Corporate Governance: A Review of Current

Sources of Research Agenda
Finance
Agency theory – investigation of different corporate governance practices and firm performance
Law
Management
Firm life cycle
Stakeholder analysis

Research
Effectiveness may be based on a number of different dimensions of corporate governance, ranging from monitoring and control over managerial discretion to promoting corporate entrepreneurship and innovation.
Regulating managerial power

Research
Board characteristics and composition
Resource dependency approach
Transaction costs theory
Role and effects of independence of non- executive directors
Codes of best practice
Internal and external control mechanisms

Research
Board processes
Effects of duality of CEO role
Stewardship theory
Executive compensation
Managerial stock ownership and performance

La Porta et al. 1998
Manuscript Type: Empirical and Conceptual
Research Question/Issue: Do differences in legal protections of investors explain why firms are financed and owned so differently in different countries? Does a country’s membership in one of the two principle legal families affect the corporate governance mechanisms?

La Porta et al. 1998
Why do Italian companies rarely go public?
Why does Germany have such a small stock market but also maintain very large and powerful banks ?
Why is the voting premium small in Sweden and the United States, and much larger in Italy and Israel
Why were Russian stocks nearly worthless immediately after
privatization—by some estimates 100 times cheaper than Western
stocks backed by comparable assets—and why did Russian companies have virtually no access to external finance ?
Why is ownership of large American and British companies so widely dispersed?

La Porta et al. 1998
Unit of analysis – country; generalized to legal family
Methods – statistical analysis of investor protection; student t-test

La Porta et al. 1998
Independent Variables
Country
Legal Family
Dependent variables
Shareholder rights
Creditor rights
Enforcement
Ownership

Results

La Porta et al. 1998
Research Findings/Results: The results show that common-law countries generally have the strongest, and French civil- law countries the weakest, legal protections of investors, with German- and Scandinavian-civil-law countries located in the middle. Also found that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights

Shleifer and Vishny 1997
Agency problem
Contracts
Managerial Discretion
Incentive Contracts
Evidence on agency problem – does it exist?
How to solve?

Shleifer and Vishny 1997
Finance without governance – reputation
Legal Enforcement of Rights
Large Investors
Takeovers
Large Creditors

Shleifer and Vishny 1997
Debt versus equity choice
LBO
Cooperatives and State ownership

La Porta et al. 1999
Studied ownership structures of large corporations in 27 wealthy economies to identify the ultimate controlling shareholders of these firms.
Found that except in economies with very good shareholder protection, relatively few of these firms are widely held, in contrast to Berle and Means’s image of ownership of the modern corporation.
Rather, these firms are typically controlled by families or the State.
Equity control by financial institutions is far less common.
The controlling shareholders typically have power over firms significantly in excess of their cash flow rights, primarily through the use of pyramids and participation in management.

Yermack 1996
Smaller boards of directors are more efficient than larger boards
Theory
Large boards have higher monitoring costs
Larger groups are less able to reach agreement and thus take no tough decisions
Model: Tobin’s Q will vary inversely with board size

Jensen 1993
Claims that since 1973 technological, political, regulatory, and economic forces have been changing the worldwide economy in a fashion comparable to the changes experienced during the nineteenth century Industrial Revolution.
During the 1970s and 1980s indicate corporate internal control systems have failed to deal effectively with these changes

Jensen 1993
IC systems have failed to require managers to make decisions to properly manage the efficient and capacity of their companies
Misspending in R&D as example