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PurposeThis paper aims to investigate the link between agency costs mitigation via three levels of rights protection (minority rights protection, enforcing contracts, resolving insolvency issues) provides the propitious climate for financing investment opportunities around the world.Design/methodology/approachWe use Bartlett’s three-group method to stratify countries based on how well they protect investors as measured by the scores provided in the Doing Business dataset developed by the world bank for 189 countries. We then test a variety of independent hypotheses that the alleviation of agency costs via three levels of protection (minority investors’ rights, contract enforcement, resolving insolvency issues) is associated with better access to credit via the banking system, better valuation of listed firms via the stock market and higher investment and growth.FindingsOur findings support Agency Theory which explains why the absence of legal protection of external investors leads to stock markets and financial institutions failing to fulfill their role of financing the economy.Practical implicationsThe policy implication from this study indicates that countries ought to (1) develop legislation that protects investors’ rights, (2) improve the quality of their judicial system in terms of enforcing the legislation and (3) build the framework for resolving disputes during insolvency as these are important ingredients for a developed financial system.Originality/valueWe use the World bank dataset and a new methodology to quantify the significance of the relationship between minority rights protection, ineffective enforcement, lack of bankruptcy laws and access to firm financing via the banking sector and the stock market. It provides new evidence that the quality of the judicial system in a country matter for firms’ ability to raise financing and enhance value creation.

'Investor Protection and Corporate Governance' analyzes the impact of corporate governance on firm performance and valuation. Using unique datasets gathered at the firm-level—the first such data in the region—and results from a homogeneous corporate governance questionnaire, the book examines corporate governance characteristics, ownership structures, dividend policies, and performance measures. The book's analysis reveals the very high levels of ownership and voting rights concentrations and monolithic governance structures in the largest samples of Latin American companies up to now, and new data emphasize the importance of specific characteristics of the investor protection regimes in several Latin American countries. By and large, those firms with better governance measures across several dimensions are granted higher valuations and thus lower cost of capital. This title will be useful to researchers, policy makers, government officials, and other professionals involved in corporate governance, economic policy, and business finance, law, and management.

This paper investigates corporate governance from a cross-country perspective and makes a comparison with Romania. There are studies that examine the corporate governance issues related to Romanian companies, but these studies provide only qualitative and descriptive accounts of the research topic, with limited cross-country analysis. The present paper complements the literature by producing a quantitative analysis of cross-country corporate governance and makes a comparison with Romania. For this purpose, a set of corporate governance indicators from a large sample of 39 advanced and developing countries was collected for the 2006-2020 period. In terms of corporate governance dimensions, it was found that Romania underperforms other developing countries in the dimensions of director liability and ownership and control, while it outperforms them in the dimensions of corporate transparency, disclosure, and shareholder rights. The results indicate that the stagnant corporate governance scores and the low development level of stock markets stand out as important business challenges for the country. The correlation and regression analyses show that stock market development is closely associated with corporate governance dimensions and, overall, corporate governance scores matter greatly for the economic growth of countries, such as Romania, which can benefit greatly from the improvement of corporate governance codes and practices in the private sector.

El estudio analizó la asimetría de información entre inversionistas mayoritarios o de control e inversionistas minoritarios o externos, a la luz de los postulados de la Teoría de la Información Asimétrica. Se hipotetizó que la presencia de este fenómeno conduce a que los inversionistas minoritarios, al sentir la incertidumbre propia de su desventaja informativa, exijan mayores retornos como garantía. Se planteó un modelo de ecuaciones estructurales, bajo el enfoque de mínimos cuadrados parciales, para el estudio de la relación entre la asimetría de información entre los inversionistas y el desempeño financiero de las sociedades; se verificó si una mayor presencia del fenómeno produce incrementos en medidas de retorno como ROA y ROE. Se emplearon datos trimestrales de las sociedades que conforman el Índice General de la Bolsa Colombiana -IGBC-, entre los años 2012-2016. Los resultados revelaron que la asimetría de información entre inversionistas mayoritarios y minoritarios y el desempeño financiero de las sociedades, presentan una relación positiva, estadísticamente significativa; aun cuando los efectos sobre el desempeño financiero son pequeños. Se sugiere que este tipo de asimetría de información, y su consecuente efecto sobre las medidas de retorno ROA y ROE, puede explicar la razón por la que el mercado accionario colombiano es atractivo para los inversionistas extranjeros.

This chapter delves into the situation where two or more separate investors join in together on a direct investing transaction. First, the definition and context for co‐investing is provided, along with a discussion of why and how this approach to investing has gained popularity. The roles of the co‐investor are then outlined, specifically as it concerns deal originators, network facilitators, sponsors, and minority investors. Drawbacks of co‐investing also are discussed and guidelines are provided for vetting co‐investors. Finally, club deals, a particular type of co‐investing, are presented.

This book seeks to contribute to the sharing of knowledge between Brazil, India, and South Africa, three of the largest emerging economies today. By assessing and comparing the investment climate in each, the authors seek to profile concrete steps that countries can take to improve the business environment. The authors focus particularly on identifying the commonalities and differences both within and among the three countries and attempt to highlight examples where policy makers will be able to drawn on the lessons from their own reform experiences and those of their counterparts in other core emerging markets. The book is organized as follows: (1) Provides a brief overview of the investment climate in each of the three countries, highlighting the key constraints identified by the national business communities, and explains the underlying concepts of the investment climate assessments and doing business indicators. (2) Examines the macroeconomic performance of Brazil, India, and South Africa and shows how the three countries perform with regard to taxation and foreign trade and exchange. (3) Reviews key microeconomic regulations, such as rules regarding the entry and exit of firms and labor regulations, and assesses the enforcement of contracts and regulations. (4) Studies the set of services, factors, and conditions that firms require when establishing operations and engaging in production and exchange, including access to finance, physical infrastructure, cost and availability of labor, and security. (5) Offers guidance on how to manage investment climate reforms by showcasing best-practice examples from recent reforms in Brazil, India, and South Africa.

We examine how managers' ethnic cultural background affects their communication with investors. Using earnings conference calls with executives from 42 countries, we find that managers from ethnic groups that have a more individualistic culture use a more optimistic tone and exhibit greater self-reference. Managers' ethnic culture has a lasting effect and persists for executives whose work experience later exposes them to different ethnic cultures. The effect of ethnic heritage is observed in dialogues that reflect real-time interactions (i.e., Q&A ) and is less pronounced in the scripted, less spontaneous portion of the calls (i.e., management discussion). Analysts respond positively to optimistic tone, but only those who share the manager's ethnic background adjust their earnings forecasts for the cultural component of managerial tone. The findings suggest that managers' ethnic background has a significant effect on how they communicate with the capital market and how the market responds to the disclosure.

Using a 2004 Chinese securities regulation that requires equity offering proposals to obtain the separate approval of voting minority shareholders, we examine whether giving minority shareholders increased control over corporate decisions helps to reduce value-decreasing corporate decisions for firms domiciled in weak investor protection countries. We find that the regulation deters management from submitting value-decreasing equity offering proposals in firms with higher mutual fund ownership. There is also weak evidence that minority shareholders are more likely to veto value-decreasing equity offering proposals in firms with higher mutual fund ownership in the post-regulation period. Overall, our evidence suggests that in weak investor protection countries, the effect of granting minority shareholders increased control over corporate decisions on the quality of corporate decisions depends on the composition of minority shareholders.

We find that socially connected fund managers have more similar holdings and trades. The overlap of funds whose managers reside in the same neighborhood is considerably higher than that of funds whose managers live in the same city but in different neighborhoods. These effects are larger when managers share a similar ethnic background, and are not explained by preferences. Valuable information is transmitted through these peer networks: a long-short strategy composed of stocks purchased minus sold by neighboring managers delivers positive risk-adjusted returns. Unlike prior empirical work, our tests disentangle the effects of social interactions from community effects.

Our study addresses a longstanding question—whether discrimination exists in financial markets. Although empirical evidence demonstrating disparate treatment of minorities is vast, studies have inadequately explained why minority customers seeking financing are targeted for discriminatory treatment. We develop a theoretical framework explaining why profitmaximizing capital suppliers may choose to offer minority clients worse terms than those provided to comparable white customers. Our framework stresses search costs and reservation prices. We then test this by comparing the relative profitability of investing private equity in minority- and white-owned small firms, an approach advocated by Gary Becker. Using three empirical tests, we consistently find the financial returns derived from investing in minority firms exceed those of white-firm investments. Conducting Becker's test, in this instance, indicates that disparate treatment of minority clients does not result in loss of profitable investing opportunities for private equity funds but, instead, higher profits.