Do controlling shareholders' expropriation incentives imply a link between corporate governance and firm value? Theory and evidence

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 corpo...

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Bibliographic Details
Published in:Journal of financial economics 2012-08, Vol.105 (2), p.412-435
Main Authors: Bae, Kee-Hong, Baek, Jae-Seung, Kang, Jun-Koo, Liu, Wei-Lin
Format: Article
Language:English
Subjects:
Argentina
Asia
Asian financial crisis
Business valuation
Cash flow
Cash flow rights
Control rights
Controlling shareholder
Corporate governance
Economic crisis
Economic models
Expropriation
Financial crisis
Firm value
Latin America
Stockholders
Studies
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Summary: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.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2012.02.007