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Ownership Structure, Corporate Governance, and Firm Value: Evidence from the East Asian Financial Crisis


Karl V. Lins


University of Utah - Department of Finance

Michael L. Lemmon


University of Utah - Department of Finance

April 2001

William Davidson Institute Working Paper No. 393; 3rd Annual Fin. Mkt. Dev. Conference, Hong Kong 2001; U of Utah Working Paper

Abstract:     
We study the effect of ownership structure on firm value during the East Asian financial crisis that began in July 1997. The crisis represents a negative shock to the investment opportunities of firms in these markets that raises the incentives of controlling shareholders to expropriate minority shareholders. Moreover, the large separation between cash flow and control rights that often arise from the use of pyramidal ownership structures and cross-holdings in these markets suggests that insiders have both the incentive and the ability to engage in expropriation. Using data from over 800 firms in eight East Asian countries, we find evidence consistent with this view. Tobin's Q ratios of those firms in which minority shareholders are potentially most subject to expropriation decline twelve percent more than Q ratios in other firms during the crisis period. A similar result holds for stock returns - firms in which minority shareholders are most likely to experience expropriation underperform other firms by about nine percent per year during the crisis period. Further, during the pre-crisis period we find no evidence that firms with a separation between cash flow rights and control rights exhibit performance changes different from firms with no such separation. All of these results are robust to controls for country and industry effects, as well as proxies for differences in risk across firms and the strength of the country's legal institutions. The evidence indicates that corporate ownership structure plays an important role in determining the incentives of insiders to expropriate minority shareholders during the times of declining investment opportunities. Our results add to the literature that examines the link between ownership structure and firm performance and provide additional guidance to policymakers engaged in the ongoing debate about the proper role and design of corporate governance features and legal institutions in developing economies.

Number of Pages in PDF File: 36

Keywords: Corporate Governance, Ownership Structure, Financial Crisis, Emerging Markets

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Date posted: April 11, 2001  

Suggested Citation

Lins, Karl V. and Lemmon, Michael L., Ownership Structure, Corporate Governance, and Firm Value: Evidence from the East Asian Financial Crisis (April 2001). William Davidson Institute Working Paper No. 393; 3rd Annual Fin. Mkt. Dev. Conference, Hong Kong 2001; U of Utah Working Paper. Available at SSRN: http://ssrn.com/abstract=265108 or http://dx.doi.org/10.2139/ssrn.265108

Contact Information

Karl V. Lins
University of Utah - Department of Finance ( email )
David Eccles School of Business
Salt Lake City, UT 84112
United States
801-585-3171 (Phone)
801-581-7214 (Fax)
Michael L. Lemmon (Contact Author)
University of Utah - Department of Finance ( email )
David Eccles School of Business
Salt Lake City, UT 84112
United States
801-585-5210 (Phone)
801-581-7214 (Fax)
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