Stealing from Thieves: Expropriation Risk, Firm Governance, and Performance
46 Pages Posted: 15 Mar 2007 Last revised: 14 Nov 2011
Date Written: November 11, 2011
We examine firm governance choices and firm valuation in the presence of expropriation risk. We argue that firms have fewer incentives to practice good governance and disclose more information when the state is likely to expropriate firm profits. 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 in industries that are subject to greater risks of expropriation practice worse governance, disclose less information, and manage earnings more. Furthermore, expropriation risk lowers firm value by 3.69% directly and by 2.81% through the deterioration in firm governance.
Keywords: Expropriation, Governance, Disclosure, and Valuation
JEL Classification: G15, G32, G38, K22
Suggested Citation: Suggested Citation