We present a model of the effects of legal protection of minority shareholders and of cash-flow ownership by a controlling shareholder on the valuation of firms. We then test this model using a sample of 539 large firms from 27 wealthy economies.

Abstract We present a simple model of an entrepreneur going public in an environment with poor legal protection of outside shareholders. The model incorporates elements of Becker's (J. Political Econ. 106 (1968) 172) ''crime and punishment'' framework into a corporate finance environment of Jensen and Meckling (J. Financial Econ. 3 (1976) 305). We examine the entrepreneur's decision and the market equilibrium. The model is consistent with a number of empirical regularities concerning the relation between investor protection and corporate finance. It also sheds light on the patterns of capital flows between rich and poor countries and on the politics of reform of investor protection. r

Are market-based or bank-based financial systems better at financing the expansion of industries that depend heavily on external finance, facilitating the formation of new establishments, and improving the efficiency of capital allocation across industries? We find evidence for neither the market-based nor the bank-based hypothesis. While legal system efficiency and overall financial development boost industry growth, new establishment formation, and efficient capital allocation, having a bank-based or market-based system per se does not seem to matter much.

In a sample of 398 firms from Indonesia, Korea, Malaysia, the Philippines, and Thailand, firm-level differences in variables related to corporate governance had a strong impact on firm performance during the East Asian financial crisis of 1997 to 1998. Significantly better stock price performance is associated with firms that had indicators of higher disclosure quality (ADRs and auditors from Big Six accounting firms), with firms that had higher outside ownership concentration, and with firms that were focused rather than diversified. The results suggest that individual firms have some power to preclude expropriation of minority shareholders if legal protection is inadequate. JEL classification: G15; G32; G34 Keywords: Financial crises; Corporate governance; Disclosure; Ownership structure; Diversification I am grateful to Simon Johnson, Sendhil Mullainathan, David Scharfstein, and Jeremy Stein for advice and encouragement, and to Simeon Djankov, Kristin Forbes, Ken French, Kathy Kahle, S.P. Kothari, Grant McQueen, Andrei Shleifer, Keith Vorkink, Marc Zenner, an anonymous referee, and seminar participants at Brigham Young University, MIT, Texas A&M University, the University of Illinois at Urbana-Champaign, and the University of Pittsburgh for helpful comments. I thank Simeon Djankov for making data available that is used in Panel C of Table 3. This paper is a revised version of a chapter of my MIT Ph.D. thesis. All errors are mine. E-mail address: todd.mitton@byu.edu 0304-405X/00/$-see front matter 2002 Elsevier Science S.A. All rights reserved 1 1.

This paper investigates whether management ownership structures and large non-management blockholders are related to firm value across a sample of 1433 firms from 18 emerging markets. When a management group’s control rights exceed its cash flow rights, I find that firm values are lower. I also find that large non-management control rights blockholdings are positively related to firm value. Both of these effects are significantly more pronounced in countries with low shareholder protection. One interpretation of these results is that external shareholder protection mechanisms play a role in restraining managerial agency costs and that large non-management blockholders can act as a partial substitute for missing institutional governance mechanisms.

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At the end of 1997, the foreign companies listed in the U.S. have a Tobin’s q ratio that exceeds by 16.5 % the q ratio of firms from the same country that are not listed in the U.S. The valuation difference is statistically significant and largest for exchange-listed firms, where it reaches 37%. The difference persists even after controlling for a number of firm and country characteristics. We propose a theory that explains this valuation difference. We hypothesize that controlling shareholders of firms listed in the U.S. cannot extract as many private benefits from control compared to controlling shareholders of firms not listed in the U.S., but that their firms are better able to take advantage of growth opportunities. Consequently, the cross-listed firms should be those firms where the interests of the controlling shareholder are better aligned with the interests of other shareholders. The growth opportunities of cross-listed firms will be more highly valued than those of firms not listed in the U.S. both because cross-listed firms are better able to take advantage of these opportunities and because a smaller fraction of the cash flow of these firms is expropriated by controlling shareholders. We find that our theory explains the greater valuation of cross-listed firms. In particular, we find expected sales growth is valued more highly for firms listed in the U.S. and that this effect is greater for firms from countries with poorer investor rights. 1.

This paper measures the value of corporate voting rights, specifically of the control block of votes, in a sample of 661 dual-class firms in 18 countries, in 1997. A consistent measure across countries is proposed. The measure is adjusted for takeover probability, block-holding costs, and dividend and liquidity differences between the share classes. The value of controlblock votes varies widely across countries. It is close to half of firm market value in South Korea, and close to zero in Finland. The value of control-block votes is interpreted as a lower bound for actual private benefits of the controlling shareholder. The legal environment, law enforcement, investor protection, takeover regulations, and power-concentrating corporate charter provisions explain 68 % of the cross-country variation in the value of control-block votes.

This paper investigates the relation between cross listing in the U.S., with its resulting commitment to increased disclosure, and the information environment of non-U.S. firms. We find that firms that cross-list on U.S. exchanges have greater analyst coverage and increased forecast accuracy relative to firms that are not cross listed. A time-series analysis shows that the change in analyst coverage and forecast accuracy occurs around cross listing. We also document that firms that have more analyst coverage and higher forecast accuracy have higher valuations. Further, the change in firm value around cross listing is correlated with changes in analyst following and forecast accuracy suggesting that cross listing enhances firm value through its effect on the firm’s information environment. Our findings support the hypothesis that crosslisted firms have better information environments, which are associated with higher market valuations.

Given the cross-sectional and temporal variation in their liquidity, emerging equity markets provide an ideal setting to examine the impact of liquidity on expected returns. Our main liquidity measure is a transformation of the proportion of zero daily firm returns, averaged over the month. We find that it significantly predicts future returns, whereas alternative measures such as turnover do not. Consistent with liquidity being a priced factor, unexpected liquidity shocks are positively correlated with contemporaneous return shocks and negatively correlated with shocks to the dividend yield. We consider a simple asset pricing model with liquidity and the market portfolio as risk factors and transaction costs that are proportional to liquidity. The model differentiates between integrated and segmented countries and time periods. Our results suggest that local market liquidity is an important driver of expected returns in emerging markets, and that the liberalization process has not fully eliminated its impact.