To Steal or Not to Steal: Firm Attributes, Legal Environment, and Valuation

62 Pages Posted: 29 Apr 2003

See all articles by Art Durnev

Art Durnev

University of Iowa - Henry B. Tippie College of Business

E. Han Kim

University of Michigan, Stephen M. Ross School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: September 22, 2003

Abstract

Newly released data on corporate governance and disclosure practices reveal wide within-country variation, with the variation increasing as legal environment gets less investor friendly. This paper examines why firms practice high-quality governance when law does not require it; firm attributes related to the quality of governance; how the attributes interact with legal environment; and the relation between firm valuation and corporate governance. A simple model, in which a controlling shareholder trades off private benefits of diversion against costs that vary across countries and time, identifies three relevant firm attributes: investment opportunities, external financing, and ownership structure. Using firm-level governance and transparency data on 859 firms in 27 countries, we find that firms with greater growth opportunities, greater needs for external financing, and more concentrated cash flow rights practice higher-quality governance and disclose more. Moreover, firms that score higher in governance and transparency rankings are valued higher in the stock market. Equally important, all these relations are stronger in countries that are less investor friendly, demonstrating that firms do adapt to poor legal environments to establish efficient governance practices.

Keywords: Corporate governance, investment opportunities, external financing

JEL Classification: G12, G32, G34, K23

Suggested Citation

Durnev, Artyom and Kim, E. Han, To Steal or Not to Steal: Firm Attributes, Legal Environment, and Valuation (September 22, 2003). 14th Annual Conference on Financial Economics and Accounting (FEA); AFA 2004 San Diego Meetings. Available at SSRN: https://ssrn.com/abstract=391132 or http://dx.doi.org/10.2139/ssrn.391132

Artyom Durnev (Contact Author)

University of Iowa - Henry B. Tippie College of Business ( email )

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E. Han Kim

University of Michigan, Stephen M. Ross School of Business ( email )

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Ann Arbor, MI MI 48109
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734-763-3117 (Fax)

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