Stealing from Thieves: Firm Governance and Performance When States are Predatory

Abstract:     
We investigate how government predatory policies (e.g., profits expropriation and bribes extraction) interact with managerial incentives in shaping firm governance structure and disclosure policies. We argue that firms have fewer incentives to practice good governance when the state is likely to expropriate firm profits or when managers collude with the state to divert corporate resources from shareholders. We empirically confirm our arguments using several comprehensive panel data sets on governance, disclosure practices, and earnings management for companies around the world. To address endogeneity concerns, we apply a difference-in-difference approach and show that firms which are subject to greater risks of expropriation practice worse governance, disclose less information, and manage earnings more in countries where states are predatory. Furthermore, deterioration in firm governance caused by predatory policies significantly reduces shareholder value. On average, firm value drops by 3% due to the direct risk of expropriation and by 9% because of poorer governance in response to state predation.

Keywords: Managerial Incentives, Corruption, Expropriation, Property Rights Protection, Taxes

JEL Classifications: G15, G32, G38, K22

Working Paper Series