آیا موافقت نامه سهامداران تحت تاثیر ارزش گذاری بازار قرار می گیرد؟: شواهد از شرکت های فهرست شده برزیل

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.

Researchers have extensively examined the link between corporate governance and firm value during an economic crisis. Previous studies show that firms with weaker corporate governance suffer more during such a period. One potential explanation for this finding is that, during a crisis period, controlling shareholders' incentives to expropriate minority shareholders tend to go up as the expected return on investment falls (Johnson et al., 2000, Mitton, 2002 and Baek et al., 2004). This view implies that controlling shareholders' incentives to expropriate minority shareholders are the key channel through which corporate governance affects firm value during a crisis period. We term this conjecture the expropriation hypothesis. However, the positive relation between the quality of corporate governance and the change in firm value during a crisis period is also consistent with several alternative explanations. One such explanation is an information-based argument. For example, prior to the 1997 Asian financial crisis, the relation-based financial system in East Asia worked well and, thus, investors might have ignored the weaknesses of East Asian firms. Alternatively, perhaps investors did not have full information on whether or not their funds were being deployed appropriately, but the crisis exposed the inherent weakness in the corporate governance systems of East Asian countries, triggering greater investor awareness of the problems in the region. This increased awareness led to investors' pulling out (Rajan and Zingales, 1998). This argument suggests that greater investor awareness of the weakness in corporate governance is the main driving force that links corporate governance to the change in firm value during the crisis period. According to this view, the poor performance of firms with weak corporate governance during a crisis period is not necessarily due to increased expropriation, but rather to investors' paying more attention to corporate governance problems that have been hidden. Another potential explanation is that the governance measures used in previous studies are somehow closely correlated with firms' sensitivity to business conditions. For example, in our sample firms, we find a strong negative correlation between firm-level governance measures and systematic risk as estimated by the market model beta. This finding suggests that the performance of poorly governed firms is more sensitive to change in market conditions, implying that firms with weaker corporate governance suffer more when the market performs poorly. Finally, it could simply be that investors overreact to a shock, and the degree of investors' overreaction is more pronounced for poorly governed firms. Like other explanations, overreaction also implies a positive relation between the change in a firm's value and the quality of its corporate governance during a crisis. While both the expropriation hypothesis and the alternative explanations have important implications for the link between corporate governance and firm value during a crisis, previous research has largely overlooked these alternative explanations in examining that link. In this paper, we reevaluate the validity of the expropriation hypothesis by developing and testing a model that considers the expropriation incentives of controlling shareholders not only during the crisis period, but also during the subsequent recovery period. In our tests, we explicitly consider the possibility that firms with weaker corporate governance suffer more during economic crisis periods because of the alternative reasons. The novelty of using the post-crisis recovery period is that the prediction of the expropriation hypothesis regarding the relation between the quality of corporate governance and the change in firm value during this period is exactly opposite to that during the crisis period. If controlling shareholders' increased incentive to expropriate minority shareholders during the crisis period is the main reason for the poor performance of firms with weak corporate governance, we would expect these firms to experience a larger percentage increase in value during the recovery period than do firms with good corporate governance. This prediction does not imply that poor corporate governance enhances firm value during the recovery period. Instead, our model suggests that the greater rebound in the stock prices of firms with weaker corporate governance during the recovery period is a reflection of the firms' more rampant asset diversion problem during the crisis period, which severely limits their ability to take full advantage of the substantially improved investment opportunities when recovery begins. The rationale for this prediction is as follows. During the crisis period, because of the significant decline in firms' profit prospects and poorer investment opportunities, controlling shareholders have stronger incentives to divert firm resources for their own benefits. Consequently, firms with weaker corporate governance experience more asset diversion and larger decline in firm value than those with better corporate governance. However, as the economy recovers, firms' profit outlook and investment opportunities improve substantially. Because controlling shareholders can benefit more from profitable firm investments than from expropriation during this recovery period, the improved economic conditions alleviate controlling shareholders' incentives to expropriate minority shareholders. Because firms with weaker corporate governance had more extant asset diversion before the recovery period, during the recovery period they have limited resources for undertaking all the profitable investments available and are thus forced to undertake only the most profitable ones. As a result, during the recovery period, on a per dollar basis, firms with weaker corporate governance realize higher returns on investments than those with better corporate governance and, thus, experience greater percentage increases in firm value. The case of Samsung Fine Chemical (SFC) illustrates how firms with weak corporate governance experience large declines in firm value during the crisis period but have strong rebounds as the economy recovers. In 1996, a year before the onset of the Asian financial crisis, the controlling shareholders of Samsung Group directly and indirectly (through firms affiliated with the business group) own 0.07% and 8.49%, respectively, of the outstanding shares of SFC, and the affiliated firms additionally hold 32.47% of its outstanding shares. This ownership structure (i.e., divergence between ownership and control) allows controlling shareholders to exercise full control over SFC despite holding a relatively small portion of its cash flow rights. During the crisis period, the stock price of SFC plummeted from 29,500 won in July 1997 by almost 74% to just above 7,700 won by the end of September 1998. However, as the economy recovered, the stock price of SFC bounced back strongly, reaching 26,600 won (an increase of 245%) by the end of December 1999. In comparison, the increase in the Korean stock market index during the same period was 152%. To test the model predictions, we first analyze a sample of 608 Korean firms listed on the Korea Stock Exchange (KSE) during the 1997–1998 financial crisis and the 1998–1999 post-crisis recovery periods. As a further test, we then examine 598 firms listed on seven other East Asian stock markets during the same periods and 302 firms listed on four Latin American stock markets during the 2001–2002 Argentine crisis and the 2002–2003 post-crisis recovery periods. We require sample firms to have data available for both the crisis and recovery periods, because otherwise our results could be driven by different firms being in the two periods. We find strong support for the expropriation hypothesis: Compared with well-governed firms, poorly governed firms drop more in stock price during the crisis period but experience significantly more increase in stock prices during the recovery period. Our finding that poorly governed firms experience a greater rebound in stock prices during the recovery period is inconsistent with the information-based explanation. The information-based explanation suggests that greater investor awareness of corporate governance problems revealed during a crisis period is the main reason for the poor performance of firms with weak corporate governance. Because the economic recovery does not change investor awareness of these firms' corporate governance, this explanation also suggests that, during the recovery period, the rebound in the stock prices of poorly governed firms should be modest or at least no greater than that of well-governed firms. Our evidence shows the opposite results. During the recovery period, the stock return performance of firms with weaker corporate governance is better than that of firms with better corporate governance. We also find that, for Korean sample firms, those with weaker corporate governance suffer larger loss of accounting profits during the crisis period but experience a greater rebound in accounting profits during the recovery period. This result provides further evidence that is consistent with our model. To control for the alternative explanations (i.e., risk and overreaction) in addressing the link between corporate governance and firm value, we include beta and past holding period returns as explanatory variables in the regressions of stock returns during both the crisis and recovery periods. If poorly governed firms have a higher sensitivity to changes in market conditions, they are likely to suffer more when the market performs poorly but perform better when the market recovers. Similarly, firms whose stock prices drop more during the crisis period could perform better during the recovery period because of the contrarian effects in stock returns that have been emphasized in the asset pricing literature. Consistent with these arguments, we find that the coefficients on beta and past holding period returns have the predicted signs in both crisis and recovery period regressions. However, controlling for beta and overreaction effects does not attenuate the impact of governance variables on the stock return. To provide further support to the expropriation hypothesis, we present ancillary evidence showing that the bad news announcements about the deteriorating economic environment in Korea (e.g., a downgrade of the sovereign rating of Korea by Moody's or other rating agencies, nationalization of the commercial bank by the Korean government, chaebol bankruptcy, etc.) affect firms with weak corporate governance more negatively than they do those firms with good corporate governance. In contrast, the good news announcements that are associated with brighter prospects for future investment opportunities (e.g., an upgrade of the sovereign rating of Korea by Moody's or other rating agencies, settlement of the negotiation on foreign debt payments, abolition of restrictions on foreign direct equity investment, etc.) affect firms with weak corporate governance more positively than they do those firms with good corporate governance. To the extent that these news events are largely unexpected and thus represent relatively exogenous shocks that significantly affect the expected return on investment, our results further confirm the expropriation hypothesis in explaining the link between corporate governance and firm value. We perform several robustness checks on the data. We use various measures of the quality of corporate governance and find evidence that is consistent with the expropriation hypothesis. We also experiment with alternative time periods for the shock and recovery periods and find robust results. Our findings have an important implication for the growing literature on law and finance. The existing literature has demonstrated the importance of investor protection in the various aspects of financial markets. For example, La Porta et al., 1997 and La Porta et al., 1998, show that countries with better investor protection have larger and deeper capital markets. Markets with better investor protection also have higher valuation of listed firms relative to their assets (La Porta et al., 2002 and Claessens et al., 2000), a larger number of listed firms (LLSV, 1997), and higher quality of accounting information (Hung, 2001, Ball et al., 2002, Fan and Wong, 2002 and Leuz et al., 2003). Furthermore, better investor protection enables firms to make greater use of external finance (LLSV, 1998) and larger investments from external funds (Rajan and Zingales, 1998 and Demirgüç-Kunt and Maksimovic, 1998). In contrast, poor investor protection increases liquidity costs (Brockman and Chung, 2003) and impedes informed arbitrage that capitalizes on firm-specific information, thereby resulting in less efficient stock prices (Morck, Yeung, and Yu, 2000). Finally, Djankov, La Porta, Lopez-de-Silanes, and Shleifer (2008) develop the anti-self-dealing index and show that it predicts a variety of stock market outcomes. As LLSV (2000) argue, the fundamental premise of this literature is the importance of investor protection in preventing the expropriation of minority investors. Our evidence shows that investor expropriation is the main channel through which corporate governance affects firm value. Although our results for the recovery period generally support the expropriation hypothesis, they are also consistent with controlling shareholders' propping behavior [negative tunneling in which controlling shareholders use their private cash to temporarily prop up troubled group affiliates (Friedman, Johnson, and Mitton (2003)]. During the recovery period, controlling shareholders in business groups could use their private funds to prop up affiliated firms so as to bring in more capital quickly or to build a reputation that can be used to raise outside capital. Such propping activities improve firm value and lead to large rebounds in the stock prices, thereby benefiting a firm's outside shareholders. Even though propping reduces controlling shareholders' current wealth, in the long run it can produce a net benefit to controlling shareholders by enhancing the values of their options to expropriate firms' future profits (Friedman, Johnson, and Mitton, 2003). While we do not explicitly model this propping-based explanation as an alternative to our expropriation hypothesis, our results during the recovery period are consistent with both the expropriation and propping arguments.1 The rest of the paper proceeds as follows. In Section 2, we develop a simple model of managerial expropriation. In Section 3, we discuss the data, variables, and sample characteristics. Section 4 follows with a discussion of the main results for the cross-sectional determinants of firm performance in Korea during the crisis and post-crisis periods. Section 5 presents the results of robustness tests and shows further evidence supporting the expropriation hypothesis. In Section 6, we report the results from the out-of-sample tests using other Asian and Latin American firms. Finally, we present summary and concluding remarks in Section 7.

In this paper, we use the experience of East Asian and Latin American firms during the post-crisis recovery period to examine the importance of managerial expropriation in linking corporate governance and firm value. We find that poorly governed firms, i.e., firms that have a high disparity between voting and cash flow rights, those that have low equity ownership by controlling shareholders, those that have low block ownership, and those that are highly diversified, suffer more during the crisis period but rebound more during the recovery period. We also find that bad (good) news in the economy affects firms with weak corporate governance more negatively (positively) than those firms with good corporate governance. These results support the expropriation hypothesis. We also find results that are somewhat consistent with the explanations based on risk and overreaction. Stock prices of high-beta firms perform worse during the crisis period but rebound more during the recovery period. Similarly, firms whose stock prices drop more during the pre-crisis (crisis) period perform better during the crisis (recovery) period, indicating that the contrarian effects in stock returns play an important role in explaining the cross-sectional variation in firm value during the aftermath of the Asian financial crisis. However, controlling for beta and overreaction effects does not reduce the importance of governance variables in explaining the change in firm value. Our results suggest that controlling shareholders' incentives to expropriate minority shareholders are a key factor that implies a link between corporate governance and firm value during the crisis period.