Corporate Governance and Risk-Taking

Better investor protection could lead corporations to undertake riskier but value-enhancing investments. For example, better investor protection mitigates the taking of private benefits leading to excess risk-avoidance. Further, in better investor protection environments, stakeholders like creditors, labor groups, and the government are less effective in reducing corporate risk-taking for their self-interest. However, arguments can also be made for a negative relationship between investor protection and risk-taking. Using a cross-country panel and a U.S.-only sample, we find that corporate risk-taking and firm growth rates are positively related to the quality of investor protection.     

Net Settlement and Counterparty Risk: Evidence from the Formation of the New York Stock Exchange Clearing House in 1892

The securities settlement literature indicates that centralized settlement can reduce monitoring incentives and lead to excessive risk‐taking and inefficient risk‐sharing. This paper examines broker‐failure rates and counterparty losses surrounding the transition from bilateral to multilateral settlement facilitated by the NYSE. Study results provide evidence that net settlement reduced failures without diminishing risk constraining incentives. The study constructs a controlled comparison of broker failures through data collected from the NYSE and the Consolidated Stock Exchange, which traded identical securities settled under different systems. The results suggest that multilateral settlement is advantageous when financial markets are highly stressed.     

DEPENDENT GROWTH IN A CAPITAL-IMPORTING ECONOMY: THE CASE OF PUERTO RICO

LIKE most less developed capitalist economies, Puerto Rico hasrelied heavily on external capital. The long-run implicationsof externally financed growth are explored for Puerto Rico underalternative assumptions about domestic saving behaviour; theextent of external ownership and the gap between productionand income are projected. The 1950-70 pattern of growth impliedthat eventually about 25 per cent of GDP would be repatriatedand 90 per cent or more of the capital stock would be externallyowned. Recent events suggest that this pattern will be difficultto sustain.