Political Economy and Corporate Governance: a cross – country analysis of political systems, legal traditions and ownership structure Renira C. Angeles 14.10.2010

Background Corporate governance: Owner, manager and the board Factor of production Agency problems (Jensen and Meckling 1976) Potential agency problems http://www.fedoa.unina.it/1824/1/Cella_Matematica.pdf Curious about factors behind variations in practice

Dependent variables Determinants of variations in: 1. Investor protection 2. Ownership concentration Ownership most analysed empirically and teoretically, largest effect (Bøhren forthcoming)

Base of this analysis Investor protection and legal origins, N=49 (La Porta et al. 1997;1998;1999;2008) Findings - LLSV legal rules protecting investors vary systematically among legal traditions - Common Law (US, UK, etc.): low investor protection - Civil Law (France): high investor protection Convincing? Static Assumes stock markets in low – protection countries ”doomed” to not expand This papers derives from this pionering study. Convincing??

Ownership concentration Dispersed ownership UK, US (Berle and Means 1932)  WHY? Ownership structure and legal origins (La Porta et al. 1998) N=49 Findings: High protection, dispersed ownership Low protection, concentrated ownership Convincing?

Political determinants on investor protection and ownership structure Purpose of this analysis: Propose a model of political determinants of investor protection and ownership structure  How can variations in electoral systems explain the observed variations in degree of investor protection and ownership structure? Want a more adequate and precise analysis to get a deeper understanding of the variations Insights from Tabellini and Persson (2002) Left – right dimension Ljiphart (1984) Justification of WHY you choose political insight? PTs interest was to identify causal effect of two poltical institutions pres versus parl and maj vs pr, on the amount of governments spending etc.

Base – political determinants The Political Economy of Corporate Governance (Pagano and Volpin 2005) Analyze political determinants of investor protection Investor protection exogenous Pol.var. included: proportionality, left, right, district size*maj, threshold*PR

Dependent variables Investor protection (Y1) Antidirector rights index (ADRI) from LLSV (1998): - proxy by mail - shares not blocked before meeting - share of capital to call required to call an extraordinary meeting < 10 % - cumulative voting - oppressed minorities are protected Is this index adequate? Revised by Holger Spamann 2010 Spamann point out some problems, derived a new index and did a new analysis – over 50 % (36 of 46 ca.) of the countries used in the original analysis by La Porta et al. changed their index

Ownership structure (Y2) 10 % cut-off point 20 % cut-off point Problems here Either data from 1994-1999 or 2002 – 2006 Need data from 2000, BUT ownership is usually stable (source)

Independent variables Legal Origins - Common Law (UK, US, New Zealand, Italy, Australia, etc.) - Civil Law (Austria, Germany, Switzerland, France, Greece, Finland et.) Political variables - PR - Maj - Left Still not sure about political variables

Two analysis

Analysis I x1:Legal origins variables Y1: Investor protection (countries aggregated in categories) x2:Political determinants

Analysis II Y2: Ownership structure x1: Legal origins (countries aggregated in categories) x2: Political determinants In order to connect to corporate governance. Why is ownership structure interesting? Agency problems, returns, mispricing. Interesting further questions: ownership structure and productivity.

Hypothesis Assumption legal model: Reforms in investor protection rare ( La Porta et al. 1998) Common law  high protection  dispersed ownership Civil law  low protection  concentrated ownership

Political determinants PR  low protection  concentrated ownership (Why? Greater proportionality, more representation, value government, coordinated and weak markets) Maj  high protection  dispersed ownership (Why? Less government/welfare state, Liberal markets, less employee protection,) There are alot more dimensions to include when evidence from political variables are included.

Variable Dataset Year Adr. Dependent variables Investor protection (Antidirector right index) Investment protection and corporate governance 2000 http://mba.tuck.dartmouth.edu/pages/faculty/rafael.laporta/publications.html Ownership structure Blockholders. Ownership cut off point 2002-2006, 1996-1999? AMADEUS or Mara Faccio: http://www.krannert.purdue.edu/faculty/mfaccio/home.asp Independent variables Legal models (categorized) Political determinants World bank, Armingeon I, Pippa Norris 1975-2006, 1960-2006, 1994-2006 (it’s learning)

Empirical evidence

Preliminary literature Jensen, Michael C. and William H. Meckling 1976. “Theory of the Firm: Managerial behavior, agency cost and ownership structure”. Journal of Financial Economics. 3 (4). pp. 305-360. La Porta, Rafael, Florencio Lopez-de-Silanes, Andrei Schleifer. 1999. ”Corporate ownership around the World”. The Journal of Finance. 54 (2). pp. 471-517 La Porta, Rafael, Florencio Lopez-de-Silanes, Andrei Schleifer, Robert W. Vishny. 1998. ”Law and Finance”. The Journal of Political Economy. 106 (6). pp. 1113 – 1155 Pagano, Marco and Paolo F. Volpin. 2005. The Political Economy of Corporate Governance. The American Economic Review. 95 (4). pp. 1005-1030