International Corporate Governance: Volume 18

We examine the influence of ownership structure on a blockholder’s power in a firm. We first describe the presence and ownership stakes of blockholders in a comprehensive sample of US firms. We develop a measure of the influence of the ownership structure on a blockholder’s power and show that an average blockholder loses 12% of her potential power due to the presence and size of the ownership stakes of other blockholders. Further, the influence of ownership structure varies systematically with a blockholder’s rank and identity, with the second and nonfamily manager blockholders experiencing the largest loss of power.

We examine changes in controlling shareholder holdings, looking for evidence of financial tunneling (unfair wealth transfers from public investors to controlling shareholders). Our sample comprises yearly data during 2000–2011 on 75 large Israeli companies. We find that controlling shareholders are successful in timing the stock market – there exists a significant negative correlation between changes in the mean controlling shareholders’ equity holdings and market return. There is also some evidence that controlling shareholders increase (decrease) their holdings before years of positive (negative) excess returns in their shares. However, statistically significant mean excess returns are documented only after decreases in controlling shareholders’ holdings. Thus, we offer only limited support for the financial tunneling hypothesis.

Business corporations (and unincorporated joint-stock companies) formed in Britain and the United States in the eighteenth century and the first half of the nineteenth century were lightly regulated by today’s standards and, as startups, sold equity directly to investors without the aid of intermediaries, yet they suffered relatively few governance breakdowns. That is because republican government-style checks against the arbitrary power of any group of stakeholders (managers, blockholders, directors) suffused their founding documents (charters/constitutions, articles of agreement, bylaws), raising the expected costs of defalcation above the expected benefits. Over the latter half of the nineteenth century, however, the original checks disintegrated. They were functionally replaced twice, first by financial capitalism a la J. P. Morgan, then by corporate raiders and takeover specialists like KKR, but politicians neutralized the first and managers (and judges) the second, leaving many widely held corporations today under the control of CEOs/Board Chairmen who can self-deal with near impunity and have apparent incentives to do so. A return to the precepts of the republican model could help to improve governance outcomes in the future.

Directors help determine the strategic direction of a corporation and are responsible for ensuring the institution has a good system of internal control. Banking institutions without a strategic direction emphasizing sound lending practices that promote the long-run financial health and viability of the institution will be sued more frequently than peer institutions. Institutions that do not have a good system of internal control will also be sued more frequently. Hence, legal expense is a bank corporate governance measure. We compare the performance of bank legal expense and a widely cited corporate governance index in a regression framework to determine which better predicts bank performance. The regressions indicate legal expense is a much better predictor, hence a better measure of bank corporate governance. Regulators should require legal expense reporting and rank institutions by the ratio of legal expense to assets to help identify institutions with weak governance. Seven case studies illustrate the role of legal expense in corporate governance.

In this study, we examine the relationship between political connections of private firms and the initial public offering process. Using registration statement information, we create a unique database of politically connected IPO firms. We find that political connections are substitutes to high-quality underwriters and big four auditors. Politically connected firms manage earnings more highly upward than non-connected firms prior to the public offering. Politically connected firms also exhibit less underpricing than non-connected firms. Finally, politically connected IPO firms have superior post-IPO returns relative to non-connected IPO firms.

Internal capital markets of diversified firms have been associated with inefficient allocation of investment funds across divisions, leading to value losses. Utilizing a sample of diversified firms that adopted or eliminated Residual Income (RI) plans between 1990 and 2009, we show that adoptions of these plans mitigate investment distortions and lead to value gains. Following the adoption of RI plans, diversified firms start allocating investment funds based on growth opportunities of their divisions. RI plan adopters lower their divisional investment levels, especially in segments with below-average growth opportunities. The overall investment allocation efficiency improves, and the diversification discount diminishes after the adoption of RI plans. However, RI plans appear to be used only as temporary tools for assessing corporate performance. The plans are adopted primarily by firms expected to immediately generate plan bonuses for management, and they are frequently eliminated by firms with bad accounting performance and low managerial bonuses. The study contributes to the literature on organizational efficiency, internal capital markets, and on the importance of measures based on economic profits or RI.

This paper investigates the capital structure of a large sample of U.S. private firms from 2004 to 2013. There is a considerable heterogeneity in private firm capital structure not only in terms of the level of leverage but also with regard to the issuance of specific debt instruments. Leverage, debt type usage, and debt specialization are dynamic and strongly related to observable firm characteristics largely in support of contract theory. Unobservable firm and industry characteristics are strong determinants of leverage levels and debt specialization. Macro credit conditions are not related to private firm leverage but are strong determinants of the degree to which firms diversify their debt capital structures.

This paper investigates the impact of the development of capital markets on economic growth in Africa and reports a significant increase in real GDP per capita after stock exchanges are established. This paper also reveals that there are significant improvements in the level of private investments in the post stock market launch era. The results also indicate that stock markets play a complementary role to the banking sector by contributing to the availability of private credit. Although African capital markets are relatively less advanced when compared to capital markets on other continents (particularly in terms of technology, structure, and liquidity), we find that their establishment has been crucial in helping African countries catch up with the rest of the world.