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Stealing from Thieves: Firm Governance and Performance when States are Predatory

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Author Info
Durnev, Art
Fauver, Larry

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Abstract

We investigate how predatory government policies (expropriation, lack of property rights protection, corruption, crime) interact with managerial incentives in shaping firm governance structure. Our model shows that owners have lower incentives to encourage valuemaximization by managers if the government is likely to expropriate firm profits. This result emerges because it is more difficult for governments to seize firm profits that managers have already stolen and hidden from the owners. The model also demonstrates that the positive valuation effect of stronger firm governance is lower in states with more predatory governments. We test these predictions using several distinct data sets on firm governance and disclosure practices, and the business and financing obstacles firms face due to government intervention. The empirical results are consistent with the model's predictions. Specifically, we find that firms located in countries with more predatory governments practice weaker governance and disclose less information. Further, the previously documented positive relation between firm governance and firm performance is weaker or disappears altogether when governments pursue predatory policies. Finally, in countries with more predatory governments, firm-specific characteristics are less important in explaining variation in governance and firms have more similar governance structures.

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Publisher Info
Paper provided by Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University in its series CEI Working Paper Series with number 2008-12.

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Length: 84 p.
Date of creation: Apr 2008
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Handle: RePEc:hit:hitcei:2008-12

Note: September 21, 2007
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Related research
Keywords: Managerial Incentives; Corruption; Expropriation; Property Rights Protection; Taxes; Governance; Disclosure; Valuation;

Find related papers by JEL classification:
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
K22 - Law and Economics - - Regulation and Business Law - - - Corporation and Securities Law
K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. René M. Stulz, 2008. "Securities Laws, Disclosure, and National Capital Markets in the Age of Financial Globalization," NBER Working Papers 14218, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Olga Lazareva & Andrei Rachinsky & Sergey Stepanov, 2007. "A Survey of Corporate Governance in Russia," Working Papers w0103, Center for Economic and Financial Research (CEFIR). [Downloadable!]
  3. Cheung, Yan-Leung & Rau, P. Raghavendra & Aris, Stouraitis, 2008. "The helping hand, the lazy hand, or the grabbing hand? Central vs. local government shareholders in publicly listed firms in China," CEI Working Paper Series 2008-11, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
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