Journal of Financial and Quantitative Analysis
Vol. 38, No. 1, March 2003
Special Issue on International Corporate Governance


Contents

Corporate Governance and the Home Bias
Magnus Dahlquist, Lee Pinkowitz, René M. Stulz, and Rohan Williamson

International Corporate Governance
Diane K. Denis and John J. McConnell

International Corporate Governance and Corporate Cash Holdings
Amy Dittmar, Jan Mahrt-Smith, and Henri Servaes

Creditor Rights, Enforcement, and Debt Ownership Structure: Evidence from the Global Syndicated Loan Market
Benjamin C. Esty and William L. Megginson

Capital Market Development, International Integration, Legal Systems, and the Value of Corporate Diversification: A Cross-Country Analysis
Larry Fauver, Joel Houston, and Andy Naranjo

Do Better Institutions Mitigate Agency Problems? Evidence from Corporate Finance Choices
Mariassunta Giannetti

Is Corporate Governance Ineffective in Emerging Markets?
Michael S. Gibson

Equity Ownership and Firm Value in Emerging Markets
Karl V. Lins

Strategic Transparency and Informed Trading: Will Capital Market Integration Force Convergence of Corporate Governance?
Enrico C. Perotti and Ernst-Ludwig von Thadden

U.S. Investors' Perceptions of Corporate Control in Mexico: Evidence from Sibling ADRs
J. Michael Pinegar and R. Ravichandran

Abstracts

Corporate Governance and the Home Bias
Magnus Dahlquist, Lee Pinkowitz, René M. Stulz, and Rohan Williamson

This paper shows that there is a close relation between corporate governance and the portfolios held by investors. Most firms in countries with poor investor protection are controlled by large shareholders, so that only a fraction of the shares issued by firms in these countries can be freely traded and held by portfolio investors. We show that the prevalence of closely-held firms in most countries helps explain why these countries exhibit a home bias in share holdings and why U.S. investors underweight foreign countries in their portfolios. We construct an estimate of the world portfolio of shares available to investors who are not controlling shareholders (the world float portfolio). The world float portfolio differs sharply from the world market portfolio. In regressions explaining the portfolio weights of U.S. investors, the world float portfolio has a positive significant coefficient but the world market portfolio has no additional explanatory power. This result holds when we control for country characteristics. An analysis of foreign investor holdings at the firm level for Sweden confirms the importance of the float portfolio as a determinant of these holdings.


International Corporate Governance
Diane K. Denis and John J. McConnell

We survey two generations of research on corporate governance systems around the world, concentrating on countries other than the U.S. The first generation of international corporate governance research is patterned after the U.S. research that precedes it. These studies examine individual governance mechanisms—particularly board composition and equity ownership—in individual countries. The second generation of international corporate governance research considers the possible impact of differing legal systems on the structure and effectiveness of corporate governance and compares systems across countries.


International Corporate Governance and Corporate Cash Holdings
Amy Dittmar, Jan Mahrt-Smith, and Henri Servaes

Agency problems are an important determinant of corporate cash holdings. For a sample of more than 11,000 firms from 45 countries, we find that corporations in countries where shareholders rights are not well protected hold up to twice as much cash as corporations in countries with good shareholder protection. In addition, when shareholder protection is poor, factors that generally drive the need for cash holdings, such as investment opportunities and asymmetric information, actually become less important. These results are stronger after controlling for capital market development. Indeed, consistent with the importance of agency costs, we find that firms hold larger cash balances when access to funds is easier. Our evidence is consistent with the conjecture that investors in countries with poor shareholder protection cannot force managers to disgorge excessive cash balances.


Creditor Rights, Enforcement, and Debt Ownership Structure: Evidence from the Global Syndicated Loan Market
Benjamin C. Esty and William L. Megginson

Using a sample of 495 project finance loan tranches (worth $151 billion) to borrowers in 61 different countries, we examine the relation between legal risk and debt ownership structure. The tranches exhibit high absolute levels of debt ownership concentration: the largest single bank holds 20.3% while the top five banks collectively hold 61.2% of a typical tranche. In countries with strong creditor rights and reliable legal enforcement, lenders create smaller and more concentrated syndicates to facilitate monitoring and low cost contracting. When lenders cannot rely on legal enforcement mechanisms to protect their claims, they create larger and more diffuse syndicates as a way to deter strategic default.


Capital Market Development, International Integration, Legal Systems, and the Value of Corporate Diversification: A Cross-Country Analysis
Larry Fauver, Joel Houston, and Andy Naranjo

Using a database of more than 8,000 companies from 35 countries, we find that the value of corporate diversification is related to the level of capital market development, international integration, and legal systems. Our results suggest that the financial, legal, and regulatory environments each have an important influence on the value of diversification. Moreover, the optimal organizational structure and corporate governance may be very different for firms operating in emerging markets than they are for firms operating in more developed and internationally integrated countries.


Do Better Institutions Mitigate Agency Problems? Evidence from Corporate Finance Choices
Mariassunta Giannetti

This paper examines how firm characteristics, legal rules, and financial development affect corporate finance decisions. In contrast to the existing literature, I use data on unlisted companies to show that institutions play an important role in determining the extent of agency problems. In particular, I find that in countries with good creditor protection, it is easier for firms investing in intangible assets to obtain loans. The protection of creditor rights is also important for ensuring access to long-term debt for firms operating in sectors with highly volatile returns. Ceteris paribus, firms are more leveraged in countries where the stock market is less developed. Unlisted firms appear more indebted than listed companies even after controlling for firm characteristics such as profitability, size, and the ability to provide collateral. Finally, institutions that favor creditor rights and ensure stricter enforcement not only are associated with higher leverage, but also with greater availability of long-term debt.


Is Corporate Governance Ineffective in Emerging Markets?
Michael S. Gibson

I test whether corporate governance is ineffective in emerging markets by estimating the link between CEO turnover and firm performance for over 1,200 firms in eight emerging markets. I find two main results. First, CEOs of emerging market firms are more likely to lose their jobs when their firm's performance is poor, suggesting that corporate governance is not ineffective in emerging markets. Second, for the subset of firms with a large domestic shareholder, there is no link between CEO turnover and firm performance. For this subset of emerging market firms, corporate governance appears to be ineffective.


Equity Ownership and Firm Value in Emerging Markets
Karl V. Lins

This paper investigates whether management stock ownership and large non-management blockholder share ownership 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.


Strategic Transparency and Informed Trading: Will Capital Market Integration Force Convergence of Corporate Governance?
Enrico C. Perotti and Ernst-Ludwig von Thadden

Dominant investors can influence the publicly available information about firms by affecting the cost of information collection. Under strategic competition, transparency results in higher variability of profits and output. Thus, lenders prefer less transparency, since this protects firms when in a weak competitive position, while equity holders prefer more. Market interaction creates strategic complementarity in gathering information on competing firms, thus entry by transparent competitors will improve price informativeness. Moreover, as the return to information gathering increases with liquidity, increasing global trading may undermine the ability of bank control to keep firms opaque.


U.S. Investors' Perceptions of Corporate Control in Mexico: Evidence from Sibling ADRs
J. Michael Pinegar and R. Ravichandran

We examine the relative prices of sibling American Depositary Receipts (ADRs). These ADRs are issued against classes of shares with different voting rights that are issued by the same foreign firm. Though superior and inferior voting siblings begin trading in the U.S. at nearly equal values, prices quickly separate. For non-Mexican issues, superior voting ADRs command a premium. For Mexican issues, superior voting shares trade at a discount. The Mexican discount is inconsistent with the benefits of U.S. listing discussed in other recent studies and cannot be explained by differences in cash flow rights, systematic risk, liquidity, voting control of major blockholders, or ownership restrictions. Our analysis suggests, however, that control for our Mexican firms has shifted to creditors and competitors, thus, eroding equity voting premiums.