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Abstract:
This Paper studies the determinants of mergers and acquisitions around the world during the 1990s by focusing on differences in laws and regulation across countries. We find that the volume of M&A activity and the premium paid are significantly larger in countries with better investor protection. This result indicates that an active market for mergers and acquisitions is a more important component of the corporate governance regime of countries with better investor protection. We also show that in cross-border deals, the targets are typically from countries with poorer investor protection than the acquirers. Hence, cross-border transactions play a governance role by improving the degree of investor protection within target firms. This finding suggests that an increase in cross-border transactions may generate a worldwide convergence of corporate governance systems.

Mergers and acquisitions, corporate governance, investor protection

Abstract:
We study the determinants of mergers and acquisitions around the world by focusing on differences in laws and regulation across countries. We find that the volume of M&A activity is significantly larger in countries with better accounting standards and stronger shareholder protection. The probability of an all-cash bid decreases with the level of shareholder protection in the acquirer country. In cross-border deals targets are typically from countries with poorer investor protection than acquirers, suggesting that cross-border transactions play a governance role by improving the degree of investor protection within target firms.

Mergers and acquisitions, Corporate governance, Investor protection

Abstract:
This essay first describes the differences in the ownership structure of companies in the three main economies of continental Europe - Germany, France, and Italy - with comparisons to the United States and the United Kingdom. Next, it summarizes the corporate governance issues that arise in firms with a dominant shareholder. Then, it provides a brief account of the major European corporate scandal, Parmalat, as an extreme example of investor expropriation in a family-controlled corporation. After outlining in general the legal tools that can be used to tackle abuses by controlling shareholders (internal governance mechanisms, shareholder empowerment, disclosure, public enforcement), it describes the corporate governance reforms enacted by France, Germany, and Italy between 1991 and 2005 and assesses the way in which investor protection in the three countries has changed.

Corporate Governance, Concentrated Ownership, Corporate Law Reform, Internal Governance, Shareholder Empowerment, Disclosure, Private Enforcement, Public Enforcement

Abstract:
If the private benefits of control are high and management owns a small equity stake, managers and workers are natural allies. There are two forces at play. First, managers effectively transform employees into a "poison pill" by signing generous long-term labor contracts and thereby reducing the firm's attractiveness to a raider. Second, employees act as "white squires" for the incumbent managers, lobbying against hostile takeovers to protect the high wages enjoyed under incumbent management. Our model is consistent with available empirical findings, and yields new predictions as well.

private benefits, employment protection, takeovers, ESOPs

Abstract:
In this paper we use a unique data set, covering all companies traded on the Milan stock exchange during the Twentieth century, to study the evolution of the stock market, the dynamics of the ownership structure of traded firms, the birth of pyramidal groups, and the growth and decline of families in Italy. We find that the stock market evolved over time according to a non-monotonic pattern, with a more developed stock market at the beginning of the century than at the middle. Similarly, ownership structure was more diffused in 1940s than in 1980s. Moreover, family controlled groups and pyramids were less common in 1930s than in 1980s. These findings are inconsistent with the view that stock market development and ownership concentration are monotonically related with investor protection.

law and finance, political economy, financial development, ownership concentration, pyramids, family capitalism

Abstract:
The paper analyzes the political decision that determines the degree of investor protection. We show that, in some circumstances, entrepreneurs and workers agree to trade low investor protection for high employment protection. The feasibility of this "corporatist" agreement depends on the distribution of wealth and on technological factors. Otherwise, a "non-corporatist" outcome will occur, featuring high investor protection and low employment protection. Therefore, our main prediction is that employment and investor protection is negatively correlated across countries. The model also predicts that the frequency of mergers and acquisitions is negatively correlated with employment protection. Both predictions are consistent with OECD evidence.

Abstract:
This paper presents a political economy model where there is mutual feedback between investor protection and stock market development. Better investor protection induces companies to issue more equity and thereby leads to a broader stock market. In turn, equity issuance expands the shareholder base and increases support for shareholder protection. This feedback loop can generate multiple equilibria, with investor protection and stock market size being positively correlated across equilibria. The model's predictions are tested on panel data for 47 countries over 1993-2002, controlling for country and year effects and endogeneity issues. We also document international convergence in shareholder protection to best-practice standards, and show that it is correlated with cross-border M&A activity, consistent with the model.

political economy, shareholder protection, corporate governance, stock market development

Abstract:
This paper analyzes executive turnover and firm valuation in Italy, a country that features all the characteristics of the most common governance structure around the world, as described by La Porta, et al. (1999): low legal protection for investors, firms with large controlling shareholders and pyramidal groups. The main findings are that turnover is significantly lower and unaffected by performance when the controlling shareholder of the firm is also a top executive in the firm, while it is more sensitive to performance when control is, to some extent, contestable and when the controlling shareholder owns a larger fraction of the firm's cash-flow rights. The results on valuation are the mirror image of those on turnover: the firm's Q is lower for companies with the controlling shareholder as a top executive, larger when a voting syndicate controls the firm, and increases with the fraction of cash-flow rights owned by the controlling shareholder.

Management turnover, corporate governance, pyramidal groups

Abstract:
What affects the number of banks a company chooses to borrow from? This paper provides evidence of a negative correlation across countries between shareholder protection and average number of banks used by firms, and proposes a simple explanation for this result. The intuition of the model is that setting up fewer bank relations induces the controlling shareholder to extract more private benefits of control because the banks share a larger fraction of the costs via the larger rent they earn. Since the opportunity to enjoy private benefits of control is larger in countries with lower shareholder protection, the model predicts more bank relationships (and higher ownership concentration) in those countries. Consistent with the model's predictions, in Italy the number of bank relations per firm increases with firm ownership concentration and with the size of the private benefits of control as measured by the voting premium.

Relationship financing, corporate governance, ownership structure, investor protection

Abstract:
We argue that the choice of corporate governance by a firm affects and is affected by the choice of governance by other firms. Firms with weaker governance give higher payoffs to their management to incentivize them. This forces firms with good governance to also pay their management more than they would otherwise, due to competition in the managerial labour market. This externality reduces the value to firms of investing in corporate governance and produces weaker overall governance in the economy. The effect is stronger the greater the competition for managers and the stronger the managerial bargaining power. While standards can help raise governance towards efficient levels, market-based mechanisms such as (i) the acquisition of large equity stakes by raiders and (ii) the need to raise external capital by firms can help too, and we characterize conditions under which this happens.

Corporate governance, executive compensation, externality, governance standards, ownership structure, regulation

Abstract:
When firms compete in the managerial labor market, the choice of corporate governance by a firm affects, and is affected by, the choice of governance by other firms. Firms with weaker governance offer managers more generous compensation packages to incentivize them. This behavior forces firms with good governance to pay their management more than they would otherwise. This externality reduces the value to firms of investing in corporate governance and produces weaker overall governance in the economy. The effect is stronger the greater the competition for managers. The need to raise external capital by firms can improve governance levels not just in the firms that are directly affected by these mechanisms, but also in the competing firms. However, poor governance can also be employed by incumbent firms as a strategic deterrent to entry by new firms. We discuss the implications of this externality view of corporate governance for regulatory standards, ownership structure of firms, and the market for corporate control.

corporate governance, executive compensation, ownership structure, externality, regulation, governance standards

Abstract:
This paper analyzes the evolution of ownership of the 4,000 biggest companies, private or listed, in France, Germany, Italy and the U.K. over the 1996-2006 period. We find that family ownership in the U.K. follows a life cycle: U.K. family firms evolve into widely held companies as they age, while Continental European ones do not. The stability of family firms is related to their profitability relative to non-family firms: in Continental Europe family firms are more profitable than non-family firms (but not in the U.K.). We also find that in the U.K. family ownership is diluted more quickly in sectors that are more dependent on external capital but not so in Continental Europe. The different evolution pattern in the U.K. relative to Continental Europe applies to both listed and private firms, although in all four countries the dispersion of ownership in listed firms is faster than in private firms.

family control, ownership, widely held, evolution, cross country study, private and listed firms

Abstract:
This paper studies the governance of defined-benefit pension plans in the United Kingdom. We construct a governance measure, equal to the proportion of trustees of the pension plan who are also executive directors of the sponsoring company. Our findings indicate that pension plans of indebted companies with a higher proportion of insider-trustees: (i) invest a higher proportion of the pension plan assets into equities, (ii) contribute less into the pension plan, and (iii) have a larger dividend payout ratio. This evidence supports an agency view, whereby insider-trustees act in the interest of shareholders of the sponsoring company, and not necessarily pension plan members.

Defined benefits, pension plans, insiders, corporate governance, pension trustees

Abstract:
External finance is critical for less established entrepreneurs, so poor investor protection can hinder competition. We model how lobbying by incumbents may reduce access to finance in countries where politicians are less accountable to voters. In a broad cross-section of countries and industries, we find that (i) the number of producers and entry rates are positively correlated with investor protection in financially dependent sectors, and (ii) countries with more accountable political institutions have better investor protection.

Financial Development, Investor protection, Competition, Lobbying, Entry, Cost of Entry

Abstract:
We develop a model of endogenous lobby formation in which wealth inequality and political accountability undermine entry and financial development. Incumbents seek a low level of effective investor protection to prevent potential entrants from raising capital. They succeed because they can promise larger political contributions than the entrants due to the higher rents earned with less competition. Entry and investor protection improve when wealth distribution becomes less unequal, and the political system becomes more accountable. Consistent with these predictions, in a cross-section of 38 countries we find that greater accountability is associated with higher entry in sectors that are more dependent on external capital and have greater growth opportunities. Also, higher accountability and lower income inequality are associated with more effective legal enforcement, even after controlling for legal origin and per-capita income.

Politics, entry, financial development, entrepreneurship, investor protection, income inequality, growth

Abstract:
We develop a model of endogenous lobby formation in which wealth inequality and political accountability undermine entry and financial development. Incumbents seek a low level of effective investor protection to prevent potential entrants from raising capital. They succeed because they can promise larger political contributions than the entrants due to the higher rents earned with less competition. Entry and investor protection improve when wealth distribution becomes less unequal, and the political system becomes more accountable. Consistent with these predictions, in a cross-section of 38 countries we find that greater accountability is associated with higher entry in sectors that are more dependent on external capital and have greater growth opportunities. Also, higher accountability and lower income inequality are associated with more effective legal enforcement, even after controlling for legal origin and per-capita income.

Politics, Entry, Financial Development, Entrepreneurship, Investor protection, Income Inequality, Growth

Abstract:
We present a model in which issuers of structured bonds choose coarse and opaque ratings to enhance the liquidity of their primary market, at the cost of reducing secondary market liquidity or even causing it to freeze. The degree of transparency is inefficiently low if the social value of secondary market liquidity exceeds its private value. We analyze various types of public intervention - requiring transparency for rating agencies, providing liquidity to distressed banks or supporting secondary market prices - and find that their welfare implications are quite different. Finally, transparency is greater if issuers restrain the issue size, or tranche it so as to sell the more information-sensitive tranche to sophisticated investors only.

default, liquidity, rating, securitization, subprime lending crisis, transparency

Abstract:
We present a model in which issuers of structured bonds choose coarse and opaque ratings to enhance the liquidity of their primary market, at the cost of reducing secondary market liquidity or even causing it to freeze. The degree of transparency is inefficiently low if the social value of secondary market liquidity exceeds its private value. We analyze various types of public intervention: requiring transparency for rating agencies, providing liquidity to distressed banks or supporting secondary market prices and find that their welfare implications are quite different. Finally, transparency is greater if issuers restrain the issue size, or tranche it so as to sell the more information-sensitive tranche to sophisticated investors only.

securitization, rating, liquidity, subprime lending crisis, default

Abstract:
When firms compete in the managerial labor market, the choice of corporate governance by a firm affects, and is affected by, the choice of governance by other firms. Firms with weaker governance offer managers more generous compensation packages to incentivize them. This behavior forces firms with good governance to pay their management more than they would otherwise. This externality reduces the value to firms of investing in corporate governance and produces weaker overall governance in the economy. The effect is stronger the greater the competition for managers. The need to raise external capital by firms can improve governance levels not just in the firms that are directly affected by these mechanisms, but also in the competing firms. However, poor governance can also be employed by incumbent firms as a strategic deterrent to entry by new firms. We discuss the implications of this externality view of corporate governance for regulatory standards, ownership structure of firms, and the market for corporate control.

corporate governance, executive compensation, ownership structure, externality, regulation, governance standards

Abstract:
We present a model of endogenous lobby formation in which wealth inequality and political accountability undermine both entry and financial development. The elite will seek a lower level of effective minority protection than the middle class to prevent potential entrants from raising financing. The elite wins because its lobby can promise larger political contributions due to the higher rents earned by restricting entry. Entry and investor protection improve when wealth distribution becomes less unequal, and the political system becomes more accountable. Evidence across 48 countries indicates that greater accountability and lower income inequality are associated with stronger legal enforcement, even after controlling for legal origin and per-capita income. Moreover, greater political accountability increases entry in external capital-dependent industries; its inclusion makes financial development insignificant. These results suggest that lobbying protects established interests by creating entry barriers and undermining legal enforcement.

Abstract:
The regulations that shape the design and operations of corporations and credit and securities markets differ vastly from country to country. In addition, similar regulations are often unequally enforced in different countries. Economists still have an imperfect understanding of why these international differences exist and of whether they tend to persist over time. However, a recent strand of research has shown that some progress on these issues can be made using the approach of the new political economy, which models regulation and its enforcement as the result of the balance of power between social and economic constituencies. In this paper we offer a first assessment of the results and potential of this approach in three fields: corporate finance, banking, and securities markets.

Abstract:
The regulations that shape the design and the operations of corporations, credit and securities markets differ vastly from country to country. In addition, similar regulations are often unequally enforced in different countries. Economists still have an imperfect understanding of why these international differences exist and of whether they tend to persist over time. A recent strand of research has shown that some progress on these issues can be made using the approach of the new political economy, which models regulation and its enforcement as the result of the balance of power between social and economic constituencies. In this Paper we offer a first assessment of the results and potential of this approach in three fields: corporate finance, banking and securities markets.
development, privatization

Political economy, shareholder protection, corporate governance, bankruptcy law, credit market regulation, financial

Abstract:
This Paper studies the determinants of executive turnover and firm valuation as a function of ownership and control structure in Italy, a country that features low legal protection for investors, firms with controlling shareholders, and pyramidal groups. The results suggest that there is poor governance, as measured by a low sensitivity of turnover to performance and a low Q ratio, when (i) the controlling shareholders are also top executives, (ii) the control is fully in the hands of one shareholder and is not shared by a set of core shareholders, and (iii) the controlling shareholders own less than 50% of the firm's cash-flow rights.

Executive turnover, corporate governance, pyramidal groups

Abstract:
This paper studies the governance of defined-benefit pension plans in the United Kingdom. We construct a governance measure, equal to the proportion of trustees of the pension plan who are also executive directors of the sponsoring company. Our findings indicate that pension plans of indebted companies with a higher proportion of insider-trustees: (i) invest a higher proportion of the pension plan assets into equities, (ii) contribute less into the pension plan, and (iii) have a larger dividend payout ratio. This evidence supports an agency view, whereby insider-trustees act in the interest of shareholders of the sponsoring company, and not necessarily pension plan members.

Defined-benefits, pension plans, insiders, corporate governance, pension trustees

Abstract:
If the private benefits of control are high and management owns a small equity stake, managers and workers are natural allies. Two forces are at play. First, managers can transform employees into a 'poison pill' through generous long-term labour contracts and thereby reduce the firm's attractiveness to a raider. Second, employees act as 'white squires' for the incumbent managers: to protect their high wages, they resist hostile takeovers, by refusing to sell their shares to the raider or by lobbying against the takeover. The model is consistent with available empirical findings, and also yields new predictions.

Corporate control, private benefits, takeovers, ESOPs, employment protection

Abstract:
This paper presents a political economy model where there is mutual feedback between investor protection and stock market development. Better investor protection induces companies to issue more equity and thereby leads to a broader stock market. In turn, equity issuance expands the shareholder base and increases support for shareholder protection. This feedback loop can generate multiple equilibria, with investor protection and stock market size being positively correlated across equilibria. The model's predictions are tested on panel data for 47 countries over 1993-2002, controlling for country and year effects and endogeneity issues. We also document international convergence in shareholder protection to best-practice standards, and show that it is correlated with cross-border M&A activity, consistent with the model.

Political economy, shareholder protection, corporate governance, stock market development

Abstract:
In this paper we study the political and economic determinants of the US states’ choices of levels of homestead exemptions, following the 1978 reform of the personal bankruptcy laws. To do so, we develop a political economy model in which homestead exemptions are ex-post beneficial to borrowers who default but ex-ante costly to all borrowers because they increase the cost of borrowing. By assuming that state residents vote on homestead exemptions, we formulate predictions and test them using state-level data. We find that states with higher levels of income inequality prior to 1978 chose to adopt higher levels of homestead exemptions following the bankruptcy reform. This result is robust to controls for other differences across states, including the level of homestead exemptions prior to 1978.

personal bankruptcy, homestead exemption, political economy, federalism, creditor rights, income inequality.

Abstract:
For this study of the governance of defined-benefit pension plans in the United Kingdom, the governance measure was equal to the proportion of trustees of the pension plan in 2002 who were also executive directors of the sponsoring company. The findings indicate that pension plans of indebted companies with a higher proportion of insider than independent trustees invest a higher proportion of pension plan assets in equities and that the sponsors contribute less to the plan and have a larger dividend payout ratio. This evidence supports the agency view that insider trustees act in the interests of shareholders of the sponsor, not necessarily in the interests of pension plan members.

Portfolio Management, Investment Policy, Asset Allocation, Corporate Governance

Abstract:
We analyze the political determinants of investor and employment protection. Our model predicts that proportional electoral systems are conducive to weaker investor protection and stronger employment protection than majoritarian systems. This prediction is consistent with international panel data evidence. The proportionality of the voting system is significantly and negatively correlated with shareholder protection in a panel of 45 countries, and positively correlated with employment protection in a panel of 21 OECD countries. Other political variables also affect regulatory outcomes, especially for the labor market. The origin of the legal system has some additional explanatory power only for employment protection.