Political connections and the cost of equity capital

Motivated by recent research on the costs and benefits of political connection, we examine the cost of equity capital of politically connected firms. Using propensity score matching models, we find that politically connected firms enjoy a lower cost of equity capital than their non-connected peers. We find further that political connections are more valuable for firms with stronger ties to political power. In additional analyses, we find that the effect of political connection on firms' equity financing costs is influenced by the prevailing country-level institutional and political environment, and by firm characteristics. Taken together, our findings provide strong evidence that investors require a lower cost of capital for politically connected firms, which suggests that politically connected firms are generally considered less risky than non-connected firms.     

FOREIGN INVESTOR PARTICIPATION IN PRIVATIZATIONS: DOES THE INSTITUTIONAL ENVIRONMENT MATTER?

We examine the determinants of foreign investors' participation in the privatization process of developing countries. First, we estimate the probability that foreign investors target privatized firms in a given country. We show that a favorable legal environment where investor protection is higher enhances foreign investors' participation. Foreigners also prefer large, strategic firms from high‐growth economies and socially stable countries with low political risk. Second, we restrict our analysis to privatized firms that foreign investors actually choose and show that the stakes foreigners hold are larger if the firms are privatized by private sales as opposed to public offerings.     

Excess Control, Corporate Governance and Implied Cost of Equity: International Evidence

We investigate whether the separation between ownership and control rights can be costly to controlling shareholders and firms in terms of capital-raising costs. Using estimates of the cost of equity capital implied by analyst earnings forecasts and growth rate for a sample of 1,207 firms from nine Asian and 13 Western European countries, we find strong, robust evidence that the cost of equity is increasing in excess control, while controlling for other firm-level characteristics. This core finding persists after controlling for legal institutions variables.     

From state to private ownership: Issues from strategic industries

This paper investigates the effects of privatization for a panel of 189 firms from strategic industries headquartered in 39 countries, and privatized between 1984 and 2002. Strategic firms can hardly be compared to manufacturing or competitive industries as they are generally under state monopoly, and involve specific issues such as regulation, political and institutional constraints. We examine the change in ownership and postprivatization means of control by the government, and assess whether positive changes in performance obtain in these particular industries that include firms from the financial, mining, steel, telecommunications, transportation, utilities, and oil sectors. We document that governments continue to exert influence on former state-owned firms after three years by retaining golden shares and/or appointing politicians to key positions in the firm. Our multivariate results reveal a negative effect of state ownership on profitability and operating efficiency, which the presence of a sound institutional and political environment moderates.     

Cross‐Country Evidence on the Importance of Auditor Choice to Corporate Debt Maturity

We examine the importance of Big Four audits in reducing agency costs evident in corporate debt maturity worldwide. Analyzing a large sample of public firms from 42 countries reveals that the fraction of long‐term debt in firms' capital structures rises with the presence of a Big Four auditor, suggesting that higher‐quality audits substitute for short‐term debt for monitoring purposes. In additional analyses, we find that the role that auditor choice plays in debt maturity is concentrated in firms from countries with strong legal institutions governing property rights and creditor rights. Collectively, our research implies that Big Four audits matter to corporate debt maturity, although the impact is isolated in firms operating in countries with more protective legal regimes.     

Institutional investment horizon and investment–cash flow sensitivity

This paper examines the relevance of institutional investors’ investment horizon, as reflected in the response of firm investment to internal cash flows. We argue that institutional investors with longer investment horizons have greater incentives and efficiencies to engage in effective monitoring. This improved monitoring mitigates asymmetric information and agency problems, and in turn reduces the wedge between the costs of internal and external funds. As a result, the sensitivity of firms’ investment outlays to internal cash flows decreases in the presence of institutional investors with long-term investment horizons. Using a sample of 8402 US firms over the period 1981–2008, we provide empirical evidence consistent with these arguments.     

DO MULTIPLE LARGE SHAREHOLDERS PLAY A CORPORATE GOVERNANCE ROLE? EVIDENCE FROM EAST ASIA

We examine the governance role of multiple large shareholder structures (MLSS) to determine their valuation effects in a sample of 1,252 publicly traded firms from nine East Asian economies. We find that the presence, number, and size of multiple large shareholders are associated with a significant valuation premium. Our results also show that the identity of MLSS influences corporate value and that the valuation effects of MLSS are more pronounced in firms with greater agency costs. Our results imply that MLSS play a valuable monitoring role in curbing the diversion of corporate resources.     

Does conditional market skewness resolve the puzzling market risk-return relationship?

In this paper, we employ instrumental variables methods that allow time-varying risk and reward-to-risk to test various conditional asset pricing models. We find a negative partial relation between the market excess return and conditional market variance. In contrast with recent findings, we show that this negative relationship is not due to the omission of the hedge term associated with the ICAPM. However, conditional market skewness seems to partly account for this negative risk-return relationship.     

The performance analysis of chart patterns: Monte Carlo simulation and evidence from the euro/dollar foreign exchange market

We investigate the existence of chart patterns in the euro/dollar intra-daily foreign exchange market. We use two identification methods of the different chart patterns: one built on 5-min close prices only, and one based on both 5-min low and high prices. We look for twelve types of chart patterns and we study the detected patterns through two criteria: predictability and profitability. We run a Monte Carlo simulation to compute the statistical significance of the obtained results. We find an apparent existence of some chart patterns in the currency market. More than one half of detected charts present a significant predictability. Nevertheless, only two chart patterns imply a significant profitability which is however too small to cover the transaction costs. The second extrema detection method provides higher but riskier profits than the first one.

The choice between private and public capital markets: The importance of disclosure standards and auditor discipline to countries divesting state-owned enterprises

For a sample of 1866 privatizations from 37 countries, we estimate the impact of disclosure standards and legal institutions that discipline auditors on the method chosen to divest state-owned enterprises. The agency conflict between minority and controlling shareholders can impede a government from privatizing by selling its stake to diffuse investors in the public capital market with a share-issue privatization (SIP) that typically generates important spillover economic benefits, rather than an asset sale to a small group of buyers. However, prior research implies that accounting transparency plays a natural role in preventing controlling shareholders from siphoning corporate resources by helping minority investors identify any diversionary practices. After controlling for firm-level and other country-level characteristics, we find that SIPs become more likely when countries mandate strict disclosure standards, although this result is sensitive to model specification. In comparison, we provide strong, robust evidence that SIPs are more likely in jurisdictions that relax the burden of proof in civil lawsuits and criminal prosecutions against auditors, leading to more credible financial statements. From a policy perspective, our cross-country research suggests that investors value reforms that subject auditors to more severe private and public enforcement over several other legal determinants, including enhancing disclosure standards.