JORDAN I. SIEGEL, Harvard Business School
Email: jsiegel@hbs.edu
PRITHWIRAJ CHOUDHURY, Harvard Business School
Email: pchoudhury@hbs.edu

The last decade of corporate governance research has been focused in large part on identifying what leads to superior or deficient corporate governance in emerging economies, and we think the conventional wisdom about the economically important topics of tunneling and business groups will need to be significantly questioned and reformulated in light of new findings, data, and methodology presented here. We propose the idea that firms’ corporate governance and firms’ strategic business activities within an industry are interlinked, and that only by conducting a simultaneous economic analysis of business strategy and corporate governance can scholars fully discern the quality of a firm’s governance. We advance this idea by taking a fresh look at one of the most rigorous extant methodologies for detecting “tunneling,� or efforts by firms’ controlling owner-managers to take money for themselves at the expense of minority shareholders. We show that efforts to discern which firms have superior or deficient corporate governance in the important emerging economy of India turn critically on whether one does a simultaneous economic analysis of business strategy and corporate governance. We find in contrast to prior views that Indian business groups are not, on average, engaging in tunneling, but are on average exhibiting good corporate governance, especially in light of the markedly different business strategies they typically undertake. Moreover, unlike many past conceptions of business groups from financial economics, sociology, and strategy, we find evidence for a knowledge-based “recombinative capabilities� view of business groups - that such groups have done the most to invest in R&D and other skills necessary to combine inputs in ways that lead to greater added value. Moreover, our finding that Indian business groups have grown larger and more diversified since liberalization and since broad-based corporate governance reforms were implemented, goes expressly against the prediction of prior schools of thought about business groups.

ROSALIND L. BENNETT, FDIC
Email: rbennett@fdic.gov
HALUK UNAL, University of Maryland - Robert H. Smith School of Business
Email: hunal@rhsmith.umd.edu

In this paper, we examine how the cost of resolving bank failures differs between an FDIC liquidation and a private-sector resolution where the assets remain in the banking system. Our findings show that private-sector resolutions do not deliver the expected cost-savings prior to the passage of the Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991. We obtain this result when we control for the selection bias that arises from the resolution process. In contrast, during the post-FDICIA period, we observe that private-sector resolutions yield significant cost savings over FDIC liquidations. We also find that the direct costs are lower for private-sector resolutions over the sample period. We derive these results from a sample that spans all failures between 1986 and 2007.

JULAPA JAGTIANI, Federal Reserve Banks - Federal Reserve Bank of Philadelphia
Email: Julapa.Jagtiani@phil.frb.org
ELIJAH BREWER, DePaul University - Department of Finance, Federal Reserve Bank of Chicago
Email: ebreweri@depaul.edu

This paper estimates the value of the too-big-to-fail (TBTF) subsidy. Using data from the merger boom of 1991-2004, we find that banking organizations were willing to pay an added premium for mergers that would put them over the asset sizes that are commonly viewed as the thresholds for being TBTF. We estimate at least $14 billion in added premiums for the eight merger deals that brought the organizations to over $100 billion in assets. In addition, we find that both the stock and bond markets reacted positively to these deals. Our estimated TBTF subsidy is large enough to create serious concern, since recent assisted mergers have allowed TBTF organizations to become even bigger and for nonbanks to become part of TBTF banking organizations, thus extending the TBTF subsidy beyond banking.

GIOVANNI DELL’ARICCIA, affiliation not provided to SSRN

We identify different sources of risk as important determinants of banks' corporate structures when expanding into new markets. Subsidiary-based corporate structures benefit from greater protection against economic risk because of affiliate-level limited liability, but are more exposed to the risk of capital expropriation than are branches. Thus, branch-based structures are preferred to subsidiary-based structures when expropriation risk is high relative to economic risk, and vice versa. Greater cross-country risk correlation and more accurate pricing of risk by investors reduce the differences between the two structures. Furthermore, the corporate structure affects bank risk taking and affiliate size.

TEREZA TYKVOVA, Centre for European Economic Research (ZEW) - International Finance and Financial Management
Email: TYKVOVA@ZEW.DE
ANDREA SCHERTLER, University of Kiel
Email: a.schertler@bwl.uni-kiel.de

In the period 2000-2008, more than one third of venture capital-backed companies worldwide received financing from venture capitalists that were not located in the same country as these companies. This paper offers a comprehensive description of how microeconomic as well as macroeconomic factors, which likely affect the availability and profitability of investment opportunities at home and abroad, influence the internationalization patterns. To carry out this comprehensive description, we study the effects these factors have on internationalization patterns from four different perspectives. First, from the perspective of a venture capitalist we analyze its cross-border and domestic deals. Second, from the perspective of the portfolio company we investigate the likelihood that a foreign venture capitalist participates in a particular deal. Third, from the perspective of the portfolio companies’ country we examine the number of cross-border deals in this country. Fourth, in a bilateral country setting, in which we combine the macroeconomic factors of the venture capitalists’ and the portfolio companies’ countries, we focus on the number of cross-border venture capital deals between these two countries. Our analyses from these four different perspectives provide a core understanding of the factors that drive internationalization within venture capital industries from different angles. To fulfill this task, we use a new dataset on worldwide venture capital investments. The key results from our four perspective analysis can be summarized as follows: domestically experienced venture capitalists seem to be able to exploit the advantages from internationalization more effectively than their less experienced counterparts. Foreign venture capitalists are more likely to participate in larger deals, especially when the portfolio company is located in a small country. Another finding is that companies from the IT, machinery, and biotech sectors are more likely to be financed by foreign venture capitalists than companies in other industries. Internationalization patterns are shaped not only by the characteristics of the venture capitalist, the portfolio company and the deal, but also by macroeconomic factors. Countries with higher expected economic growth, in which more promising investment opportunities for venture capitalists are likely to be generated, stimulate venture capital activity from domestic as well as foreign venture capitalists. A higher stock market capitalization encourages domestic venture capitalists to invest more both at home and abroad.