Transcript More like common law

Stephen Choi
Legal Origin
(Common v. French Civil)
Antidirector Rights
Stock Mkt Cap / GDP
# Listed Dom. Firms / Pop.
# IPOs / Pop.
Ownership Concentration
Presence of Controlling SHs
Dividend Payouts
Corporate Valuation
Enforcement levels
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1. Coding Errors – Spamann (2008)
◦ 33 of the 46 country-level observations used in LLSV
(1998) antidirector rights were incorrect
◦ correlation between corrected and original values is only
0.53
◦ inconsistent treatment of exceptions in the LLSV (1998)
coding
◦ corrected antidirector rights index is no longer
significantly correlated with legal origin or stock market
size (as measured by market capitalization to GDP, listed
firms per capita, or IPOs per capita)
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2. Other Areas of the Law More Important
Antidirector Rights Index
(1) the ability to mail in a proxy vote
(2) the lack of a requirement that shares
must be deposited prior to proxy voting
(3) the availability of cumulative voting
(4) the presence of “legal mechanisms
against perceived oppression by
directors” against minority shareholders
(5) the “preemptive right to buy new
issues of stock”
(6) whether “the percentage of share
capital needed to call an extraordinary
shareholders meeting” is at or below
10%
How important relative to
other investor protections
(at least in U.S.)
Vague…Lots of variation
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2. Other Areas of the Law More Important
Antidirector Rights Index
(1) the ability to mail in a proxy vote
(2) the lack of a requirement that shares
must be deposited prior to proxy voting
(3) the availability of cumulative voting
(4) the presence of “legal mechanisms
against perceived oppression by
directors” against minority shareholders
(5) the “preemptive right to buy new
issues of stock”
(6) whether “the percentage of share
capital needed to call an extraordinary
shareholders meeting” is at or below
10%
U.S. scores only a 2
out of sample max.
of 5 corrected
antidirector rights
score
(Spamann 2008)
What about:
∙ Securities Regulation
∙ Private enforcement
- Class Actions?
- Derivative v. Direct?
∙ Anti-takeover
- Poison Pill?
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3. Legal Origin Causality?
United States “Common Law” Regime
- Extensive federal bureaucracy
- Federal Securities Regulation
--Codified
--Extensive SEC Rulemaking
More like common law
- Rule 10b-5
antifraud liability
Not like common law
- Mandatory Disclosure
(10-K, 10-Q, 8-K, etc)
- Regulation FD
- Sarbanes Oxley Act
(CEO Certification
Prohib. on auditors
Internal Controls
Penalty for restatement
Prohib. on certain loans
PCAOB)
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3. Legal Origin Causality?
Rajan and Zingales (2003)
- Level of financial development in France was
greater than that of the U.S. in 1913
Coffee (2001)
- Markets developed first; investor protections
second in the U.S. at end of 19th century
Cheffins (2000)
- Similar story for U.K. as for U.S.
Roe (2006)
- War and destruction explains variation in capital
market development in 20th century
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3. Legal Origin Causality?
Other Factors Correlated with Legal Origin
-Initial Endowments (Beck et al. 2003a)
-Ethnolinguistic Heterogeneity and religious makeup
of a country (LLSV 1999)
-Culture (Licht et al. 2005; Stulz and Williamson
2002)
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Intuitive
Managers or controlling shareholders
expropriating investments
Government expropriating profits at any time
through exorbitant taxes or corrupt practices.
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Secure Property Rights
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Private contracting
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Rule of law
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Gompers, Ishii, and Metrick (2003) [U.S.]
◦ 24 governance provisions from IRRC
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Bebchuk, Cohen, and Ferrell (2004) [U.S.]
◦ 6 provision “entrenchment” index
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Staggered Boards
Limits to shareholder bylaw amendments
Supermajority voting for mergers
Supermajority voting for charter amendments
Presence of poison pill
Presence of golden parachutes
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Cheung, Rau, and Stouraitis (2006)
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Hong Kong listed companies
Non-operating earning items
Acquisition of assets from firm’s main owners
Consideration paid with stock
Cash assistance by firms to third parties
Likelihood of expropriation higher where owner is
in mainland China – Rulings in Hong Kong are not
enforceable in China.
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Bulgaria’s experience limiting financial tunneling
◦ Dilutive Equity Offerings and Below-Market Freezeouts
post-1998 privatizations
◦ Atanasov, Black, Ciccotello, and Gyoshev (2007)
Bulgaria’s 2002 securities law reforms
preemptive rights and appraisal rights
mandatory tender offer rule
majority of the minority shareholders vote to approve the
terms of a mandatory tender offer
 minimum “fair” price in tender offer
 increase in the powers of the Bulgarian Financial Supervision
Commission
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No more dilutive offerings and below-market freezeouts
Valuation of firms at high risk of tunneling increase
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Controlling Self-Dealing
◦ Djankov, La Porta, Lopez-de-Silanes, Shleifer (2005)
 Lex Mundi firm survey
 Minimum (mandatory) legal requirements for selfdealing transaction
 Aggregate Self-Dealing Index (ASDI)
 Public Enforcement (formal maximum fines and criminal
sanctions for self-dealing transactions)
ASDI is higher in common law countries
ASDI is correlated with larger capital markets
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Lex Mundi Survey Questions
◦ (1) who approves the transaction
◦ (2) what needs to be disclosed to the board of directors or
supervisory board, the shareholders, the stock exchange,
and the regulators
◦ (3) what are the duties of officers, directors, and controlling
shareholders
◦ (4) how the transaction’s validity could be challenged
◦ (5) what causes of action are available if Buyer suffers
damages
◦ (6) what needs to be proved under each cause of action
◦ (7) who has standing to sue under each available cause of
action
◦ (8) available of direct and derivative suits
◦ (9) access to information and discovery rights; and
◦ (10) fines and criminal sanctions
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Importance of Transparency
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La Porta, Lopez-de-Silanes, and Shleifer (2006)
◦ Focus on regulation of IPOs from attorney surveys
 Disclosure
 Securities Liability
 Authority (Formal) of Securities Regulatory Authority
◦ Greater disclosure requirements and securities liability
positively related with greater market capitalization, more
publicly traded firms, and IPOs (also with lower cost of
capital – Hail and Leuz (2005)).
◦ Formal securities regulatory authority powers generally not
significantly related
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Procedural Formalism (and Delay)
◦ Djankov et al. (2003b)
 Lex Mundi survey (tenant eviction case and bounced
check collection)
 Procedural Formalism Index
 Richer countries have lower level of Formalism
 More formalism correlates with longer duration
 More formalism predicts lower enforceability of
contracts, higher corruption, as well as lower honesty,
consistency, and fairness of the system
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Procedural Formalism Index
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(i) professionals versus laymen
(ii) written versus oral elements
(iii) legal justification
(iv) statutory regulation of evidence
(v) control of superior review
(vi) engagement formalities, and
(vii) independent procedural actions
Examples of Securities Arbitration in U.S.
◦ Choi, Fisch, and Pritchard (2008)
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La Porta, Lopez-de-Silanes, Pop-Eleches, and
Shleifer (2004) (LLPS)
◦ Judicial Independence (judge tenure, judicial decisions as
source of law)
◦ Judicial Constitutional Review power (rigidity of the
constitution and power to review law for constitutionality)
Judicial independence is correlated positively (and
significantly) with greater economic freedom
Judicial review is correlated positively and significantly
with greater political freedom.
English Common Law positively related with judicial
independence
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Jackson (2007)
◦ United States is outlier in amount spent on financial
regulation
◦ Common law jurisdictions spend more than civil law
countries on financial regulation
◦ United States is outlier in the level of actual public and
private enforcement actions and recoveries (and has a
vigorous class action lawsuit system)
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Jackson and Roe (2007)
◦ Strong relationship between greater levels of public
enforcement and greater financial development
(particularly with stock market capitalization )
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Fauver and Fuerst (2006)
◦ Employee representatives on the board bring with
them information and expertise, making them
powerful monitors of managers
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Desai, Dyck and Zingales (2007)
◦ Greater enforcement of the tax laws works to
reduce the ability of those in control to expropriate
private benefits of control and therefore may
increase the market values of companies
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Berkowitz, Pistor, and Richard (2003)
◦ Indirect (not directly from origin country) and
unreceptive transplants result in a lower level of
legality
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Pagano and Volpin (2005)
◦ More proportional the voting system of a country, the
lower the level of investor protections and the stronger
the level of employment protections
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Rajan and Zingales (2003)
◦ Financial and business incumbents in a country oppose
financial development because with financial
development typically follows greater competition.
◦ The ability of incumbents to block financial development
however is lessened as a country’s economy increases
both cross-border trade and capital flows.
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Policy Levers
◦ Antitrust Policy
◦ Trade Policy
◦ Foreign Investment Policy
◦ Reducing the Level of Governmental Intervention in
the Economy
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The Problem with Governmental Intervention
◦ The availability of government rents will place a
premium on private entities that are best able to
capture such rents, even if the entities also result in
greater expropriation of private benefits of control.
 Bertain et al. (2002)
 Leuz and Oberholder-Gee (2006)
◦ Government officials may intervene in the economy
to capture rents for themselves—at the expense of
investor and societal welfare
 Shleifer and Vishny (1993)
 Djankov, McLiesh, Nenova, and Shleifer (2003a)
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Choi and Kim (2002)
◦ Reduces opposition from entrenched controlling
interests
◦ Allows for experimentation and new information
◦ Increases incentives for regulators and limits rentseeking opportunities
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Examples
◦ Neuer Markt
◦ Novo Mercado
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U.S. Evidence
◦ Romano (1985)
◦ Daines (2001)
◦ Bebchuk and Cohen (2001)
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Outside U.S.
◦ Pistor and Xu (2005)
 Competition between specific regions in China
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What will companies choose?
◦ Reese and Weisbach (2002)
 French civil law firms cross-list into U.S. more than
English common law firms
 Subject themselves to SEC public filing requirements
 Greater incidence of post-listing equity offerings
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What will companies choose?
◦ Siegel (2005)
 Mexican firms cross-listed in U.S. on Level II/III ADR
did not have lower propensity of insider asset taking
compared with Level I/IV ADR firms
 Very infrequent SEC and private enforcement in U.S.
against Mexican firms
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Law Matters
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Key is to determine what law matters
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Minimum Preconditions
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What other preconditions?
◦ Developing support for investor protections