Postprivatization corporate governance: The role of ownership structure and investor protection

We investigate the role of ownership structure and investor protection in postprivatization corporate governance. Using a sample of 209 privatized firms from 39 countries over the period 1980 to 2001, we find that the government relinquishes control over time to the benefit of local institutions, individuals, and foreign investors, and that private ownership tends to concentrate over time. Firm size, growth, and industry affiliation, privatization method, as well as the level of institutional development and investor protection, explain the cross-firm differences in ownership concentration. The positive effect of ownership concentration on firm performance matters more in countries with weak investor protection.     

Large shareholders and accounting research

Large shareholders are a potentially very important element of firms’ corporate governance system. Whereas analytical research is typically vague on who these large shareholders are, in practice there are important variations in the types of large owners (and the different types of large owners could play very different governance roles). After briefly reviewing the standard agency cost arguments, in this article I emphasize the heterogeneity of concentrated ownership and in particular focus on the roles of families, institutions, governments, and employee ownership. I also discuss the role of large shareholders in private (i.e., unlisted) firms, where ownership tends to be more concentrated than in publicly traded firms. Finally, I briefly discuss variations in ownership structures across selected countries.     

The political economy of residual state ownership in privatized firms: Evidence from emerging markets

We investigate the political determinants of residual state ownership for a unique database of 221 privatized firms operating in 27 emerging countries over the 1980 to 2001 period. After controlling for firm-level and other country-level characteristics, we find that the political institutions in place, namely, the political system and political constraints, are important determinants of residual state ownership in newly privatized firms. Unlike previous evidence that political ideology is an important determinant of privatization policies in developed countries, we find that right- or left-oriented governments do not behave differently in developing countries. These results confirm that privatization is politically constrained by dynamics that differ between countries.     

Do minority acquisitions transfer better corporate governance practices? An analysis of UK's cross-border minority investments

This study examines the influence of minority shareholders on the transfer of corporate governance practices into companies in other countries where they invest. By analysing UK firms that acquired a minority ownership in foreign firms between 1993 and 2014, we find evidence of better corporate governance in the board structure of target foreign firms following UK firms taking a minority shareholding, the extent and nature of the changes varying depending on the quality of investor protection in the country the foreign target firm is located. Our findings contribute to the on-going debates on the spillover effect of better corporate governance practices via cross-border mergers and acquisitions as well as relationship between internal (board of directors) and external (country's quality of investor protection) corporate governance mechanisms.     

Privatization,financial development,property rights and growth

This study analyzes how prevailing institutional arrangements i.e., property rights, contracting rights, political institutions, and corporate governance practices affect privatized firms’ performance, capital markets development, and economic growth. Most of the studies surveyed show that privatization enhances privatized firms performance, efficiency, and profitability, which percolates to economic growth. Privatized firms performed better in countries with better regulatory and legal frameworks. Partial privatization may be beneficial in countries with weak institutions, namely, the French civil law countries. The stronger the economic and the governing institutions, the easier it is for privatized firms to thrive and contribute to economic growth. Overall, privatization allows firms to achieve improved efficiency while driving the development of the financial sector.     

Exploring the Causes of Accounting Restatements by Family Firms

Prior research shows that family firms have better earnings quality than non‐family firms in common‐law countries and highly developed markets. In contrast, we do not find a significant difference in the financial reporting quality between family and non‐family firms in the context of a civil‐law system and less developed market. We show that the financial reporting quality of family firms is conditioned on: (1) the divergence between the controlling shareholders’ voting rights and their cash flow rights, and (2) the firm's reputation for integrity, while these two conditions do not explain the restatement likelihood for non‐family firms. Moreover, when accounting irregularities are detected in the case of family firms, they are associated with more serious accounting restatements. Together, these results imply that the severity of the conflict between ultimate and minority shareholders, and a lack of integrity, explain the propensity for making financial restatements among family firms in a regime characterized as having weak investor protection and concentrated ownership structures.     

DOES PRIVATIZATION FOSTER CHANGES IN THE QUALITY OF LEGAL INSTITUTIONS?

We analyze the effect of privatization on the quality of legal institutions of governance. Our findings suggest that large-scale privatization (in terms of progress and volume) increases the risk of corruption in developing countries but has no effect on the legal institutions of governance (i.e., law and order and investor protection). The method of privatization (public share issues versus private sales) helps curb corruption and improve the quality of law enforcement and of investor protection. In developed countries, the progress and volume of privatization reduce the risk of corruption, and the method of privatization enhances the quality of law enforcement.     

Determinants of Foreign Ownership in Newly Privatized Companies in Transition Economies

We investigate determinants of foreign ownership in newly privatized firms. We analyze data on privatized Czech firms to address two related general questions. First, what characteristics distinguish transition firms that attract a foreign investor? Second, how do firm‐specific characteristics influence the size of the foreign equity stake? Our results suggest that foreign investors i) seek safe, profitable firms in which they can exert unchallenged influence on corporate governance and then ii) structure their equity stakes to mitigate agency costs and political risk.     

To Steal or Not to Steal: Firm Attributes, Legal Environment, and Valuation

Data on corporate governance and disclosure practices reveal wide within‐country variation that decreases with the strength of investors' legal protection. A simple model identifies three firm attributes related to that variation: investment opportunities, external financing, and ownership structure. Using firm‐level governance and transparency data from 27 countries, we find that all three firm attributes are related to the quality of governance and disclosure practices, and firms with higher governance and transparency rankings are valued higher in stock markets. All relations are stronger in less investor‐friendly countries, demonstrating that firms adapt to poor legal environments to establish efficient governance practices.     

The choice of ADRs

We study the determinants of a firm’s decision to issue one of the four available ADR programs (Level I, Level II, Level III, and Rule 144A). We find that the firm’s attributes (size, income, asset growth, leverage, privatization, ownership structure, and country-of-origin) and the firm’s home-country institutional variables (accounting rating and legal protection of minority shareholders) condition this choice. We also examine the issuing activity and the determinants of the ADR choice before and after the enactment of the Sarbanes–Oxley (SOX) Act. Following this structural change, we provide evidence of a reallocation between ADR programs. Compared to the pre-SOX period, firms from emerging markets, and those from countries with weak legal protection of minority shareholders, are more likely after SOX to choose Rule 144A and Level III, respectively.     

Corporate Governance and Equity Prices: Evidence from the Czech and Slovak Republics

The Czech and Slovak Republics' mass privatization scheme used voucher points distributed to the population and a competitive bidding process to change the governance of a large number of firms. Voucher prices and following secondary market prices are shown to depend upon the resulting ownership structures. The more concentrated ownership is, the higher prices are. High absolute ownership by a single domestic investor is associated with even higher voucher prices. I find some evidence that initially prices are relatively lower when a bank-sponsored investment fund has a relatively large stake in a firm. This suggests conflicts of interest.     

Fund ownership and stock price informativeness of Chinese listed firms

We examine the impact of mutual fund ownership on stock price informativeness in China. Existing evidence shows that stock price informativeness is low in China, and attributes this to firms’ lack of disclosure incentives under the weak investor protection institutional environment. Mutual funds are more sophisticated and influential than individual investors to monitor firms, and thus serve as an external governance mechanism to improve corporate transparency. However, the impact of mutual funds in China can also be moderated by state ownership of listed firms, which reduces firms’ dependence on outside investors for capital. Indeed, we find that mutual fund ownership is positively related to share price informativeness, but this effect is less pronounced among state-controlled firms. The main policy implication from our findings is that mutual funds contribute to the corporate information environment of emerging economies but further privatization of listed firms would be needed to realize greater benefit.     

The performance of newly privatized firms in selected MENA countries: The role of ownership structure, governance and liberalization policies

The paper analyzes 95 newly privatized firms (NPFs) in four Middle Eastern and North African countries (Egypt, Morocco, Tunisia, and Turkey). We find that these firms experienced significant increases in profitability and operating efficiency, and significant declines in employment and leverage. We also document strong performance improvements for firms that did remain state-owned, that were not sold to foreigners, and that came from Egypt. Job losses are higher in Egypt and in firms where the state is no longer in control. Also, the results indicate that revenue firms and NPFs in Morocco display significantly less leverage than control firms and those from other countries. We find that profitability changes are negatively related to state control and positively related to foreign ownership. Trade openness, change in real GDP over the privatization window, index of investor protection, and foreign ownership are important determinants of the changes in sales efficiency and output. These findings suggest that NPFs become more productive in environments where property rights are better protected and enforced and that foreign investors influence firms' productivity through their monitoring role.     

Corporate Ownership Around the World

We use data on ownership structures of large corporations in 27 wealthy economies to identify the ultimate controlling shareholders of these firms. We find that, except in economies with very good shareholder protection, relatively few of these firms are widely held, in contrast to Berle and Means's image of ownership of the modern corporation. Rather, these firms are typically controlled by families or the State. Equity control by financial institutions is far less common. The controlling shareholders typically have power over firms significantly in excess of their cash flow rights, primarily through the use of pyramids and participation in management.     

Does societal trust make managers more trustworthy?

This study examines the effects of shareholders' trust on managers' bad news hoarding. Using a large sample of listed firms from 33 countries, we find that firms domiciled in countries with higher societal trust have higher stock price crash risk, which indicates that managers may exploit shareholders' trust to conceal bad news and that a low-trust society can be beneficial in restraining management misconduct due to the monitoring undertaken by low-trust outsiders. We also find that the positive association between societal trust and crash risk is less pronounced (1) when low-trust foreign shareholders have greater control over a country's firms, in line with the view that low-trust shareholders' concerns about being expropriated by managers and the consequent strong efforts at monitoring; (2) when long-term investors have greater control over a country's firms, suggesting that long-term investors playing a complementary role in monitoring corporate governance; and (3) when a country has strong formal institutions, such as investor protection and financial accounting systems, suggesting that robust formal institutions are substitute for social norms.     

Investor protection and cross-border acquisitions of private and public targets

We examine the announcement-period acquirer returns and target values for a large sample of cross-border acquisitions by U.S. firms, differentiating between private and public targets and paying particular attention to the legal protection of minority shareholders in the target country. For high-protection target countries, acquirer announcement-period returns are significantly negative for public targets and significantly positive for private targets. For low-protection target countries, the acquirer returns are significantly positive for public targets and insignificantly different from zero for private targets. For public targets, acquirer returns are decreasing and target-firm values and acquisition premia are increasing with the level of investor protection. For private targets, investor protection does not affect acquirer returns or target-firm values. We find that bidder returns decrease with the level of creditor protection in the target country and increase with the quality of accounting standards. Our results also show that in low- protection countries, firm-level corporate governance mechanisms, such as higher insider ownership, may substitute for the lower level of investor protection.     

The Vote Is Cast: The Effect of Corporate Governance on Shareholder Value

This paper investigates whether improvements in the firm's internal corporate governance create value for shareholders. We analyze the market reaction to governance proposals that pass or fail by a small margin of votes in annual meetings. This provides a clean causal estimate that deals with the endogeneity of internal governance rules. We find that passing a proposal leads to significant positive abnormal returns. Adopting one governance proposal increases shareholder value by 2.8%. The market reaction is larger in firms with more antitakeover provisions, higher institutional ownership, and stronger investor activism for proposals sponsored by institutions. In addition, we find that acquisitions and capital expenditures decline and long‐term performance improves.     

Investor protection and the value effects of bank merger announcements in Europe and the US

Investor protection regimes have been shown to partly explain why the same type of corporate event may attract different investor reactions across countries. We compare the value effects of large bank merger announcements in Europe and the US and find an inverse relationship between the level of investor protection prevalent in the target country and abnormal returns that bidders realize during the announcement period. Accordingly, bidding banks realize higher returns when targeting low protection economies (most European economies) than bidders targeting institutions which operate under a high investor protection regime (the US). We argue that bidding bank shareholders need to be compensated for an increased risk of expropriation by insiders which they face in a low protection environment where takeover markets are illiquid and there are high private benefits of control.     

Corporate Governance and Its Impact on R&D Investment in Emerging Markets

Corporate R&D activities are inherently risky but also difficult to monitor. Against this background, we examine the impact of ownership concentration and legal shareholder rights protection on corporate R&D investments in emerging markets. Based on a comprehensive sample of publicly listed firms from 24 countries, we find that R&D intensity is lower in firms with (strategic) block ownership, and this effect is more pronounced in countries with stronger shareholder rights protection. This suggests that, similar to the situation in developed economies, dispersed ownership, which allows shareholders to diversify their investment risks, is beneficial for corporate R&D and that this effect is intensified by more developed institutions.     

Enhancing the efficiency of securities markets in East Asia

We explore the relative efficiency of stock markets across countries using newly available data on transactions costs and the quality of the informational environment of stock markets. These new measures are constructed from firm-level stock returns in a panel of 60 countries for the period 2000–2004. We develop a framework to understand the linkages between efficiency, liquidity, transactions costs, and informational quality and then study their determinants. We find that some institutional arrangements – such as the availability of stock lending and short selling – and the openness of markets are associated with lower transactions costs. We also find that, although disclosure rules for directors and officers of listed firms are essential, the ability of shareholders to seek redress is more conducive to a better informational environment in stock markets. This in turn serves as the basis for policy recommendations for the East Asian region. In particular, the region needs to continue to strengthen the implementation and enforcement of corporate governance, to further enhance the market and institutional infrastructure, and focus on measures to foster a larger and more diversified investor base, in order to continue to see gains in the efficiency of stock markets.