Do Controlling Shareholders’ Expropriation Incentives Imply a Link between Corporate Governance and Firm Value? Theory and Evidence

59 Pages Posted: 16 Nov 2011

See all articles by Kee-Hong Bae

Kee-Hong Bae

York University - Schulich School of Business

Jae-Seung Baek

Hankuk University of Foreign Studies - Department of International Finance

Jun-Koo Kang

Nanyang Technological University (NTU) - Nanyang Business School

Wei-Lin Liu

School of Finance, Shanghai University of Finance and Economics (SUFE)

Date Written: October 6, 2011

Abstract

We develop and test a model that investigates how controlling shareholders’ expropriation incentives affect firm values during crisis and subsequent recovery periods. Consistent with the prediction of our model, we find that during the 1997 Asian financial crisis, Asian firms with weaker corporate governance experience a larger drop in their share values, but during the post-crisis recovery period, such firms experience a larger rebound in their share values. We also find consistent evidence for Latin American firms during the 2001 Argentine economic crisis. Our results support the view that controlling shareholders’ expropriation incentives imply a link between corporate governance and firm value.

Keywords: Expropriation, Corporate governance, Firm value, Korean financial crisis, Chaebol, Ownership structure, Controlling shareholder, Cash flow rights, Control rights

JEL Classification: G15, G21, G32, G33, G34

Suggested Citation

Bae, Kee-Hong and Baek, Jae-Seung and Kang, Jun-Koo and Liu, Wei-Lin, Do Controlling Shareholders’ Expropriation Incentives Imply a Link between Corporate Governance and Firm Value? Theory and Evidence (October 6, 2011). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1089926

Kee-Hong Bae (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
416-736-2100 ext) 20248 (Phone)
416-736-5687 (Fax)

Jae-Seung Baek

Hankuk University of Foreign Studies - Department of International Finance ( email )

College of Economics and Business
Oedae-ro 81, Mohyun, Cheoin-gu
Yongin-si, 17035
Korea, Republic of (South Korea)
+82-31-330-4936 (Phone)

Jun-Koo Kang

Nanyang Technological University (NTU) - Nanyang Business School ( email )

Nanyang Avenue, Block S3-01b-54
Singapore, 639798
Singapore
(+65) 6790-5662 (Phone)
(+65) 6791-3697 (Fax)

HOME PAGE: http://www.nbs.ntu.edu.sg/nbs_corporate/divisions/bnf/index.asp

Wei-Lin Liu

School of Finance, Shanghai University of Finance and Economics (SUFE) ( email )

Shanghai, 200433
China

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