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Do controlling shareholders' expropriation incentives imply a link between corporate governance and firm value? Theory and evidence

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  • Bae, Kee-Hong
  • Baek, Jae-Seung
  • Kang, Jun-Koo
  • Liu, Wei-Lin

Abstract

We develop and test a model that investigates how controlling shareholders' expropriation incentives affect firm values during crisis and subsequent recovery periods. Consistent with the prediction of our model, we find that, during the 1997 Asian financial crisis, Asian firms with weaker corporate governance experience a larger drop in their share values but, during the post-crisis recovery period, such firms experience a larger rebound in their share values. We also find consistent evidence for Latin American firms during the 2001 Argentine economic crisis. Our results support the view that controlling shareholders' expropriation incentives imply a link between corporate governance and firm value.

Suggested Citation

  • Bae, Kee-Hong & Baek, Jae-Seung & Kang, Jun-Koo & Liu, Wei-Lin, 2012. "Do controlling shareholders' expropriation incentives imply a link between corporate governance and firm value? Theory and evidence," Journal of Financial Economics, Elsevier, vol. 105(2), pages 412-435.
  • Handle: RePEc:eee:jfinec:v:105:y:2012:i:2:p:412-435
    DOI: 10.1016/j.jfineco.2012.02.007
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    References listed on IDEAS

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    Cited by:

    1. Esen KARA & Duygu ACAR ERDUR & Lale KARABIYIK, 2015. "Effects Of Corporate Governance Level On The Financial Performance Of Companies: A Research On BIST Corporate Governance Index (XKURY)," Ege Academic Review, Ege University Faculty of Economics and Administrative Sciences, vol. 15(2), pages 265-274.
    2. Enikolopov, Ruben & Petrova, Maria & Stepanov, Sergey, 2014. "Firm value in crisis: Effects of firm-level transparency and country-level institutions," Journal of Banking & Finance, Elsevier, vol. 46(C), pages 72-84.
    3. repec:eee:ememar:v:32:y:2017:i:c:p:28-37 is not listed on IDEAS
    4. Cynthia A. Utama & Sidharta Utama, 2016. "Interaction between Incentive to Expropriate and Investment Opportunities as a Determinant of Overinvestment Problem in Indonesia," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 12(1), pages 73-99.
    5. Byun, Hae-Young & Choi, Sunhwa & Hwang, Lee-Seok & Kim, Robert G., 2013. "Business group affiliation, ownership structure, and the cost of debt," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 311-331.
    6. Jerry X. Cao & Yuan Ding & Hua Zhang, 2016. "Social Capital, Informal Governance, and Post-IPO Firm Performance: A Study of Chinese Entrepreneurial Firms," Journal of Business Ethics, Springer, vol. 134(4), pages 529-551, April.
    7. Saghi-Zedek, Nadia & Tarazi, Amine, 2015. "Excess control rights, financial crisis and bank profitability and risk," Journal of Banking & Finance, Elsevier, vol. 55(C), pages 361-379.
    8. Bereskin, Frederick L. & Kim, Bushik & Oh, Frederick Dongchuhl, 2015. "Do credit rating concerns lead to better corporate governance? Evidence from Korea," Pacific-Basin Finance Journal, Elsevier, vol. 35(PB), pages 592-608.
    9. Duc Nam Phung & Anil V. Mishra, 2016. "Ownership Structure and Firm Performance: Evidence from Vietnamese Listed Firms," Australian Economic Papers, Wiley Blackwell, vol. 55(1), pages 63-98, March.
    10. Wang, Xiaoming & Cao, Jerry & Liu, Qigui & Tang, Jinghua & Tian, Gary Gang, 2015. "Disproportionate ownership structure and IPO long-run performance of non-SOEs in China," China Economic Review, Elsevier, vol. 32(C), pages 27-42.
    11. Beuselinck, Christof & Cao, Lihong & Deloof, Marc & Xia, Xinping, 2017. "The value of government ownership during the global financial crisis," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 481-493.
    12. repec:eee:reveco:v:55:y:2018:i:c:p:233-245 is not listed on IDEAS
    13. Cai, Charlie X. & Hillier, David & Tian, Gaoliang & Wu, Qinghua, 2015. "Do audit committees reduce the agency costs of ownership structure?," Pacific-Basin Finance Journal, Elsevier, vol. 35(PA), pages 225-240.
    14. Jiang, Guohua & Rao, Pingui & Yue, Heng, 2015. "Tunneling through Non-Operational Fund Occupancy: An investigation based on officially identified activities," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 295-311.
    15. repec:eee:pacfin:v:43:y:2017:i:c:p:238-255 is not listed on IDEAS
    16. Pandey, Rakesh & Vithessonthi, Chaiporn & Mansi, Mansi, 2015. "Busy CEOs and the performance of family firms," Research in International Business and Finance, Elsevier, vol. 33(C), pages 144-166.
    17. Howard Bodenhorn, 2014. "Voting Rights, Shareholdings, and Leverage at Nineteenth-Century U.S. Banks," Journal of Law and Economics, University of Chicago Press, vol. 57(2), pages 431-458.
    18. Hwang, Lee-Seok & Kim, Hakkon & Park, Kwangwoo & Park, Rae Soo, 2013. "Corporate governance and payout policy: Evidence from Korean business groups," Pacific-Basin Finance Journal, Elsevier, vol. 24(C), pages 179-198.
    19. repec:eee:riibaf:v:42:y:2017:i:c:p:102-123 is not listed on IDEAS
    20. Bae, Kee-Hong & Kim, Seung-Bo & Kim, Woochan, 2012. "Family control and expropriation at not-for-profit organizations: evidence from korean private universities," MPRA Paper 44029, University Library of Munich, Germany.
    21. repec:eee:reveco:v:51:y:2017:i:c:p:82-98 is not listed on IDEAS
    22. Black, Bernard S. & Kim, Woochan & Jang, Hasung & Park, Kyung-Suh, 2015. "How corporate governance affect firm value? Evidence on a self-dealing channel from a natural experiment in Korea," Journal of Banking & Finance, Elsevier, vol. 51(C), pages 131-150.

    More about this item

    Keywords

    Expropriation; Corporate governance; Firm value; Asian financial crisis; Controlling shareholder; Cash flow rights; Control rights;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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