Leverage, Investment, and Firm Growth

We show that there is a negative relation between leverage and future growth at the firm level and, for diversified firms, at the segment level. Further, this negative relation between leverage and growth holds for firms with low Tobin's q, but not for high-q firms or firms in high-q industries. Therefore, leverage does not reduce growth for firms known to have good investment opportunities, but is negatively related to growth for firms whose growth opportunities are either not recognized by the capital markets or are not sufficiently valuable to overcome the effects of their debt overhang.

The Benefits and Costs of Group Affiliation: Evidence from East Asia

business group, group affiliation, East Asian corporations

Who controls East Asian corporations ?

The authors identify the ultimate ownership structure for 2,980 corporations in nine East Asian countries. They find that: A) More than half of those firms are controlled be a single shareholder. B) Smaller firms and older firms are more likely to be family-controlled. C) Patterns of controlling ownership stakes differ across countries. The concentration of control generally diminishes with higher economic and institutional development. D) In many countries control is enhanced though pyramid structures and deviations from one-share-one-vote rules. As a result, voting rights exceed cash-flow rights. E) Management is rarely separated from ownership control, and management in two thirds of the firms that are not widely held is related to management of the controlling shareholder. F) In some countries, wealth is very concentrated and links between government andbusiness are extensive, so the legal system has probably been influenced by the prevailing ownership structure.Small and Medium Size Enterprises,Microfinance,Small Scale Enterprise,International Terrorism&Counterterrorism,Economic Theory&Research,Microfinance,Private Participation in Infrastructure,Small Scale Enterprise,Rural Land Policies for Poverty Reduction,Economic Theory&Research

The Costs of Group Affiliation: Evidence from East Asia

We examine the costs of business group affiliation using data for 2,600 firms in nine East Asian economies for the 1994-1996 period. We find that group-affiliated firms are on average valued below independent firms, with the discount attributable to firms whose ultimate owners have voting rights exceeding cash-flow rights. When there is no divergence between voting and cash flow rights, group-affiliated firms actually have a slight value premium over independent firms. Our results are robust to different valuation measures, time periods and estimation techniques. The evidence is consistent with the view that the anticipation of expropriation associated with group affiliation more than offsets any possible benefits of group membership.

Expropriation of Minority Shareholders in East Asia

We examine the evidence on expropriation of minority shareholders by the controlling shareholder in publicly traded companies in nine East Asian countries. Higher cash-flow rights are associated with higher market valuation. In contrast, higher control rights have an insignificant or negative effect on corporate valuation. Deviations of voting from cash-flow rights through the use of pyramiding, cross-holdings, and dual-class shares, are associated with lower market values. Results are robust to the time period we study, splitting the sample by individual countries, using alternative measures of the incentive for expropriation, and using alternative measures for firm valuation. We conclude that the risk of expropriation is the major principal-agent problem for public corporations in East Asia.

Corporate growth, financing, and risks in the decade before East Asia's financial crisis

East Asia's financial crisis has been attributed in part to the weak performance and risky financial structures of Asian corporations. In the period before Asia's financial crisis, however, analysts were not suggesting that the financial structure of many East Asian corporations would be unable to withstand the combined shocks of increased interest rates, depreciated currencies, and large drops in domestic demand. To document the basic record of corporate performance and financing structures for East Asian corporations, the authors analyze data for 5,550 firms in nine countries for the period 1988-96. They find large differences in performance and financial structure across countries. Profitability - as measured by real return on assets (ROA) in local currency -- was relatively low in Hong Kong, Japan, the Republic of Korea, and Singapore in the decade before the crisis. Corporations in Indonesia, the Philippines, and Thailand averaged high returns - roughly double those in Germany and the United States for the same period. In 1994-96, measured performance declined somewhat in several East Asian countries, especially Japan and Korea. Those differences in performance were not fully reflected in sales growth, as investment rates were high and continued to drive output growth in all countries. These stylized facts suggest that the East Asian miracle was indeed based on a vibrant corporate sector. But the combination of high investment and relatively low profitability in some countries meant that much external financing was needed. Outside equity was used sparingly - in part because stock markets were depressed (Japan) or because insiders preferred to retain control - so borrowing was heavy in most East Asian countries, and leverage increased in the years before 1996 in Korea, Malaysia, and Thailand. Risk increased as short-term (foreign exchange) borrowing became increasingly important in the 1990s, especially in Malaysia, Taiwan (China), and Thailand. In other words, it is now apparent that some of the vulnerabilities in corporate financial structures that were to become an important factor in East Asia's financial crisis already existed in the early 1990s, although they were not noted at the time.International Terrorism&Counterterrorism,Payment Systems&Infrastructure,Economic Theory&Research,Environmental Economics&Policies,Banks&Banking Reform,Banks&Banking Reform,Environmental Economics&Policies,International Terrorism&Counterterrorism,Economic Theory&Research,Financial Intermediation

Tobin's Q, Corporate Diversification and Firm Performance

In this paper, we show that Tobin's q and firm diversification are negatively related. This negative relation holds for different diversification measures and when we control for other known determinants of q. We show further that diversified firms have lower q's than equivalent portfolios of specialized firms. This negative relation holds throughout the 1980s in our sample. Finally, it holds for firms that have kept their number of segments constant over a number of years as well as for firms that have not. In our sample, firms that increase their number of segments have lower q's than firms that keep their number of segment constant. Our evidence is consistent with the view that firms seek growth through diversification when they have exhausted internal growth opportunities. We fail to find evidence supportive of the view that diversification provides firms with a valuable intangible asset

The Pattern and Valuation Effects of Corporate Diversification: A Comparison of the United States, Japan, and other East Asian Economies

Corporate diversification, Valuation effects, East Asia, USA, Japan

Asset Sales, Firm Performance, and the Agency Costs of Managerial Discretion

We argue that management sells assets when doing so provides the cheapest funds to pursue its objectives rather than for operating efficiency reasons alone. This hypothesis suggests that (1) firms selling assets have high leverage and/or poor performance, (2) a successful asset sale is good news and (3) the stock market discounts asset sale proceeds retained by the selling firm. In support of this hypothesis, we find that the typical firm in our sample performs poorly before the sale and that the average stock-price reaction to asset sales is positive only when the proceeds are paid out.

Troubled savings and loan institutions: voluntary restructuring under insolvency

Regulatory agencies are unwilling or unable to close thrift institutions immediately upon insolvency. Instead, they have progressively reduced the thrift capital requirement, refrained from enforcing that requirement, and allowed thrifts to hold more nonmortgage loans in the hope that the industry would recover. According to this study, only 13 percent of the largest 300 firms eventually recovered between the end of 1979 and the end of 1989. When the thrift crisis surfaced in the early 1980s, the firms that ultimately recovered operated in a fashion similar to those that eventually failed. But in the mid-1980s, recovered thrifts pursued a risk-minimizing strategy, while nonrecovered thrifts pursued a risky, high-growth strategy. We find no evidence that managers of unsuccessful firms consumed more perquisites than their successful counterparts.Savings and loan associations