Family Control and the Rent-Seeking Society

The small number of very large family-controlled corporate groups in many countries combined with their long continuity of control and ability to act discretely give these organizations a comparative advantage in political rent-seeking. This advantage is a key part of a self-reinforcing system whereby oligarchic family corporate control, political rent seeking, and low general levels of trust combine to stymie growth.http://deepblue.lib.umich.edu/bitstream/2027.42/39971/3/wp585.pd

Purifying Japan's Banks: Issues and Implications

We use a simple real options framework and empirical data to establish that although Japanese banks hold borrowers’ shares, their interest is more aligned as a contractual claimant than a residual claimant of corporations. We then explain why the Japanese model of corporate governance was useful during the 'catching up' growth of that country's postwar reconstruction decades, but became problematic subsequently. The interests of shareholders, creditors, workers, and managers are more readily aligned because such growth entails investment in known-technology physical capital- intensive projects with highly predictable cash flows. Once on the technological frontier, 'keeping up' growth requires risk taking and a tolerance for 'creative destruction'. This is better accommodated by entrusting corporate governance to firms' true residual claimants, their shareholders.

Special issues relating to corporate governance and family control

Control of corporate assets by wealthy families in economies lacking institutional integrity is common. It has negative implications on corporate governance and adverse macroeconomic effects when it extends across a sufficiently large part of the country's corporate sector. The authors consider the reasons why family control and control pyramids predominate in emerging market economies and in some industrial economies. They also discuss the reasons why widely held freestanding firms predominate in the United States. The authors discuss policies that countries might adopt to discourage family control pyramids, but caution that control pyramids are but one feature of an institutionally deficient economy. A concerted effort to improve a country's institutions is needed before diffuse ownership is desirable.Small and Medium Size Enterprises,Economic Theory&Research,Small Scale Enterprise,International Terrorism&Counterterrorism,Microfinance,Private Participation in Infrastructure,Microfinance,International Terrorism&Counterterrorism,Economic Theory&Research,Small Scale Enterprise

Family Control and the Rent-Seeking Society

The small number of very large family-controlled corporate groups in many countries combined with their long continuity of control and ability to act discretely give these organizations a comparative advantage in political rent-seeking. This advantage is a key part of a self-reinforcing system whereby oligarchic family corporate control, political rent seeking, and low general levels of trust combine to stymie growth.

Do Corporate Global Environmental Standards in Emerging Markets Create Or Destroy Market Value

Arguments can be made on both sides of the question of whether a stringent, global corporate environmental standard represents a competitive asset or liability for multinational enterprises (MNEs) investing in emerging and developing markets. This paper seeks to answer this question by analyzing the global environmental standards of a large sample of US-based MNEs in relation to their market performance. We find that firms adopting a single, stringent global environmental standard have higher market values, as measured by Tobin's q, than firms defaulting to less stringent, or poorly enforced host country standards. Thus, developing countries that use lax environmental regulations to attract foreign direct investment end up attracting poorer quality, and perhaps, less competitive firms. Our results also suggest that externalities are incorporated to a significant extent in firm valuation. We discuss plausible reasons for this observation.http://deepblue.lib.umich.edu/bitstream/2027.42/39644/3/wp259.pd

Does Firm-specific Information in Stock Prices Guide Capital Allocation?

We show that firms in industries in which firm-specific stock price variation is larger use more external financing and allocate capital with greater precision in the sense that their marginal q ratios are closer to one. According to the Efficient Markets Hypothesis, greater firm-specific stock price variation reflects higher intensity firm-specific information capitalization in stock prices. We propose that higher firm-specific price variation may be an indicator of greater functional-form market efficiency in the sense of Tobin (1982).

Corporate Governance, Economic Entrenchment and Growth

Around the world, large corporations usually have controlling owners, who are usually very wealthy families. Outside the U.S. and the U.K., pyramidal control structures, cross shareholding and super voting rights are common. Using these devices, a family can control corporations without making a commensurate capital investment. In many countries, such families end up controlling considerable proportions of their countries'' economies. Three points emerge. First, at the firm level, these ownership structures vest dominant control rights with families who often have little real capital invested creating agency and entrenchment problem simultaneously. In addition, controlling shareholders can divert corporate resources for private benefits using transactions within the pyramidal group. The result is a poor utilization of resources. At the economy level, extensive control of corporate assets by a few families distorts capital allocation and reduces the rate of innovation. The result is an economy-wide misallocation of resources, and slower economic growth. Second, political influence is plausibly related to what one controls, rather than what one owns. The controlling owners of pyramids thus have greatly amplified political influence relative to their actual wealth. They appear to influence the development of both public policy, such as property rights protection and enforcement, and institutions like capital markets. We denote this phenomenon economic entrenchment. Third, we conceive of a relationship between the distribution of corporate control and institutional development that generates and preserves economic entrenchment as one equilibrium; but not the only one. Based on the literature, we identify key determinants of economic entrenchment. We also identify many gaps where further work exploring the political economy importance of the distribution of corporate control is needed.

Capitalizing China

Despite a vast accumulation of private capital, China is not embracing capitalism. Deceptively familiar capitalist features disguise the profoundly unfamiliar foundations of “market socialism with Chinese characteristics.” The Chinese Communist Party (CCP), by controlling the career advancement of all senior personnel in all regulatory agencies, all state-owned enterprises (SOEs), and virtually all major financial institutions state-owned enterprises (SOEs), and senior Party positions in all but the smallest non-SOE enterprises, retains sole possession of Lenin’s Commanding Heights. This manuscript introduces the chapters comprising the NBER volume Capitalizing China (Fan and Morck, eds. 2012), which examine China’s high savings rate, banking system, financial markets, financial regulations, corporate governance, and public finances; and consider policy alternatives the CCP might consider if its goal is China’s elevation into the ranks of high income countries.

Do Corporate Global Environmental Standards in Emerging Markets Create Or Destroy Market Value

Arguments can be made on both sides of the question of whether a stringent, global corporate environmental standard represents a competitive asset or liability for multinational enterprises (MNEs) investing in emerging and developing markets. This paper seeks to answer this question by analyzing the global environmental standards of a large sample of US-based MNEs in relation to their market performance. We find that firms adopting a single, stringent global environmental standard have higher market values, as measured by Tobin's q, than firms defaulting to less stringent, or poorly enforced host country standards. Thus, developing countries that use lax environmental regulations to attract foreign direct investment end up attracting poorer quality, and perhaps, less competitive firms. Our results also suggest that externalities are incorporated to a significant extent in firm valuation. We discuss plausible reasons for this observation.corporate environmental policy, corporate performance, race to the bottom in foreign direct investment