. We further explore these effects, finding that a more stable (unstable) political environment in the foreign location positively (negatively) moderates these effects.

FDI, Stock Market Development and Institutional Quality: An African Perspective

This paper empirically sought to establish the existence of relationships between foreign direct investment, stock market development and institutional quality, respectively. The study adopted a multiple regression analysis, using a panel of nine African countries between 2009 and 2016. Using the random effects model, we find that the relationship between foreign direct investment and stock market development is positive and statistically significant. On the other hand, institutional quality reflected a negative effect on FDI inflows, implying that countries with low quality institutions would struggle to attract inward FDI. The policy implications are that host countries’ policy makers should eliminate or reduce any practices that deter foreign direct investments, such as capital controls and risk of expropriation (institutions), while simultaneously improving the domestic financial infrastructure and related regulations.

Privatisation of Toll Roads to Promote Malay Entry into Business in Malaysia: A Critical Review of Distribution Stance, Returns, Risk and Governance

The focus of the paper is on toll road privatisation. An overview of the choice of privatisation and the form it took, in promoting the entry of Malays into business, is followed by a review of other studies on privatisation in Malaysia. Given the highly confidential nature of the privatised concessions, data on ownership and likely terms have been gleaned from rating of the bonds issued, as the bond market has been the key source of infrastructure financing. From such data, the dominance of the Malay managerial class over its business class is readily evident, especially after the Asian financial crisis (AFC). The likely impact of toll road privatisation on the stance of distribution is also examined. As concessions are still awarded on a negotiated basis, the issue of rent-seeking is also explored. Uncertainty and variability in the financial performance of the concessionaires can be seen from the spread and deterioration in credit of the issuers, attesting to the greenfield nature of the projects undertaken or due to differences in gearing or in the support and subsidy enjoyed from the government. The separation in ownership and control, either due to continued ownership by state-owned enterprises (SOEs) or widely held public listed companies (PLCs), has increased the risk of expropriation by those who exercise management control.

Discussion of: The State Expropriation Risk and the Pricing of Foreign Earnings

Discussion of: The State Expropriation Risk and the Pricing of Foreign Earnings

Does the market understand the ex ante risk of expropriation by controlling shareholders?

We examine how the market values operating assets in the presence of time-varying ex ante risk that these assets may be tunneled away. We analyze pairs of Chinese publicly listed firms and their non-listed parents and examine the market valuation of current assets (cash balances, trade receivables, receivables due from the controlling shareholders, inventories) and fixed assets on the publicly listed firm's balance sheet. Our results show that in periods when the risk of tunneling from the publicly listed firm to its controlling shareholder increases, operating assets that are easy to tunnel (cash and receivables due from the controlling shareholder) are valued at larger discounts, while operating assets that are not easy to tunnel (trade receivables, inventories, fixed assets) are not valued at such discounts.

The State Expropriation Risk and the Pricing of Foreign Earnings

ABSTRACT We examine the pricing of U.S. multinational firms' foreign earnings in regard to their risk of expropriation and unfair treatment by the governments of the countries in which their international subsidiaries are located. Using 8,891 firm-years observations during the 2001–2013 period, we find that the value relevance of foreign earnings increases with the improvement of the protection from state expropriation risk in the subsidiary host-countries. Our results are not driven by the earnings management practice, investor distraction, country informativeness, and political and trade relationship of a foreign country with the U.S. Furthermore, our results are robust to the confounding effects of country factors, measurement error in the variable of the risk of expropriation, the influence of private contracting institutions, and endogeneity in the decision of the location of subsidiaries. JEL Classifications: G14; H13; M14; L22.

Board Gender Diversity and Corporate Expropriations: Evidence from Pakistan Stock Exchange

This research study investigates the role of board gender diversity in mitigating the risk of corporate expropriation of listed companies in Pakistan. For this purpose, data from 2009 to 2019 has been collected for 223 firms randomly selected from 24 non-financial sectors. The current study used panel data analysis techniques i.e. random vs fixed-effect regression models were estimated for testing the relationship of board gender diversity and corporate expropriations. The results of the panel data analysis showed that Hausman test results support the random effect models for the analysis of the data. The results of the random effect models showed that board gender diversity has a negative significant effect on the dividend ratios and director loans, which are used as a proxy for corporate expropriations. Moreover, external audit quality, growth, and leverage are also found to hurt corporate expropriations. However, managerial ownership, net profit margin, and size variables are found to have a positive effect on corporate expropriations. The results of the study will be helpful for the corporate managers and policy makers regarding the corporate governance and provide a deep insight in to the role of the gender in managing and aligning the benefits of the outsider shareholders by reducing the corporate expropriations of controlling large shareholders. The study is novel in its nature as being the first study that has been conducted in the context of Pakistan and has studied the role of gender in managing corporate expropriations.

Does the price of natural resources affect firms’ total factor productivity? Evidence from a natural experiment in China

This study uses a natural experiment on a market reform implemented in China in 2006 to examine how the marketization of the pricing of natural resources affects the total factor productivity (TFP) of resource-oriented firms, focusing on Chinese A-share stocks. We adopt the difference-in-differences (DIDs) approach and show that the reform has significantly improved firms’ TFP. This study uses propensity score matching and dynamic DIDs and finds consistent results. Cross-sectional tests indicate that the TFP improvement is stronger for firms with greater misallocation of resources, lower political expropriation risk, and greater financial constraints. We also document that firms’ TFP has a catch-up effect and show that the reform has narrowed TFP gaps between firms. Our study provides clear policy suggestions and offers evidence of the economic consequences of the reform of the natural resources market.

Rwanda’s Land Policy Reform: Self-Employment Perspectives from a Case Study of Kimonyi Sector

Rwanda’s Land Policy Reform promotes agri-business and encourages self-employment. This paper aims to analyze the situation from a self-employment perspective when dealing with expropriation risk in rural areas. In this study, we conducted a structured survey addressed to 63 domestic units, complemented by focus groups of 47 participants from Kimonyi Sector. The binary logistic regression analysis revealed that having job alternatives, men heading domestic units, literacy skills in English, and owning land lease certificates (p < 0.05) are positively and significantly related to awareness of land expropriation risk. The decision of the head of the domestic unit to practice the main activity under self-employment status is positively influenced by owning a land lease certificate, number of plots, and French skills, while skills in English and a domestic unit’s size have a positive and significant influence on involvement in a second activity as self-employed. Information on expropriation risk has no significant effect on self-employment. The domestic unit survey revealed that 34.9% of the heads of domestic units only have one job, 47.6% have at least two jobs in their everyday life, 12.7% have a minimum of three jobs, and 4.8% are inactive. The focus group synthesis exposed the limits to self-employment ability and facilities.

Institutional investment horizons, corporate governance, and credit ratings: International evidence

Using a comprehensive set of firms from 57 countries over the 2000–2016 period, we examine the relation between institutional investor horizons and firm-level credit ratings. Controlling for firm- and country-specific factors, as well as for firm fixed effects, we find that larger long-term (short-term) institutional ownership is associated with higher (lower) credit ratings. This finding is robust to sample composition, alternative estimation methods, and endogeneity concerns. Long-term institutional ownership affects ratings more during times of higher expropriation risk, for firms with weaker internal corporate governance, and for those in countries with lower-quality institutional environments. Additional analysis shows that long-term investors facilitate access to debt markets for firms facing severe agency problems. These findings suggest that, unlike their short-term counterparts, long-term investors improve a firm's credit risk profile through effective monitoring.

Rights Offers and Delaware Law

Under Delaware law, a securities issuance in which all existing investors may participate pro rata (a “rights offer”) is often seen as treating insiders and outsiders equally, making it difficult for nonparticipating outsiders to prevail on a claim that insiders sold themselves cheap securities. I show that insiders can use rights offers to sell themselves cheap securities, even if outsiders are sophisticated and well-capitalized. My analysis suggests courts applying Delaware law should more aggressively probe rights offers for substantive fairness. I conclude by describing red flags indicating a heightened risk of expropriation.

Family Control and Corporate Social Responsibility: The Moderating Effect of the Board of Directors

This paper examines the effect of family control on corporate social responsibility (CSR) in French-listed companies. Based on quantile regressions, our results show that family identity and involvement in capital and management positively influence CSR performance, particularly for low-CSR firms. These findings support the socio-emotional perspective of family firms. However, families with excess control engage less in CSR activities for expropriation purposes. Additional analysis shows that board size and gender diversity attenuate the negative effect of excess family control on CSR performance and help then mitigating the expropriation risk by family-controlled firms.

Exploring the underlying relationship among risks in BOT transportation projects in developing countries: the case of Vietnam

PurposeDespite the fact that extensive studies on public-private partnerships have focused on risk identification and classification, research still lacks concentration on studying the latent structure of risks in build operate transfer (BOT) transportation projects, especially in developing countries. The research was carried out in Vietnam and this paper aims to explore the underlying relationships among risks in the context of BOT transportation projects.Design/methodology/approachA questionnaire survey was conducted to investigate the perception of stakeholders regarding the probability of occurrence and the severity of the impact of risks related to BOT transportation projects. Factor analysis was performed based on a total of 40 risks.FindingsSeven risk groups were formed as a result of factor analysis, namely, “projects’ viability and political-regulatory risks”, “macroeconomic risks”, “projects’ feasibility study and market risks”, “financial risks”, “organization/coordination and force majeure risks”, “tolling, contractual, approvals risks” and “media and land expropriation risks”.Originality/valueThe research contributes to the current body of knowledge by providing deep insight into the structure of risks in BOT transportation projects in Vietnam through exploring the underlying relationships among risks, to form a latent risk structure from practical viewpoints. The findings are beneficial for involved stakeholders and policymakers to set up and propose suitable management strategies and related policies.

Finance, institutions, and innovation activities in China

Using novel firm-level micro-panel data in China from 2000 to 2009 and data on institutional factors, we study which funding sources effectively finance firm innovation activities in China and how the effectiveness of funding sources varies according to the quality of institutions. We show that institutional factors impact the effectiveness of each funding source in different ways. First, when property rights are better protected against the risk of expropriation by the government, internal financing from net profit—namely, the reinvestment of profit—is more important in financing firm innovation activities. Second, as contracts are enforced more reliably, trade credit finance and bank finance play larger roles in financing firm innovation activities.

Ownership dispersion across large shareholders and loan-syndicate structure

This study tests the relationship between ownership dispersion across large shareholders and the structure of loan syndicates. The results of an analysis of a set of bank loan contracts that were extended to Indonesian listed firms, from 1992 to 2016, show that an uneven ownership distribution between the largest controlling shareholder and multiple large shareholders is associated with a smaller and more concentrated syndicate. In line with the agency and moral hazard theoretical framework, the results suggest that in a weak legal system, when banks are lending to companies that are at a high risk of expropriation, they decrease the syndicate size and increase the syndicate concentration in order to intensify their efforts in due diligence and monitoring.

Entrepreneurs' socioeconomic status and government expropriation in an emerging economy

AbstractResearch SummaryThis study focuses on a salient challenge for entrepreneurs in emerging economies: government expropriation. Drawing on signaling arguments, we propose that an owner's high socioeconomic status (SES) attracts government attention to her start‐up by conveying information about its resource endowments. The empirical tests based on start‐ups in China support that an owner's high SES increases government expropriation. The effect is stronger for start‐ups in regions with greater income inequality or in those where the legal system is less developed. High‐SES entrepreneurs can mitigate the risk of government expropriation by building political connections.Managerial SummaryInstitutional voids in emerging economies pose a major threat to start‐ups in the form of government expropriation. This research finds that the threat is more severe for start‐ups with high‐SES entrepreneurs because they have strong resource‐mobilization capabilities and easily become expropriation targets. Further, this research suggests that two measures help protect high‐SES entrepreneurs from government expropriation: locating their start‐ups in regions with low income inequality or a well‐developed legal system, and building connections with the government in order to exchange favors with government officials.

Trust and R&D investments: evidence from OECD countries

AbstractThis paper examines two potential mechanisms – access to credit and reduction in relational risks – through which social trust can affect R&D investments. Social trust can increase R&D investments by expanding firms' access to external finance with which they can use to fund promising R&D projects. It can also increase R&D investments by reducing relational risks that expose firms to ex-ante and ex-post holdups or expropriation risks. Using industry-level data on R&D investment intensities in 20 OECD countries, I test these mechanisms by evaluating whether more external finance dependent and relational risk vulnerable industries exhibit disproportional higher R&D investment intensities in trust intensive countries. The results indicate that external finance dependent industries and relational risks vulnerable industries experience relatively higher R&D investment intensities in trust-intensive countries. Therefore, the results underline access to external finance and reduction in relational risks as causal pathways linking social trust and R&D investments.

Family control and cost of debt: Evidence from China

This paper studies how family ownership influences the cost of debt. Using a sample of Chinese listed firms, we find that family control leads to a higher bond yield-spread. This evidence contradicts the findings in developed markets. We document that the risk of expropriation and financial reporting quality are plausible mechanisms. Besides, Protection of debtholders' rights can mitigate the concern of family expropriation and information asymmetry, and reduce the cost of debt. We also show consistent evidence that family firms generally take less debt and have lower debt maturity due to the high cost. Overall, our results shed light on how family control affects financing costs in the capital market with less protection for creditor rights.

Cross-border cooperation between securities regulators

The events of September 11, 2001, prompted sweeping cross-border coordination efforts for securities regulators around the globe. After 9/11, the International Organization of Securities Commissions (IOSCO) forged a nonbinding arrangement—the Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (MMoU)—that standardized the protocol for information sharing among participating securities regulators. Because regulators from different countries entered the MMoU at different times, their enlistments created a set of staggered shocks. I use these shocks to show that the resulting cross-border cooperation (a) increases cross-border enforcement and (b) reduces the cost of liquidity provision in the capital markets of participating countries. These results support the conclusion that the MMoU helps fill gaps in cross-border regulation that historically exposed investors to information asymmetry, agency costs, and expropriation risks.

Property rights and deforestation: Evidence from the Terra Legal land reform in the Brazilian Amazon

Abstract This paper estimates the early impacts of Terra Legal, a large property rights reform, on deforestation and farming in the Brazilian Amazon. Twelve and a half million hectares, more than 2.5% of the Brazilian Amazon, have been registered under this program. The establishment of property rights may increase a farmer’s incentive to invest in his land and expand his farm due to a lower risk of expropriation. On the other hand, the enforcement of conservation requirements may be easier when farmers have legal titles to their land. We use county level data from 2007 to 2012 on farm registrations, deforestation, crop choice and bovine management to test the impact of the Terra Legal land reform. While we find no overall impact of the program on deforestation during the period in our sample, we do show that there is substantial heterogeneity in impacts across counties. Counties with the largest area registered do have an increase in the level of area deforested, but they also have a decrease in the rate of deforestation. We investigate the extent to which changes in deforestation are related to the amount of registration that occurs among small, medium and large farms, and find limited support for less deforestation among counties with more area registered by small farms; more area registered by large farms is associated with a higher level of deforestation, but a decreased deforestation rate. Our results suggest that land tenure reform can create incentives to decelerate deforestation. Farm size has a strong impact on the farm management changes generated by improved property rights; coupling land tenure reforms with incentives to intensify production rather than expand could lead to reduced deforestation, particularly among small farms.