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Corporate governance and the shareholder base

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  • Karl V. Lins
  • Francis E. Warnock
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    Abstract

    This paper uses a sample of 4,410 firms from 29 countries to investigate the relation between corporate governance and the shareholder base. In contrast to previous work, our results strongly support the notion that poor corporate governance, at both the firm and country level, negatively impacts the willingness of foreign investors to hold a firm's equity. Specifically, we find that firms whose managers have sufficiently high control rights that they may reasonably be expected to expropriate minority equity investors attract significantly less U.S. investment, especially in countries with poor external governance. Our findings suggest that the prices U.S. investors are asked to pay for firms with poor governance are not low enough to fully compensate them for expected expropriation or increased estimation risk associated with expected poor disclosure by these firms. Because prior research shows that a smaller shareholder base is associated with a lower firm value, our results are consistent with the notion that the shareholder base represents an important channel through which poor expected corporate governance contributes to a reduction in firm value.

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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 816.

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    Date of creation: 2004
    Date of revision:
    Handle: RePEc:fip:fedgif:816

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    Keywords: Corporate governance ; Investments; Foreign;

    This paper has been announced in the following NEP Reports:

    References

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    Cited by:
    1. Chisari, Omar O. & Ferro, Gustavo, 2009. "Gobierno Corporativo: los problemas, estado actual de la discusión y un ejercicio de medición para Argentina
      [Corporate Governance: the problems, the current stage of the discussion and a measure
      ," MPRA Paper 15630, University Library of Munich, Germany.
    2. John Ammer & Sara B. Holland & David C. Smith & Francis E. Warnock, 2004. "Look at me now: the role of cross-listing in attracting U.S. investors," International Finance Discussion Papers 815, Board of Governors of the Federal Reserve System (U.S.).
    3. Charles P. Thomas & Francis E. Warnock & Jon Wongswan, 2004. "The performance of international portfolios," International Finance Discussion Papers 817, Board of Governors of the Federal Reserve System (U.S.).

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