The Impact of Product Market Competition on Private Benefits of Control
AbstractThis paper investigates the impact of product market competition (PMC) on private benefits of control (PBC). We estimate PBC using the voting premium between shares with differential voting rights. We use two measures of the intensity of product market competition: an external competition measure based on industry-level import penetration, and an internal measure derived from domestic product market regulations. Using data for publicly-traded firms in 19 countries for which information on dual class shares is available we find that PMC is strongly negatively correlated with PBC. The evidence indicates that the effect is particularly strong for firms in industries that are likely to be concentrated and in countries with poor legal environments. We further examine the channels through which PMC enhances governance. We find evidence indicating that improvements in the availability of industry information and the higher default probability associated with tougher competition are two important forces in reducing the estimated price gap between dual class shares. Using exchange rates and terms of trade as instruments for import penetration, we find that the link between competition in product markets and private benefits of control is not spurious. Overall, our results suggest that product market competition can help in curbing private benefits of control.
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Bibliographic InfoPaper provided by Institute of Economic Research, Hitotsubashi University in its series Hi-Stat Discussion Paper Series with number d05-159.
Date of creation: Mar 2006
Date of revision:
private benefits of control; competition; corporate governance; import penetration;
Find related papers by JEL classification:
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- D40 - Microeconomics - - Market Structure and Pricing - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-04-29 (All new papers)
- NEP-COM-2006-04-29 (Industrial Competition)
- NEP-FIN-2006-04-29 (Finance)
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