Workshop on Finance, Governance and the SE Asian Crisisto Be Held at Brunel University
Workshop on
Corporate Governance, Corporate Restructuring,
Corporate Finance in Transition Economies
Brunel University, 9-10 September 2005
Programme/Abstract
Contact: Dr. Sarmistha Pal ()
Invited session 1.
Ajit Singh (Cambridge University) 'Corporate Governance, Competition and Finance: Re-Thinking Lessons From The Asian Crisis' (joint with Jack Glen, International Finance Corporation.
This paper critically examines the Greenspan-Summers-IMF thesis concerning the Asian crisis, which suggested that the fundamental causes of the Asian crisis lay in the microeconomic behavior of economic agents in these societies - in the Asian way of doing business. The paper concentrates on corporate governance and competition in emerging markets and outlines the international significance of these issues in the context of the New International Financial Architecture and the Doha Development Round at the WTO. It reviews new analyses and fresh evidence on corporate governance, corporate finance and on competition in emerging and mature markets, to suggest that the basic thesis above is not valid and the consequent policy proposals are therefore deeply flawed.
Contributed Session 1. Corporate Governance and Capital Structure in Asia
Session Chair: Nigel Driffield
Sarmistha Pal (Brunel University) 'How Ownership Structure Affects Capital Structure and firm Performance? Recent evidence from East Asia' joint with Nigel Driffield (Aston Business School) and Vidya Mahambare (Cardiff Business School).
Despite the seminal work of Claessens et al. (2002) highlighting the role of ownership structure on firm performance in East Asia, the relationship between capital structure and ownership remains much unexplored. The present paper examines the effects of ownership concentration on capital structure and firm performance in a world where moral hazard plays a critical role (a la Bajaj et al. 1998). Ownership structure is captured in terms of manager-shareholder that addresses the traditional agency conflict between managers and owners. Moral hazard can however play an important role in that managers' compensation depends not only on the fraction of the equity they retain, but also on their ability to divert cash flows for perquisite consumption. Thus in our framework, both capital structure and firm performance depends on ownership structure and the extent of moral hazard. In doing so, we not only allow for simultaneity between capital structure and firm performance (a la Berger and di Patti, 2003), but also the non-linearity in the effects of ownership concentration. Our empirical results in essence depend on the classification of firms in terms of family and other types characterised by the presence of a Cronyman (i.e., when the manager is also a controlling owner). There is evidence that family ownership could mitigate the problem of moral hazard (i.e., whether voting rights are higher than cash flow rights) though it could exacerbate the problem of over-lending in our samples. Also the effects of ownership structure on firm performance cannot be delineated from its effects on leverage. As such, the results presented here confirm and extend the essential findings of Claessens et al. (2002).
Kunal Sen (University of East Anglia) ‘Insecurity: The Profitability Consequences of Borrowing in Indian Industry’ joint with Sumit Majumdar (University of Texas at Dallas)
Corporate governance systems differ widely across countries. There has been considerable debate on which system works the best in improving firm performance. Much of this debate has been based on empirical evidence drawn from advanced market economies. There have been relatively few studies that have examined the implications of corporate governance systems in emerging economies. This paper examines one important aspect of corporate governance in an emerging economy context: the effect of borrowing on profitability among Indian manufacturing firms. Using an unique data-set on a cross-section of Indian firms that disaggregate debt into its various components, the paper conducts a fine-grained analysis of the effects of the different types of corporate borrowing on firm performance. We show that in contrast to the conventional thinking (drawn from theories of asymmetric information) on the importance of bank lending in particular, and monitored debt in general, in determining firm performance, in the Indian context, what matters more is unsecured arms-length lending in influencing firm profitability, rather than bank borrowing or monitored debt. This, we argue, is chiefly related to the specific institutional context of the Indian economy where the combination of public ownership of banks and other financial intermediaries and weak bankruptcy laws and exit procedures for firms make unsecured arms-length privately owned debt the most effective capital structure variable in influencing firm performance.
Rida Zaidi (University of Cambridge) 'Corporate Governance and Family Firms in Weak Legal Environments: Evidence from Pakistan'.
This paper examines the role of the family firm in weak contracting environments using a data set of listed Pakistani companies. We find that the usual disaggregation between family and non-family firms does not provide a true indication of performance and corporate governance differences. Instead it is the particular form of the family firm that becomes important in this context. We find firms where family members have direct ownership and equity stakes and therefore pure family firms tend to be poor performers relative to other ownership types. However family firms that use more sophisticated means of control and have a more dispersed shareholding structure have better performance relative to other types. We show good governance in the form of transparency and quality audit matters. However we only find weak evidence for the role of non-executive directors that have been heavily advocated in recent years. This is partly due to extensive linkages across families and industrialists that prevents outside directors from being truly independent. The results highlight the necessity of outside block monitors as we do not find any offsetting role of transparency and board structures in reducing agency costs of the family firm.
Invited Session 2.
Saul Estrin (London Business School) ' Methods of Privatization and Economic Growth in Transition Economies' joint with John Bennett (Brunel Unviersity) and Giovanni Urga (City University)
Dynamic panel data methods are used to estimate a growth model using data from 23 countries for the period 1990 to 2003. The estimating equation is augmented with country- and time-specific variables for methods of privatization and other factors potentially relevant to growth in transition economies. It is found that `mass privatization' is associated with faster growth, but the other privatization methods have no significant impact on growth. The findings suggest that the long-term growth process may have been accelerated by the speed with which mass privatization severed the links between the state and firms.
Contributed Session 2. Corporate Governance and Restructuring in Eastern and Central Europe
Session Chair: Jana Fidrmuc
Jana Fidrmuc (Warwick Business School) 'Fire the Manager to Improve Performance? Managerial Turnover and Incentives after Privatization in the Czech Republic'. (joint with Jan Fidrmuc, Department of Economics and Finance, Brunel University)
This paper analyzes the effect of the introduction of managerial incentives and new human capital on enterprise performance after privatization in the Czech Republic. We find weak evidence for the presence of managerial incentives: only in 1997, three to four years after privatization, poor performance significantly increases the probability of managerial change. Nevertheless, replacing the managing director in a newly privatized firm improves subsequent performance. This indicates that the privatized firms operate below potential under the incumbent management. We show that the institutional framework matters as well: managerial turnover improves performance only if the management is closely interconnected with the board of directors and thus holds effective executive authority.
Aleksandra Gregoriè (University of Ljubljana, and Institute for Economic Research, Slovenia): 'Ownership concentration and firm performance in Slovenia' joint with Jože P. Damijan (Faculty of Economics, University of Ljubljana, and Institute for Economic Research, Slovenia) and Janez Prasnikar (Faculty of Economics, University of Ljubljana, Slovenia, and ISEE).
By granting Slovenian firms the discretionary power on the allocation of 40% of their shares, the Slovenian Privatization Law (1992) introduced two main methods of ownership transformation: firms could either privatize internally (through internal buyout) or externally (by public sale of shares and listing on the Stock Exchange). Consequently, a 'battle for control' between inside owners (employees, former employees and their relatives) and outside owners (Privatization Investment Funds and State-controlled Funds) predominantly characterised firm decision making in the initial years of privatization. These privatization methods also determined the post-privatization changes in ownership and control of Slovenian corporations, which in turn affected performance of Slovenian firms. Our empirical results are consistent with the peculiarities of Slovenian ownership consolidation. Given the lack of controlling owners in Slovenia, ownership concentration has no significant impact on firm productivity, while its impact on firm financial performance is non-monotonic: the significantly worse performance of firms with large (above 25%) but not majority owners reflects the current 'fight for control' between blockholders rather than improving the control over managers. We further find that when dominant, domestic non-financial firms, banks and insider owners have a better impact on financial performance than State-controlled Funds, while the influence of Privatization Investment Funds is significantly worse.
Adriana Korczak (City University) ‘Corporate Ownership and Information Content of Earnings in Poland' joint with Piotr Korczak (University of Bristol)
The paper investigates the impact of managerial ownership on the information content of accounting earnings. The information content of earnings is defined as the relationship between earnings and stock returns. Using a unique database of ownership structure of Polish listed companies, we find that the relationship decreases with managerial ownership. We further test this effect in subsamples of firms with high and low levels of unrelated block holdings. The results demonstrate a negative impact of managerial ownership on the informativeness of earnings when a company has low unrelated block ownership and the relationship reverses for companies with high proportion of unrelated block ownership. The results remain unchanged after controlling for endogeneity of the ownership structure. Our evidence suggests that unrelated block ownership may act as a partial substitute for missing corporate governance institutions.
Tomasz Mickiewicz (University College London) 'CEOs' Perceptions of Finance for Investment: A Multidimensional Analysis of Survey Data on Large Firms in Hungary and Poland joint with Igor Filatotchev (King's College London) and Natalia Isachenkova (Kingston University).
Using survey data on 157 large private Hungarian and Polish companies this paper investigates links between corporate governance and CEOs' expectations with regard to sources of finance for investment in modernization and restructuring of the firm. Managers' expectations of the importance of financing options refer to the period of 2001-2005 and are represented as a multidimensional construct, allowing for a correlation structure across seven ordinal responses. In terms of factors affecting the importance of a specific financing option the paper is focused on a number of firm-specific variables, including ownership structure, presence of foreign investors, banking relations, company size, performance, indebtedness and intentions to divest. The Bayesian estimation methodology is used to deal with the small sample restrictions. We found a curvilinear (an inverted U-shaped) relationship between ownership concentration and expectations to rely on public equity as a source of finance. The latter is most likely for the firms with the largest investor having between 25%-49% of shares, or just below the controlling stake threshold. In contrast, CEOs of firms with both highly dispersed ownership and high ownership concentration are less likely to use public equity market as the source of investment finance. Larger and more profitable firms find it easier to raise public equity finance. Presence of foreign owners facilitates access to bank loans from non-resident banks. Finally, firms with the largest shareholder being domestic institutional investor are more likely to borrow from domestic banks.
Invited Session 3.
Stijn Claessens (World Bank and University of Amsterdam) 'Enforcement and Corporate Governance', joint with Eric Berglof (Stockholm School of Economics and CEPR).
Enforcement more than regulations, laws on the books, or voluntary codes is key to an effective business and corporate governance at least in transition and developing economies. We first provide a framework for understanding enforcement and how it is shaped by countries' institutional contexts. Enforcement involves a range of private and public enforcement 'tools'. The limited empirical evidence suggests that private tools are often more effective than public tools. However some public enforcement is necessary regardless, and private enforcement mechanism often requires public laws to function. Private initiatives are often also taken under the threat of legislation or regulation. Yet in some countries bottom-up, private-led tools preceded and even shaped public laws. We then analyze how weak enforcement affects firms' corporate governance, as it encourages concentrated ownership. While large blockholdings align incentives and encourage monitoring, ownership concentration weakens other corporate governance mechanisms. Unfortunately political economy constraints, resulting importantly from the intermingling of business and politics, often prevents improvements in general enforcement environment and adoption and implementation of public laws in developing countries.
Contributed Session 3. Corporate Governance and restructuring in China
Session Chair: Lihui Tian
Xiaoying Hu (University of York) 'A General Equilibrium model of the financial sector in the Chinese Transitional economy', joint with Huw Dixon (University of York)
This paper extends the framework introduced by Huw Dixon and John Bennett (1996, 2001). In particular, we model the financial sector (state banking system) and how it interacts with the investment decisions of firms in the state and marketized industrial sectors. Effectively, the PBC runs a dual track financial system with the banks lending at a plan track price to state owned firms, and at a market interest rate to state owned and private firms. In the case where the state owned firms borrow at the market rate on the margin, this rate determines the capital labour ratio of firms, the demand for capital and employment in the industrial sector. The model is non-linear and we solve it numerically after careful calibration. In this context, we also consider the effects on the endogenous variables, namely, free market interest rate, investment, employment, prices and market wages of a number of policy interventions including changes in planned output and wages of the state owned sector, changes in household personal taxation, changes in the government deficit, changes in the plan track interest rate and quantity (reform of the banking sector).
Pei Sun (University of Cambridge ) ‘Triggering The Chinese-style Privatization: Motives and Constraints’ joint with Guy Liu (Brunel University) and Wing Woo (University of California, Davis)
The paper is focused on the examination of how the on-going privatization of small and medium SOEs in China can be successfully triggered and completed. Case studies, institutional analysis and a simple theoretical model are used to identify the specific motives of local government leaders, and the specific constraints they have to face during the ownership restructuring process. It is concluded that the whether local governments are motivated to privatize their SOEs depends on if ownership change can stimulate the higher growth of both corporate business and local tax revenues without expenses of bureaucrat private benefits. Moreover, the motivation to privatize is not sufficient to ensure a privatization program to succeed since full privatization is subject to the three constraints of social stability, the banking stability and the managerial participation. The motivation to privatize ownership for growth but subject to the constraints is what we argue for characterizing the Chinese-styled privatization, and this argument offers a powerful explanation on why China's privatization is partial and slow.
Amy Kam (City University) Financial Distress Resolution in China - A Case Study’ joint with David Citron (City) and Gulnur Muradoglu (City)
This paper examines two financially distressed companies and their resolution strategies. Existing distress literature focuses on developed economies such as the US and the UK. This paper is one of the first empirical works sets in the emerging market context. The main purpose of the case studies is to provide richer in-depth data on complex events which large-scale empirical studies of necessity ignore. To achieve this, two types of analyses are employed: 1. the stock market responses to the turnaround strategies announced by these two distressed firms are analysed; 2. by using accounting data, we gain a further appreciation on how the firms cope with distress. We provide a deep understanding of unique features in China, such as the role of government and other more commercially driven shareholders, and the subsequent importance of social policy issues; protracted and complex nature of the restructurings; and the frequent use of mergers, asset swaps and asset sales. We come up with new hypotheses for further empirical study on a large-scale basis.