Private credit in 129 countries

We investigate cross-country determinants of private credit, using new data on legal creditor rights and private and public credit registries in 129 countries. Both creditor protection through the legal system and information-sharing institutions are associated with higher ratios of private credit to gross domestic product, but the former is relatively more important in the richer countries. An analysis of legal reforms shows that credit rises after improvements in creditor rights and in information sharing. Creditor rights are remarkably stable over time, contrary to the hypothesis that legal rules are converging. Finally, legal origins are an important determinant of both creditor rights and information-sharing institutions. The analysis suggests that public credit registries, which are primarily a feature of French civil law countries, benefit private credit markets in developing countries.     

Underpricing of IPOs: Firm-, issue- and country-specific characteristics

Using a large firm-level dataset of 2920 IPOs from 21 countries we examine the impact of country-level institutional characteristics on the underpricing of IPOs. Through hierarchical linear modeling we are able to control for firm-specific and issue-specific characteristics and test whether country-specific institutional characteristics add explanatory power to explain the level of underpricing. Our results show that about 10% of the variation in the level of underpricing is between countries. The quality of a country’s legal framework, as measured by its level of investor protection, the overall quality of its legal system and its level of legal enforcement, reduces the level of underpricing significantly.     

Cross-listing and legal bonding: Evidence from mergers and acquisitions

Using a sample of foreign acquisitions of US targets, this study examines the extent to which cross-listing in the US leads to legal and regulatory bonding, and/or whether reputational bonding proxied by financial intermediaries monitoring, an often ignored component of the bonding mechanism, is an important factor in US investors decision to hold shares in cross-listed firms. We find that compared to US firms, cross-listed firms are less likely to use equity in takeovers of US targets. Further, cross-listed firms from countries with poorer legal protections are less likely to finance with equity and pay higher premiums than cross-listed firms from countries with better legal protections. Using analysts’ coverage and institutional following as proxies for financial intermediary monitoring, we find some support for the importance of reputational bonding. The evidence suggests that while cross-listing reduces barriers to investment, there are limits to its ability to completely subsume both the legal environment and the importance of the monitoring of financial intermediaries. This further suggests that the extent of actual legal and regulatory bonding by cross-listed firms may be more limited than often assumed.     

Financial System Size in Transition Economies: The Effect of Legal Origin

Gorton and Winton (1998) link the size of the banking system in transition economies to financial stability. We provide empirical evidence consistent with their notion that the size of the financial system will be smaller in these countries. This effect holds even after controlling for the effect of rule of law and/or legal origin, and other relevant variables. Transition economy status, thus adds additional explanatory power to traditional law and finance explanations of financial development. Classification of transition economies by legal origin reveals that Russian legal origin has a strong negative effect on financial development. Regression analysis shows claims on the private sector/gross domestic product (GDP) to be 46 to 60 percentage points lower in the countries of the former Soviet Union, and 23 to 39 percentage points lower in non-Soviet transition economies compared to countries of English legal origin. There is a positive relation between claims on the private sector and the rule of law for a broad cross section of countries.     

Investor protection and the Coasian view

The corporate charters of a sample of Mexican firms show that private firms often significantly enhance the legal protection offered to investors, but public firms rarely do so. We construct a model that endogenizes the degree of investor protection that firms provide, using as a springboard the assumption that legal regimes differ in their ability to enforce precisely filtering contracts that provide protection only in those cases where expropriation can occur. Our model generates predictions about the types of contracts that would be employed and the levels of investor protection that would prevail across different legal regimes in both private and public firms.     

Legal insider trading and market efficiency

Does legal insider trading contribute to market efficiency? Using refinements proposed in the recent microstructure literature, we analyzed the information content of legal insider trading. We used data on 2110 companies subject to 59,244 aggregated daily insider trades between January 1995 and the end of September 1999. Our main finding is that, even though financial markets do not respond strongly in terms of abnormal returns to insider trading activities, the significant change in price sensitivity to relative order imbalance due to abnormal insider trades reveals that price discovery is hastened on insider trading days.     

The relationship between corporate governance and foreign ownership of the banks in developing countries

The aim of this paper is to determine the effect of corporate governance on foreign ownership of the banks. Within this context, annual data of 65 developing countries for the periods between 2004 and 2013 was analyzed. In addition to this situation, 7 explanatory variables were used in this study in order to achieve this objective. As a result of the analysis, it was identified that there is a strong relationship between operations of foreign banks and governance levels of the countries. In this regard, it was determined that the factors of corruption, political stability, rule of law and flexibility in legal regulations affect foreign bank operations. Moreover, it was also analyzed that foreign bank operations are stronger in the countries that have low poverty, high political stability and efficient legal infrastructure. On the other hand, it was defined that strict legal regulation affects foreign bank operations negatively which shows that foreign banks prefer to enter into the countries that have flexible legal regulations. This study gives essential information to developing countries about the factors that affect the decisions of foreign banks in order to enter into a developing country. Therefore, by considering the results of this study, the authorities of these countries can have a chance to take necessary actions so as to attract foreign banks.     

The dynamics of privatization, the legal environment and stock market development

In this paper, we examine under which conditions privatization is an effective means to develop local stock markets for a panel of 61 countries over the last twenty four years. By addressing the endogeneity between privatization and stock market development, we show for the 1980-98 period that the initial legal environment is a significant contemporary determinant of stock market development, while privatization is not. When we examine the dynamics of privatization in interaction with the legal environment, we find that privatization has a two-year-lagged effect on stock market development in emerging markets, and a one-year-lagged effect in developed countries. Results for the 1999-2003 period seem to be largely affected by the global crash that followed the Asian crisis.     

Institutions and Bank Behavior: Legal Environment,Legal Perception,and the Composition of Bank Lending

This paper explores how the legal environment affects bank behavior in 20 transition economies. Based on a newly constructed data set we find that banks’ loan portfolio composition depends on the legal environment. If banks operate in a well‐functioning legal environment they lend relatively more to SMEs and provide more mortgages. On the other hand, banks lend more to large enterprises and to the government if the legal system is unsound. As a transmission channel we identify the banks’ willingness to accept collateral which depends on the bankers’ perceptions of the prevailing laws regarding collateral.     

ADR holdings of US-based emerging market funds

What motivates investors to hold American Depositary Receipts (ADRs) rather than the underlying stock of US listed foreign firms? We analyze the investment allocation decision of actively-managed emerging market mutual fund managers. Although legal provisions are typically assumed to affect ADR and its underlying domestic shares equally, investors holding ADRs may have a higher level of legal protection as these securities are issued and traded in the US. We find that ADRs are the preferred mode of holdings if the local market of the issuer has weak investor protection, low liquidity and high transaction costs.     

Concentrated control,institutions, and banking sector: An international study

Using a broad sample of listed commercial banks in East Asia and Western Europe, this paper investigates the relations among concentrated control, a set of bank operating characteristics, and legal and regulatory regimes. We find that banks with concentrated control exhibit poorer performance, lower cost efficiency, greater return volatility, and higher insolvency risk, relative to widely held ones. We also document that legal institutions and private monitoring effectively reduce the detrimental effects of concentrated control and that official disciplinary power plays a weak governance role, whereas government intervention exacerbates the adverse effects. Further evidence shows that the relations between control concentration and bank operating characteristics are curvilinear and vary according to the types of controlling owners. Overall, our findings support the contention that country-level institutions play important roles in constraining insider expropriation, and that private monitoring mechanisms are more effective than are public rules and supervision in governing banks.     

Is it the Law or the Lawyers? Investment Covenants around the World*

This paper introduces a new dataset from 50 private investment funds from 17 countries around the world. We analyse the frequency of use of investment covenants imposed by institutional investors governing the activities of private investment fund managers in areas pertaining to investment decisions, investment powers, types of investments, fund operations and limitations on liability. While the data indicate a role for country legality in affecting the frequency of use of fund covenants, the data further indicate that the presence of legally trained managers has a more pronounced role in affecting the use of covenants. As private equity and venture capital investment increases across Europe and elsewhere, our results indicate that legal practice factors will matter more than the legal setting for the establishment of covenants governing new funds.     

Accounting Quality and Loan Pricing: The Effect of Cross-country Differences in Legal Enforcement

This study examines whether the strength of legal enforcement at the country level plays a role in the value-relevance of accounting quality for loan pricing determination, using an international sample of firms reporting under IFRS. The underlying hypothesis is that stronger vs. weaker enforcement should affect the informativeness of financial statements, due to their increased credibility, and thus results in a stronger influence of accounting quality on loan pricing, in case this information is considered more reliable by potential lenders. Evidence indicates that accounting quality is consequential for the determination of loan spread only in combination with the level of legal enforcement, and this only holds for the countries with stronger legal enforcement. This evidence indicates that financial statement quality information is value-relevant and has a significant impact on the determination of loan pricing only if this information is considered to be credible enough by loan providers in a country, and this is the case when legal enforcement is stronger.     

Are price limits really bad for equity markets?

Despite widely documented criticisms, price-limit rules are present in many equity markets around the world. Using a game-theoretic model, we argue that, if the cost of monitoring a market is high, price-limit rules are beneficial. Empirical tests based on a cross section of 43 equity markets across five continents support our theoretical prediction. We find that the probability of the existence of price-limit rules is greater in markets that incur higher monitoring costs due to poorer business disclosure, more corruption and less efficiency in legal, regulatory and technological environments.     

Mapping global money laundering trends: Lessons from the pace setters

This paper uses an exploratory data analysis tool to map countries according to key factors—internet penetration rates, brain drain, efficiency of legal system, and effective tax and financial systems on the incidence of money laundering. Pace setters and laggards in the pervasiveness of money laundering for 88 countries will be identified. The results indicate that pace setters have high development of internet adoption, low incidence of brain drain, sound legal, tax and financial systems, and low incidence of money laundering. From the study, key policy initiatives adopted by pace-setter countries to reduce money laundering activities were examined.     

Cross-country IPOs: What explains differences in underpricing?

We study the impacts of country-level information asymmetry, investors' home-country bias, effectiveness of contract enforcement mechanisms, and accessibility of legal recourse on IPO underpricing in 36 countries around the globe. We find evidence consistent with all four of our hypotheses. First, we find a positive and significant effect of country-level information asymmetry on IPO underpricing. Second, our empirical evidence is consistent with the agency-cost-based explanation of IPO underpricing. We find that lower cost to entice the block holders, measured by domestic investors' home-country bias, reduces IPO underpricing. Third, we find that effective contract enforcement mechanisms help to reduce IPO underpricing. Finally, we find a positive relation between the accessibility of legal recourse and IPO underpricing.     

Institutional determinants of capital structure adjustment speeds

Many authors relate a firm's performance to legal and political features and the regulatory environment in which it operates. This article compares firms' capital structure adjustments across countries and investigates whether institutional differences help explain the variance in estimated adjustment speeds. We find that legal and financial traditions significantly correlate with firm adjustment speeds. More narrowly, institutional features also relate to adjustment speeds, consistent with the hypothesis that better institutions lower the transaction costs associated with adjusting a firm's leverage. Such associations between institutional arrangements and leverage adjustment speeds are consistent with the dynamic trade-off theory of capital structure choice.     

我国证券交易所推出股指期货的法律基础

股指期货的推出需要一定的条件,其中法律环境是重要条件之一.本文结合我国的具体法律制度,借鉴国外的立法经验,对当前我国证券交易所推出股指期货进行了法律可行性分析,并提出相关的法律建议与对策.     

Overreaction of country ETFs to US market returns: Intraday vs. daily horizons and the role of synchronized trading

In this paper we study the intraday price formation process of country Exchange Traded Funds (ETFs). We identify specific parts of the US trading day during which Net Asset Values (NAVs), currency rates, premiums and discounts, and the S&P 500 index have special effects on ETF prices, and characterize a special intraday and overnight updating structure between these variables and country ETF prices. Our findings suggest a structural difference between synchronized and non-synchronized trading hours. While during synchronized trading hours ETF prices are mostly driven by their NAV returns, during non-synchronized trading hours the S&P 500 index has a dominant effect. This effect also exceeds the one that the S&P 500 index has on the underlying foreign indices and suggests an overreaction to US market returns when foreign markets are closed.     

How does law affect finance? An examination of equity tunneling in Bulgaria

We model and test the mechanisms through which law affects tunneling and tunneling affects firm valuation. In 2002, Bulgaria adopted legal changes which limit equity tunneling through dilutive equity offerings and freezeouts. Following the changes, minority shareholders participate equally in equity offerings, where before they suffered severe dilution; freezeout offer price ratios quadruple; and Tobin's q rises sharply for firms at high risk of tunneling. The paper shows the importance of legal rules in limiting equity tunneling, the role of equity tunneling risk as a factor in determining equity prices, and substitution by controlling shareholders between different forms of tunneling.