Investor protection and convertible debt design

An important issue that firms consider when designing convertible debt is to specify security features such as conversion ratio, maturity date and call period. Following Lewis et al. [Lewis, M., Rogalski, R., Seward, J., 2003. Industry conditions, growth opportunities and market reactions to convertible debt financing decisions. Journal of Banking and Finance 27, 153–181], we employ a single measure that simultaneously considers all of these features: the expected probability (measured at issue date) that the convertible will be converted to equity at maturity. We find that firms in countries with stronger shareholder rights issue convertible debt with a higher expected probability of converting to equity. The positive association between the expected probability of conversion and shareholder rights is less pronounced in firms for which ownership structures create potentially high managerial agency costs. Specifically, in countries with stronger shareholder rights, firms with higher separation of control rights and cash flow rights tend to issue convertibles with lower probability of conversion. Furthermore, we find that large non-management block ownership strengthens the likelihood of issuing convertible debt with higher probability of conversion in countries with stronger shareholder rights. In contrast, firms in countries with stronger creditor rights issue convertibles with lower probability of conversion. We also document that the negative association between creditor rights and probability of conversion is more pronounced in firms with higher separation of control rights and cash flow rights.     

Do shareholder protection and creditor rights have distinct effects on the association between debt maturity and ownership structure?

This study examines the effects of the firm's ownership concentration and its institutional environment on corporate debt maturity choices. As ownership concentration and debt maturity are alternative governance mechanisms, we theorize and investigate whether their association is influenced by country-level governance factors that enhance outside monitoring by minority shareholders and debtholders. Our investigation is based on a dataset of 50,599 firm-year observations from 38 countries. We use a propensity-score matching approach and find that the effect of ownership concentration on debt maturity is conditional to country-level governance attributes. Ownership concentration has a negative effect on debt maturity in countries where both shareholder protection and creditor rights are weak. Ownership concentration, however, tends to lengthen debt maturity as protection increases, and this positive effect on the length of debt maturity is stronger in countries enhancing protection towards debtholders (instead of shareholders). We also explore other characteristics of ownership structure, such as the identity and presence of controlling shareholders. These results corroborate the view that entrenched shareholders may use debt maturity opportunistically. Our study provides new insights into the interplay between firm- and country-level governance mechanisms and a deeper understanding of cross-country differences in the association between ownership structure and debt financing.     

The inequality-credit nexus

This paper explores the inequality-credit nexus from both a theoretical and an empirical perspective. The paper develops an overlapping generation model in which the effect of income inequality on private credit depends on the countries’ per capita income and on the quality of laws protecting creditor rights. The model predicts that greater inequality leads to higher levels of private credit in countries with low per capita incomes and weak legal rights, while this effect is ambiguous or negative in economies with higher aggregate income and stronger credit protection. Using a panel dataset of 155 countries over the 1982–2015 period, the paper shows empirical evidence that is robust and consistent with the model’s predictions. The paper’s major finding suggests a credit channel through which inequality may affect economic outcomes.     

Product Market Competition and Shareholder Rights: International Evidence

This paper examines the interaction between product market competition and international differences in shareholder rights in relation to firm performance and corporate policies. In contrast to existing literature, we provide evidence of complementarities between product market competition and country shareholder rights protections. The benefits of shareholder rights protections for firm performance are conditional on the presence of a competitive industry environment. We find that stronger shareholder rights protections are associated with better firm performance in competitive industries. However, this relation is not significant in concentrated industries. Consistent results are obtained from the analysis of key corporate policies.     

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.     

Governance quality and privately negotiated stock repurchases: Evidence of agency conflict

This study examines the impact of shareholder rights on the wealth effects of privately negotiated stock repurchases. Our results show that wealth gains are lower when shareholder rights are more suppressed. We also find that the premium paid for shares is inversely related to the strength of shareholder rights, and this suggests that managers pay higher premiums when shareholder rights are more restricted. These findings imply that managers use shareholders’ funds to eliminate blockholders who are more likely to monitor them when shareholder rights are relatively weak, thereby entrench themselves. Consistent with this view, we further show that significant positive abnormal long-run returns after private stock repurchases are limited to firms with stronger shareholder protection. Overall, the evidence is consistent with the predictions of agency theory.     

Creditor rights and the corporate bond market

This study examines whether investor protection affects capital markets, specifically the development of corporate bond markets versus equity markets. Using a dataset of 42 countries, we show that countries with strong creditor rights have more developed corporate bond markets than equity markets. However, we find only weak evidence that countries with stronger shareholder protection have more developed equity markets than corporate bond markets. Additionally, we find that the effect of financial reforms on capital markets is strongly dependent on the strength of investor protection and on the associated information disclosure in a given country.     

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.     

Creditor rights and corporate risk-taking

We propose that stronger creditor rights in bankruptcy affect corporate investment choice by reducing corporate risk-taking. In cross-country analysis, we find that stronger creditor rights induce greater propensity of firms to engage in diversifying acquisitions that are value-reducing, to acquire targets whose assets have high recovery value in default, and to lower cash-flow risk. Also, corporate leverage declines when creditor rights are stronger. These relations are usually strongest in countries where management is dismissed in reorganization and are also observed over time following changes in creditor rights. Our results thus identify a potentially adverse consequence of strong creditor rights.     

How creditor rights affect the value of cash: A cross-country study

We examine how legal protection of creditors affects the value of cash across countries. We find that the marginal value of cash is considerably higher in countries with weak creditor rights. Creditor rights are at least as relevant as shareholder rights, which other studies have found to be an important factor affecting various corporate policies. In addition, we find that marginal investment is more valuable for firms in countries with weak creditor rights. This combines the findings of previous studies that weak creditor protection makes firms financially constrained and that cash is more valuable for financially constrained firms. Subsample analysis suggests that financial constraints generated by weak creditor rights create underinvestment among cash starved firms but alleviate agency conflicts among cash rich firms. Further analysis reveals that good country governance complements laws protecting creditors in cash valuation.     

Large shareholders, board independence, and minority shareholder rights: Evidence from Europe

We examine the relation between minority shareholder protection laws, ownership concentration, and board independence. Minority shareholder rights is a country-level governance variable. Ownership structure and board composition represent firm-level governance variables. Prior research hypothesizes and documents a negative relation between countries' minority shareholder rights quality and firms' ownership concentration. We introduce the hypothesis that shareholder protection rights and firms' board independence are positively related. When a country's minority shareholder rights are strong, then minority shareholders should have the legal power to affect board composition. Using a sample of large firms from 14 European countries, we test both hypotheses and find that countries with stronger shareholder protection rights have firms with lower ownership concentrations and with more independent directors, consistent with both hypotheses. We also find evidence that ownership concentration and board independence are negatively related.     

Banking Competition and Capital Ratios

Empirical studies provide evidence that bank capital ratios exceed regulatory requirements. But why do banks maintain capital levels above regulatory requirements? We use data for more than 2,600 banks from 10 European countries to test recent theories suggesting that competition incentivises banks to maintain higher capital ratios. These theories also predict that banks that engage in arm's length lending have lower capital ratios, and that shareholder rights and deposit insurance characteristics affect capital ratios. Consistent with these theories, our evidence robustly indicates that competition increases capital holdings. Banks that lend at arm's length exhibit lower capital ratios, whereas banks in countries with strong shareholder rights operate with higher capital ratios. We also show some evidence that generous deposit protection schemes that exclude non‐deposit creditors are associated with higher capital ratios. Our results have important policy implications. First, while the traditional view suggests imposing restrictions on bank activities in order to restrain competition, our analysis indicates the opposite, even after adjusting the regressions for risk‐taking. Second, weak shareholder rights undermine market forces that would otherwise encourage banks to hold higher capital ratios.     

The impact of bank ownership concentration on impaired loans and capital adequacy

This paper examines the impact of bank ownership concentration on two indicators of bank riskiness, namely banks’ non-performing loans and capital adequacy. Using balance sheet information for around 500 commercial banks from more than 50 countries averaged over 2005–2007, we find that concentrated ownership (proxied by different levels of shareholding) significantly reduces a bank’s non-performing loans ratio, conditional on supervisory control and shareholders protection rights. Furthermore, ownership concentration affects the capital adequacy ratio positively conditional on shareholder protection. At low levels of shareholder protection rights and supervisory control, ownership concentration reduces bank riskiness.     

Legal shareholder protection and corporate R&D investment

This paper investigates the effects of shareholder protection law on corporate R&D investment. I find that the institutional protection of shareholder benefits reduces both underinvestment and overinvestment in R&D projects. Legal shareholder rights significantly increase R&D investment for firms that may underinvest, but reduce R&D for firms that may overinvest. Shareholder protection further enhances the growth of firms in R&D intensive industries, and promotes the economic growth of innovative countries. The results consistently show that enforcing stronger legal shareholder protection can help firms achieve an overall more efficient capital allocation to productive R&D investment.     

Creditor rights,information sharing,and bank risk taking

Looking at a sample of nearly 2,400 banks in 69 countries, we find that stronger creditor rights tend to promote greater bank risk taking. Consistent with this finding, we also show that stronger creditor rights increase the likelihood of financial crisis. On the plus side, we find that stronger creditor rights are associated with higher growth. In contrast, we find that the benefits of information sharing among creditors appear to be universally positive. Greater information sharing leads to higher bank profitability, lower bank risk, a reduced likelihood of financial crisis, and higher economic growth.     

Governance and bank valuation

This paper assesses the impact of the ownership structure of banks and shareholder protection laws on bank valuations while controlling for differences in bank regulations. Except in a few countries with very strong shareholder protection laws, banks are not widely held. Rather, families or the State control banks. Furthermore, (i) larger cash-flow rights by the controlling owner boost valuations, (ii) stronger shareholder protection laws increase valuations, and (iii) greater cash-flow rights mitigate the adverse effects of weak shareholder protection laws on valuations. These results suggest that ownership structure is an important mechanism for governing banks.     

Institutional failure or market failure?

We investigate the effect of the power of creditors, property rights protection, and institutional quality, on bank profits using a panel of 498 banks from 46 countries. Results show that better institutions and stronger property rights protection reduce bank profits, while stronger power of creditors drives up bank profits significantly. Results imply that better institutions and enhanced property rights protection lead to greater flow of credit allowing firms and investors to undertake more profitable ventures. By extension, stronger creditor rights erect steeper barriers to external finance for firms and investors. National indicators of economic freedoms may be more important to lowering the spread than strict creditor rights. Seemingly, credit markets fail when economic institutions fail or when governments intervene into these markets in ways that impede the safety and soundness of financial transactions and private contracting.     

Ownership structure, market discipline, and banks’ risk-taking incentives under deposit insurance

The paper studies the effects of market discipline by creditors and ownership structure on banks’ risk taking in the presence of partial deposit insurance. An agency-cost model explains how the effects of creditor discipline and shareholder control are interdependent, the non-monotonic effect of shareholder control, and the role of leverage. Panel regressions on several hundred banks worldwide 1995-2005 confirm a negative individual risk effect of creditor discipline and the expected convex effect of shareholder control. Increased shareholder control significantly strengthens the negative effect of market discipline on asset risk, but joint effects on overall default risk are limited.     

Political rights and the cost of debt

We examine the impact of country-level political rights on the cost of debt for corporate bonds issued by firms incorporated in 39 countries. Similar to, but separate from, the relation for creditor rights, greater political rights are associated with lower yield spreads. A one standard deviation increase in political rights is associated with an 18.6% decline in bond spreads. We find evidence that political and legal institutions are substitutes; marginal improvements in political rights produce greater reductions in the cost of debt for firms from countries with weaker creditor rights. We examine potential factors through which political rights may affect the cost of debt and find that greater freedom of the press provides an important channel for reducing bond risks. Moreover, debt of firms with cross-listed equity trades at a premium in U.S. markets, but this relation appears to be more consistent with improved visibility than with bonding effects.