Unbundling institutions for corporations

This paper proposes that a country's institutions for corporations—especially their roles—can be divided into the supporting for corporate growth and the policing of corporate wrongdoing. We identify the two roles of institutions indirectly yet more effectively through their respective targets. Companies with negative free cash flows (FCF) are the main target of the institutional supporting, while companies with positive FCF are subject primarily to the institutional policing. Using firm-level data from 43 countries for the period of 2000–2018, we find evidence for the possibility and usefulness of this unbundling. Specifically, the cross-country difference in corporate performance is concentrated in negative-FCF firms. To the extent that the corporate performance we examine is a direct outcome of the surrounding institutions, our results suggest that a meaningful cross-country difference in institutional interventions—that is, the ones that create a difference in economic outcome across countries—lies in those for negative-FCF firms. They are the institutional supports that discover and finance corporate growth opportunities so that companies can invest beyond their own means, thereby running negative FCF.