Political rights and equity pricing

We examine the influence of political rights on the implied cost of equity capital using a sample of firms from 44 countries. We find that firms' equity financing costs are lower when political rights are stronger. We further find that political institutions' direct impact on the cost of equity capital is incremental to that of legal institutions. Economically, our results imply that a one standard deviation increase in political rights is associated with a 38 basis point decrease in corporate cost of equity capital. In additional analyses, we find that the effect of political rights on equity pricing is more pronounced in countries with weak legal institutions.     

Are Multiple Directorships Beneficial in East Asia?

We posit that the benefits and costs of multiple directorships are conditional on firm characteristics. We find firm valuation is positively associated with multiple directorships in (i) firms with high advising needs and (ii) firms with high external financing needs. These beneficial effects of multiple directorships are generally stronger in countries with weak shareholder rights and in firms that are widely held. However, when controlling shareholder hold high voting‐rights to cash‐flow rights, multiple directorships reduce firm valuation, especially in countries with weak shareholder rights and in closely held firms. As multiple directorships increases, cash holdings (capital expenditures) contribute less to shareholder value. The negative association between value of cash (capital expenditure) and busy boards is mitigated in firms with (i) high advising needs, (ii) high external financing needs and (iii) less entrenched ownership structures.     

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.     

Underwriting Fees and Shareholder Rights

Do firms’ governance provisions affect their terms of obtaining external financing? We hypothesize that it is more difficult for firms with more restrictions on shareholder rights to raise external equity, and that since analyst coverage is an important part of underwriting services, underwriters would use analyst recommendations to promote issuing firms with weaker shareholder rights more strongly and charge them higher underwriting fees. Consistent with our hypothesis, we find that analyst recommendations on issuing firms with weak shareholder rights increase more than those with strong shareholder rights prior to SEOs, and that underwriting spreads are positively related to issuing firms’ shareholder rights as proxied by the G‐index. Furthermore, the effect of shareholder rights on underwriting fees is largely contained in the six provisions in the E‐index.     

International Evidence on Cash Holdings and Expected Managerial Agency Problems

This article uses managerial control rights data for over 5000firms from 31 countries to examine the net costs and benefitsof cash holdings. We find that when external country-level shareholderprotection is weak, firm values are lower when controlling managershold more cash. Further, when external shareholder protectionis weak we find that firm values are higher when controllingmanagers pay dividends. Only when external shareholder protectionis strong do we find that cash held by controlling managersis unrelated to firm value, consistent with generally prevailingU.S. and international evidence.     

Investor protection and capital structure: International evidence

Institutions, environments, and firm characteristics are important determinants of capital structure. From a sample of firms across 45 countries, we find that investor protection plays an important role in the determinants of capital structure: firms in countries with better creditor protection have higher leverage, while firms in countries where shareholder rights are better protected use more equity funds. The other differences in institutions and environments also explain the cross-sectional variation in the aggregate capital structure across counties. Furthermore, firm characteristics identified by previous studies, as correlated in a cross-section with capital structure in developed markets, are similarly correlated in the present sample of countries. The evidence presented herein indicates that institutional differences are as important as firm characteristics in determining capital structure.     

Legal protection of investors,corporate governance,and the cost of equity capital

This study examines the effect of firm-level corporate governance on the cost of equity capital in emerging markets and how the effect is influenced by country-level legal protection of investors. We find that firm-level corporate governance has a significantly negative effect on the cost of equity capital in these markets. In addition, this corporate governance effect is more pronounced in countries that provide relatively poor legal protection. Thus, in emerging markets, firm-level corporate governance and country-level shareholder protection seem to be substitutes for each other in reducing the cost of equity. Our results are consistent with the finding from McKinsey's surveys that institutional investors are willing to pay a higher premium for shares in firms with good corporate governance, especially when the firms are in countries where the legal protection of investors is weak.     

Shareholder litigation rights and capital structure decisions

We exploit the staggered adoption of the universal demand (UD) laws across U.S. states, which impedes shareholder rights to initiate derivative lawsuits, as a quasi-natural experiment to examine the relation between shareholder litigation rights and firm capital structures. We find that weaker shareholder litigation rights due to the UD laws adoption lead to higher financial leverage, which enhances firm value. Furthermore, the positive relation between the UD laws adoption and financial leverage is more pronounced for firms exposed to higher shareholder litigation risk ex ante or financially constrained firms. Our evidence is consistent with lower shareholder litigation threats motivating firms to increase financial leverage.     

Accounting conservatism of cross-listing firms in the pre- and post-Sarbanes Oxley periods

This study investigates the level of accounting conservatism of a sample of cross-listed firms, American Depository Receipts (ADRs), during the pre- and post-Sarbanes Oxley (SOX) periods. After examining two proxies for accounting conservatism, Basu's [Basu, S. (1997). The conservatism principle and the asymmetric timeliness of earnings. Journal of Accounting and Economics 24(1), 3-37.] conservatism measure and abnormal accruals, we find that the SOX-exposed Levels II and III ADRs become more conservative during the post-SOX period while the SOX-unexposed Level I ADRs have no increase in the level of accounting conservatism. Further, we investigate whether such an increase in accounting conservatism is associated with different levels of shareholder protection in ADRs' home countries, and find that only Levels II and III ADRs from code law (weak shareholder protection) countries become more conservative and Levels II and III ADRs from common law (strong shareholder protection) countries have no change in accounting conservatism. These results suggest that SOX-exposed cross-listing firms from weak shareholder protection countries are most greatly influenced by the stringent requirements in SOX, and hence respond by increasing conservatism in their financial reporting.     

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.     

When do peers matter?: A cross-country perspective

We assess the importance of industry peers for a firm's own decision making strategy, using a rich sample of data covering 47 countries and 87 different industries between 1990 and 2011. Following the instrumental variable approach suggested by Leary and Roberts (2014), we find that, similar to U.S. firms, foreign firms do follow their peers when they make financial policy decisions. A standard deviation increase in peer firms' average leverage leads to about 5 percentage point increase in a firm's own leverage. We also find evidence that firms are more likely to follow their peers when investor protection laws including information disclosure and minority shareholder protection are weak, when creditor rights laws are strong, and when equity markets are more developed, suggesting that peers matter the most when firms have the greatest need to learn and to demonstrate their quality. These results hold even when we perform the analysis on a matched sample of firms.     

Do analyst recommendations reflect shareholder rights?

We examine whether sell-side analyst recommendations reflect shareholder rights. Our rationale is that analysts should be influenced by external governance only if market participants do not efficiently price its value. We find that stronger shareholder rights are associated with more favorable recommendations. Further analysis reveals that analysts favor firms with strong shareholder rights only when strong rights appear to be warranted, but do not penalize firms for having strong rights when not needed. These findings occupy middle ground in the debate on the pricing efficiency of shareholder rights. Moreover, we find that firm value is positively associated with the strength of shareholder rights regardless of the expected external governance structure. The latter result is consistent with a “one-size-fits-all” interpretation, and implies that firms across the board could increase share value by reducing their number of anti-takeover provisions.     

Controlling shareholder share pledging and the cost of equity capital: Evidence from China

We propose and test the incentive view—that the margin call pressure and ownership-control discrepancy associated with insider share pledging increase investors’ perceived risk, and thus also the cost of equity capital, in an emerging market. Using a controlling shareholder share pledging sample for Chinese listed firms, we find that firms with share pledging have a cost of equity capital that is 23.7 basis points higher than firms without share pledging. Further, share pledging increases the cost of equity capital through the information risks and agency conflicts channels. Cross-sectional analyses show that share pledging has a stronger effect on the cost of equity capital in non-state-owned enterprises, firms without monitoring of multiple large shareholders, firms with controlling shareholders assuming the position of chairperson, and firms with a weak institutional environment. In addition, using the global financial crisis and the outbreak of the coronavirus (COVID-19) as quasi-natural experiments, we disentangle the potential confounding effect of firm fundamentals and show that share pledging is positively associated with the cost of equity capital. Overall, the results are consistent with our incentive view that share pledging increases the cost of equity capital in an emerging market.     

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.     

Shareholder rights, financial disclosure and the cost of equity capital

This study extends research into whether shareholder rights and disclosures of financial-related attributes are associated with firms' costs of equity capital. Using cost-of-equity-capital estimates derived from expected earnings growth valuation models, we find that firms with stronger shareholder rights regimes and higher levels of financial transparency are associated with significantly lower costs of equity capital. We also find evidence that greater financial disclosure and stronger rights regimes interact in reducing firms' costs of equity capital, such that the effect of a high level of one mechanism is minimal when it is combined with a low level of the other. Finally, we document that neither factor dominates the other in their associations, and that there are tradeoffs between disclosure levels and shareholder rights in their influence on firms' implied costs of equity capital. JEL Classification G30 · M10     

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.     

Corporate governance and firm cash holdings in the US

Using governance metrics based on antitakeover provisions and inside ownership, we find that firms with weaker corporate governance structures actually have smaller cash reserves. When distributing cash to shareholders, firms with weaker governance structures choose to repurchase instead of increasing dividends, avoiding future payout commitments. The combination of excess cash and weak shareholder rights leads to increases in capital expenditures and acquisitions. Firms with low shareholder rights and excess cash have lower profitability and valuations. However, there is only limited evidence that the presence of excess cash alters the overall relation between governance and profitability. In the US, weakly controlled managers choose to spend cash quickly on acquisitions and capital expenditures, rather than hoard it.     

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.     

Connected lending and concentrated control

Banks’ controlling owners may exploit business relationships with other firms so as to tangibly or intangibly benefit themselves. This paper uses data from more than 2600 firms across 25 countries to study whether the control rights of the banks’ controlling owners are associated with whether firms need special connections with banks in order to obtain loans. I find that the control rights of the controlling owners increase the need for special connections. I also find that supervisory power raises the need for special connections and intensifies the adverse effect induced by concentrated control. No evidence is found that shareholder rights protection reduces the need for special connections, nor that bank officials become less corrupted as the control rights of the controlling owners increase. The results thus indicate that an increase in the control rights of the banks’ controlling owners only reduces the integrity of bank lending.