Do Public Equity Markets Matter in Emerging Economies? Evidence From India

Do public equity markets serve an unique role that is not easily served by other forms of financing in emerging economies? We analyze this question using the collapse of India’s equity market in 1997, which provides an exogenous shock to firms’ ability to issue equity. We find that both public and private firms exhibit higher bankruptcy rates and lower growth after 1997. The decline in growth is greater among firms with more external finance needs and fewer tangible assets. Overall, the evidence suggests that public equity markets are an important, not easily replaced, source of finance in emerging economies

Essays on corporate governance.

My dissertation consists of three essays on Corporate Governance. The first essay studies a situation where corporate governance assumes importance because the manager and shareholders may disagree about optimal decisions due to heterogeneous prior beliefs. An important contribution of the essay is to characterize the optimal governance arrangement in such situations and to highlight the optimality of joint control. We apply our theory to an entrepreneur/manager's choice between private and public ownership and derive a number of testable predictions. The second essay investigates the importance of reputation concern as a governance mechanism. Specifically we study this in the context of Indian Business Groups. We use the first bankruptcy of a group firm to identify an event leading to loss of group reputation. We show that groups use intra-group loans to support member firms in financial distress and avoid a reputation loss. Firms belonging to groups with unimpaired reputation are less likely to become bankrupt. The first bankruptcy in a group is followed by a significant drop in the amount of external finance raised, a discontinuous drop in investments and profits, and an increase in the bankruptcy probability of other healthy firms in the group. In the last essay, I highlight an alternate way in which large institutional shareholders can influence firm governance. I show that large shareholders can influence governance both when they become activist and also when they sell their shares. Selling depresses the stock price, increases stock liquidity and facilitates takeovers. I highlight this mechanism in a model and test the main predictions using institutional trading data on firms that undertake large acquisitions. Using acquisitions to identify firms with potential agency problems, I relate the largest institutional block holder's trading in the post acquisition period to firm performance and subsequent changes in firm governance. The main results are that the block holder selling increases takeover probability by over 35% and the block holder is aware of the takeover possibility and trades in response.Ph.D.FinanceManagementSocial SciencesUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/126036/2/3224888.pd