[Show abstract][Hide abstract] ABSTRACT: In the recent financial crisis, macroeconomic stimuli produced mixed results across developed economies. In contrast, China's stimulus boosted real GDP growth from an annualized 6.2% in the first quarter of 2009 trough to 11.9% in the first quarter of 2010. Amidst this phenomenal response, land auction and house prices in major cities soared. We argue that the speed and efficacy of China's stimulus derives from state control over its banking system and corporate sector. Beijing ordered state-owned banks to lend, and they lent. Beijing ordered centrally-controlled state-owned enterprises (SOEs) to invest, and they invested. However, our data show that much of this investment was highly leveraged purchases of real estate. Residential land auction prices in eight major cities rose about 100% in 2009, controlling for quality variation. Moreover, higher price rises occur these SOEs are more active buyers. We argue that these centrally-controlled SOEs overbid substantially, fueling a real estate bubble; and that China's seemingly highly effective macroeconomic stimulus package may well have induced costly resource misallocation.
[Show abstract][Hide abstract] ABSTRACT: Economics and history both strive to understand causation: economics using instrumental variables econometrics and history by weighing the plausibility of alternative narratives. Instrumental variables can lose value with repeated use because of an econometric tragedy of the commons bias: each successful use of an instrument potentially creates an additional latent variable bias problem for all other uses of that instrument – past and future. Economists should therefore consider historians’ approach to inferring causality from detailed context, the plausibility of alternative narratives, external consistency, and recognition that free will makes human decisions intrinsically exogenous.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
[Show abstract][Hide abstract] ABSTRACT: An economic system called corporatism arose in the late 19<sup>th</sup> century, promoted by Anti-Cartesian French intellectuals dismayed with the â€œdisenchantment of the worldâ€ Weber attributed to capitalism, and by a Roman Catholic church equally dismayed with both liberalism and socialism. Corporatism recognizes the innate inequality of human beings and their need for secure places in a legitimate hierarchy and thus puts the police power of the state behind officially sanctioned Corporations, elite-controlled industrial group cartels empowered to set wages, prices, employment, and quotas, to regulate entry, and to limit imports. Corporatism was to end the class struggle by guaranteeing workers their accustomed jobs and incomes and by delegating traditional authority through a principle of subsidiarity. We argue that countries that adopted corporatism most fully â€” those with Roman Catholic majorities or French-educated elites â€” experienced substantial financial development reversals and retain legacy Corporatist institutions that continue to retard financial development and growth.
[Show abstract][Hide abstract] ABSTRACT: The conflict of interests between controlling and minority shareholders is an important issue in firms with concentrated ownership. We document that the controlling shareholders’ expropriation behavior through tunneling or self-dealing is much severer in politically connected firms. The results are not due to firms with high tendency of expropriation establishing connection for protection, but because of a less concern of capital market punishment. We show that expropriation is severer only in firms whose political connection secures bank loan access. These findings are consistent with the view that the firms’ financing condition is an important dimension that influences corporate governance.
[Show abstract][Hide abstract] ABSTRACT: Economics has firms maximizing value and people maximizing utility, but firms are run by people. Agency theory concerns the mitigation of this internal contradiction in capitalism. Firms need charters, regulations and laws to restrain those entrusted with their governance, just as economies need constitutions and independent judiciaries to restrain those entrusted with government. Agency problems distort capital allocation if corporate insiders are inefficiently selected or incentivized, and this hampers economic growth absent a legal system with appropriate constraints. However, political economy problems and agency problems in corporations may reinforce each other, compromising the quality of both corporate governance and government.
[Show abstract][Hide abstract] ABSTRACT: Pyramidal organizational structure is wide spread around the world. This paper considers an explanation of pyramids built by the state: separating firms from political interferences. Our empirical results based on hand-collected data of 742 local government owned business groups generally support this political cost hypothesis. The evidence from survey among executives and officials confirm a negative association between the extent of pyramids and that of government intervention of firm decisions. In addition, government owners build more extensive corporate pyramids when firm managers are subject to greater market and legal discipline, indicating that managerial agency problems constrain the extent of pyramids. We also find that managerial professionalism and firm performance measures are higher when firms are associated with more extensive pyramids. These aspects of state-owned pyramids complement recent studies focusing on private ownership.
[Show abstract][Hide abstract] ABSTRACT: Corporate governance matters because how well corporations utilize the people's savings matters. Many developed economies mandate that corporations be run for their public shareholders. This is not because shareholders are superior to employees, bankers, bondholders, customers, suppliers, or anyone else. Rather, it is because poor governance usually harms public shareholders before it harms others. Well engineered disclosure rules make corporations transparent, so poor governance quickly depresses share prices, alarming shareholders who demand corrective measures. Ideally, all this happens before the problem grows large enough to harm employees, customers, or other stakeholders. Governing corporations for shareholders really amounts to ‘using’ shareholders as early warning alarms and automatic correction mechanisms. But sound government policies are necessary, for this works if corporations are rendered transparent and public shareholders are empowered to force changes. Other stakeholders cannot fulfill this role as well because shareholders’ wealth is most directly tied to the firm's economic efficiency.
Procedia - Social and Behavioral Sciences 01/2010;
[Show abstract][Hide abstract] ABSTRACT: Opening up to global trade and investment is often thought to trigger institutional improvement by raising the expected benefits of institutional reform and reducing incumbents' incentives and ability to preserve the status quo. However, recent experience is not entirely consistent with this conventional wisdom. We suggest an explanation based on variation across countries in firms' reliance on ambient institutions. Large, well-established firms depend less on an economy's institutions than do small and incipient firms. Multinational firms likewise can use their global organizations to sidestep weak local institutions. Firm heterogeneity of this sort can thus contribute to markedly different institutional responses to liberalization-institutional development is better in locations where firms and potential entrants benefit more from such development. Our framework also suggests that institutional development might occur in stages. In an economy whose basic institutions are sound, individuals rationally invest in entrepreneurial capability and firms rationally invest less in institution substitutes. Economies with firms that rely more on ambient institutions or with more potential entrants who would rely on those institutions are more likely to experience further institutional improvement following accession to the global economy. Economies with fewer firms or potential entrants dependent on sound institutions, in acceding to the global economy, may exhibit scant institutional improvement, and perhaps even institutional deterioration. Political rent-seeking is not necessary for the latter outcome, but expands the range of conditions under which it ensues. (c) 2010 The Earth Institute at Columbia University and the Massachusetts Institute of Technology.
Asian Economic Papers 01/2010; 9(2):44-71. · 0.50 Impact Factor
[Show abstract][Hide abstract] ABSTRACT: We examine the mode of international expansion as an equilibrium governance contract between home country and host country factor owner. The focus is on agency costs, a form of transactions costs. Two phenomena are shown to be related to the agency costs imposed by factor owners: (i) the choice of different modes of international expansion by one firm in different locations, and (ii) the simultaneous occurrence of several forms of foreign involvement in the same location. We attempt to characterize the dynamic relationship between the mode of an offshore operation and changes in factor market conditions that affect agency costs.
[Show abstract][Hide abstract] ABSTRACT: Different economies at different times use different institutional arrangements to constrain the people entrusted with allocating capital and other resources. Comparative financial histories show these corporate governance regimes to be largely stable through time, but capable of occasional dramatic change in response to a severe crisis. Legal origin, language, culture, religion, accidents of history (path dependence), and other factors affect these changes because they affect how people and societies solve problems.
Annual Review of Financial Economics. 12/2009; 1(1):145-179.
[Show abstract][Hide abstract] ABSTRACT: Transferring technology to an economy characterized by tight government controls and/or central planning is problematic because the lack of competition in goods markets and inadequacies in the markets for workers and managers combine to weaken the incentive structure and reduce the information flow. After examining these issues from the viewpoint of the supplier of technology this paper develops a number of hypotheses which suggest that buy-back may be a helpful means to alleviate the resulting difficulties.RésuméLes transferts de technologie à une economie carac-térisée par des contrǒles gouvernementaux serrés et/ou par la planification centralisée sont problématiques parce que l'absence de concurrence sur les marchés des produits manufacturés s'ajoute aux insuffisances des marchés tant pour le personnel que pour la direction pour affaiblir le système des primes de rendement et ralentir la diffusion de l'information. Après avoir examiné ces questions du point de vue de celui qui fournit la technologie, ce papier émet un certain nombre d'hypothèses qui suggèrent que le rachat (buy-back) pourrait ětre un moyen utile d'alléger les difficultés qui en résultent.
Canadian Journal of Administrative Sciences / Revue Canadienne des Sciences de l Administration 04/2009; 6(3):31 - 36. · 0.56 Impact Factor
[Show abstract][Hide abstract] ABSTRACT: The objective of patent rights is to foster innovation and economic growth. However, to date, there is little robust evidence that patents "work". Here, we applied a difference-in-differences strategy to study the impact of changes in patent rights within panels of up to 54 manufacturing industries in up to 72 countries between 1981-2000. We found that stronger patent rights were associated with faster growth among more patent-intensive industries. During 1991-95, for an industry with average patent intensity, a one standard deviation increase in patent rights (equivalent to an increase from Hong Kong to Australia) was associated with an increase in growth of 0.69% points, or almost a fifth of the average industry growth rate of 3.7%. The effect of patent rights on growth became stronger in the 1990s than in the 1980s. Patents "worked" through both encouraging factor accumulation and technical progress. Our findings were robust to alternative measures of both patent rights and patent intensity, specification of the growth equation and sample, and controls for various possible confounds, including financial development, trade openness, and human capital.
[Show abstract][Hide abstract] ABSTRACT: Where legal systems and market forces enforce contracts inadequately, vertical integration can circumvent these transaction difficulties. But, such environments often also feature highly interventionist government, and even corruption. Vertical integration might then enhance returns to political rent-seeking aimed at securing and extending market power. Thus, where political rent seeking is minimal, vertical integration should add to firm value and economy performance; but where political rent seeking is substantial, firm value might rise as economy performance decays. China offers a suitable background for empirical examination of these issues because her legal and market institutions are generally weak, but nonetheless exhibit substantial province-level variation. Vertical integration is more common where legal institutions are weaker and where regional governments are of lower quality or more interventionist. In such provinces, firms led by insiders with political connections are more likely to be vertically integrated. Vertical integration is negatively associated with firm value if the top corporate insider is politically connected, but weakly positively associated with public share valuations if the politically connected firm is independently audited. Finally, provinces whose vertical integrated firms tend to have politically unconnected CEOs exhibit elevated per capita GDP growth, while provinces whose vertically integrated firms tend to have political insiders as CEOs exhibit depressed per capita GDP growth.
[Show abstract][Hide abstract] ABSTRACT: We observe less efficient capital allocation in countries whose banking systems are more thoroughly controlled by tycoons or families. The magnitude of this effect is similar to that of state control over banking. Unlike state control, tycoon or family control also correlates with slower economic and productivity growth, greater financial instability, and worse income inequality. These findings are consistent with theories that elite-capture of a country’s financial system can embed “crony capitalism”.
Journal of Financial Economics 01/2009; · 3.72 Impact Factor
[Show abstract][Hide abstract] ABSTRACT: We find that the well-documented positive relation between institutional ownership and future equity returns comes almost entirely from independent institutional trading (i.e., change in equity ownership by independent institutions). Not only does independent institutional trading predict future stock returns with no long-run price reversal, it is also positively related to future earnings surprises (relative to analyst expectations) and earnings announcement abnormal returns. In contrast, grey institutions (which have existing or potential business relationships with firms in which they invest) have no such predictive power. Furthermore, the predictive power of independent institutional trading on future stock returns exists only among firms with high information asymmetry, but not among firms with low information asymmetry. Overall, our findings suggest that independent institutions have information advantages over grey institutions in the equity market., and seminar participants at Rensselaer Polytechnic Institute, University of Kentucky, the 2008 China International Finance Conference, and the 2008 FMA annual meetings for helpful comments. The identities of public pension funds used in this paper were generously provided by Micah Officer. We gratefully acknowledge the able research assistance of Laura Coogan and Ying Huang. All remaining errors and omissions are our own.
[Show abstract][Hide abstract] ABSTRACT: Summary Weak institutions impede foreign direction investment (FDI), yet China attracts massive FDI despite global media spotlighting its institutional infirmities. Standard institutional quality variables poorly track rapid transformations, like China' regime shift following Den Xiaoping's 1993 Southern Tour. Economy track record usefully augments these variables in such cases. Cross-country regressions controlling for institutional quality and economy track record reveal China's FDI inflow unexceptional. Rather, China's FDI inundation resembles analogous post-reform East Bloc events. Arguments that China's FDI inflow is inefficiently large because weak institutions deter domestic investment while special initiatives attract FDI are thus either unsupported or not unique to China.
[Show abstract][Hide abstract] ABSTRACT: Better investor protection could lead corporations to undertake riskier but value-enhancing investments. For example, better investor protection mitigates the taking of private benefits leading to excess risk-avoidance. Further, in better investor protection environments, stakeholders like creditors, labor groups, and the government are less effective in reducing corporate risk-taking for their self-interest. However, arguments can also be made for a negative relationship between investor protection and risk-taking. Using a cross-country panel and a U.S.-only sample, we find that corporate risk-taking and firm growth rates are positively related to the quality of investor protection.
The Journal of Finance 07/2008; 63(4):1679 - 1728. · 4.22 Impact Factor
[Show abstract][Hide abstract] ABSTRACT: This paper examines the propensity of firms to comove in investment decisions. Although stock return comovement and herding among investors received considerable attention in existing work, little is known about correlated investment behavior of firms. After controlling for the similarity of firm characteristics, investments are expected to comove more when firms imitate other firms and rely on public information rather than on firm specific private information about investment opportunities. We consider the effects of agency conflicts on comovement and find evidence in support of managerial shirking of information acquisition effort. Weakly governed managers rely less on private information acquisition and comove more in their investment decisions. Our results also show that the effect is strongest for firms in industries with high information intensity and specialized assets. Further, comovement in investment is decreasing in shareholder rights and property rights protections and increasing in the degree of information asymmetry. The results are obtained after controlling for similarity in firm investment opportunities, correlation in cash flows, fraction of tangible assets, and industry concentration. Critically, we find that comovement in investment has a negative effect on firm and industry performance and productivity growth, after controlling for other factors.