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

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  • Durnev, Art
  • Fauver, Larry

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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Bibliographic 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
Date of revision:
Handle: RePEc:hit:hitcei:2008-12

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

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Cited by:
  1. Art Durnev & Vihang Errunza & Alexander Molchanov, 2009. "Property rights protection, corporate transparency, and growth," Journal of International Business Studies, Palgrave Macmillan, vol. 40(9), pages 1533-1562, December.
  2. Boubakri, Narjess & Bouslimi, Lobna, 2010. "Analyst following of privatized firms around the world: The role of institutions and ownership structure," The International Journal of Accounting, Elsevier, vol. 45(4), pages 413-442, December.
  3. René M. Stulz, 2009. "Securities Laws, Disclosure, and National Capital Markets in the Age of Financial Globalization," Journal of Accounting Research, Wiley Blackwell, vol. 47(2), pages 349-390, 05.

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