재무분야 최근 학문적 연구동향 발표회 “ 기업지배구조가 자본시장에 미치는 영향 ” 고려대학교 경영대학 배기홍 2003 년 5 월 23 일

2 Some Questions Why do some countries have so much bigger capital markets than others? For instance, why do US and UK have enormous equity markets, while Germany and France have smaller ones? Why do hundreds of firms go public in US every year, while only a few dozen went public in Italy over a decade? Why do Germany and Japan have such extensive banking systems, even relative to other wealthy economies? Why do Russian firms have virtually no access to external finance and sell at about one hundred times less than Western firms with comparable assets?

3 Some Questions - Continued Why do the firms in the US and UK have widely diffused ownership, while those in emerging markets have their ownership concentrated in a few large shareholders or families? Why are initial IPO returns so much higher in emerging markets than in developed markets? Why do emerging markets have lower dividend payout ratios than developed markets? Why do emerging markets have synchronous stock price movements? Why are emerging market returns positively skewed?

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5 Some Answers Recent literature suggests that answers to the above questions have something to do with the degree of investor protection. Corporate governance deals with the ways in which suppliers of capital to corporations assure themselves of getting a return on their investment. – How do they make sure that managers do not steal the capital they supply or invest it in bad projects? How do suppliers of capital control managers (or controlling shareholders)?

6 Findings of Recent Research on Corporate Governance Investor protection is an important determinant of financial development, explaining such outcomes as the size and breadth of capital markets, IPO activity, dividend policies, ownership structures, etc. Quality of investor protection is intimately related to origin of commercial laws. –Specifically, common law countries protect both shareholders and creditors better than civil (especially French) law countries. Law enforcement is also a key determinant of investor protection.

7 Common Law (uncodified) vs. Civil Law (codified) The laws of many countries in the world originate in those of England and France. Legal systems based on English laws are described as common law, while those based on French laws as civil, or Roman, law. Civil law relies on professional judges, legal codes, and written recodes, while common law relies on judges, broader legal principles, and oral arguments.

8 Measures of Investor Protection Shareholder rights Creditor rights Efficiency of judicial system Accounting Standard

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13 Consequences of Investor Protection: (1) Financial Markets

14 Consequences of Investor Protection: (2) Ownership Patterns

15 Consequences of Investor Protection: La Porta, Rafael, Florencia Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny, 1997, “Legal Determinants of External Finance,” Journal of Finance 52, No.3: La Porta, R., Lopez-de-Silanes, F., Shleifer, A., Vishny, R., 2000, “Agency Problem and Dividend Policy around the World,” Journal of Finance 55: La Porta, R., Lopez-de-Silanes, F., Shleifer, A., Vishny, R., Investor protection and corporate valuation. Journal of Finance, forthcoming. Johnson, Simon, and Andrei Shleifer and Florencia Lopez-de-Silanes, 2000, “Tunneling,” American Economic Review 90:

16 Consequences of Investor Protection: Bae, K.-H., Jun-Koo Kang and Jin-Mo Kim, 2002, “Tunneling or Value Added? Evidence from Mergers by Korean Business Groups,” Journal of Finance, forthcoming Paper. Joh, Sung Wook, 2002, “Corporate Governance and Firm Profitability : Evidence from Korea before the Economic Crisis,” Journal of Financial Economics, forthcoming Paper. Bertrand, Marianne, Paras Mehta, and Sendhil Mullainathan, “Ferreting Out Tunneling: An Application to Indian Business Groups,” NBER working paper no La Porta, Lopez-de-Silanes, and Zamarripa, 2002, “Related Lending,” Quarterly Journal of Economics, forthcoming.

17 Consequences of Investor Protection: Johnson, S,. Boone, P., Breach, A., Friedman, E., 2000, “Corporate Governance in the Asian Financial Crisis,” Journal of Financial Economics 58: Mitton, T., “A cross-firm analysis of the impact of corporate governance on the East Asian financial crisis,” Journal of Financial Economics, forthcoming. Morck, R., Yeung, B., Yu, W., 2000, “The information content of stock markets: why do emerging market have synchronous price movements?” Journal of Financial Economics 58, Brockman, P., Chung, D., 2002, “Investor Protection and Firm Liquidity” Journal of Finance, forthcoming.

18 Ownership and firm value

19 Control minus ownership and firm value

20 Samsung Group Samsung Electronics Samsung Corp Samsung Life Ins Samsung Foundations Samsung SDI Samsung Card Samsung Mech. Elec Samsung Heavy Ind. Samsung Capital Cheil Textile Hotel Shilla Samsung Everland Cheil Comm. Samsung Security Samsung Techwin Samsung F&M Ins Samsung Engineering Samsung Prec.Chem S-one

21 Current works in progress Property Rights Protection and Bank Loan Contracts Corporate Governance and Conditional Skewness in World Stock Market Indexes Corporate Governance, Cost of Capital, and Market Liberalization

Property Rights Protection and Loan Rates Kee-Hong Bae, Korea University Vidhan Goyal, HKUST

23 Loan Spreads around the World

24 Research Question Does corporate governance matter for the cost of financing? Do differences in property rights protection matter for loan spreads (default risk premium)? –If property rights are weakly protected, banks will charge higher spreads to compensate for the greater contracting risk.

25 Are countries with weak property rights associated with higher spreads?

26 Analyses in three stages 1. Cross-country analysis 2. Firm-level analysis to control for firm characteristics affecting loan spreads 3. The impact of ownership-control disparity on loan spreads.

27 1. Cross-country analysis OLS

28 Property rights and loan spread

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30 2. Firm-level analysis First-stage regression –Loan rate = fct (firm characteristics, country dummy, year dummy) Firm size = (-) Profitability = (-) Leverage = (+) Market to book/intangibles/capital expenditure = (+) Loan size = (-) Loan maturity = (+) Second-stage regression –Use estimates of country dummy as dependent variable.

31 First-stage regression

32 Second-stage regression

33 3. Ownership-control disparity as firm-level governance proxy Does ownership-control disparity affect the terms at which banks lend to firms? Do banks lend at better terms to firms with better corporate governance? Our objective is to examine how cross-firm differences in corporate governance affect loan rates.

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35 Conclusions By improving property rights protection, a country can expect to see a large reduction in its cost of external financing. –While we are not the first to reach this conclusion, our evidence is more direct and is based on cross-country sample of actual loan transactions. Improving property rights protection at the country-level has a large impact on bank loan spreads. –Improving firm-level corporate governance mechanisms matters too, but the effects are second order.

Corporate Governance and Conditional Skewness in World Stock Market Indexes Kee-Hong Bae, Korea University Chanwoo Lim, Korea University John Wei, HKUST

37 Motivation Why are emerging markets’ stock returns more positively skewed than those of developed markets?

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39 Are countries with weak property rights associated with higher positive skewness?

40 Hypothesis Discretionary-disclosure hypothesis –In stock markets characterized by poor corporate governance, managers have more discretionary power over the disclosure of bad information. Risk-sharing hypothesis –Economies that do not protect investors’ rights facilitate risk-sharing among affiliated firms through intercorporate income-shifting.

41 Analyses in two stages 1. Cross-country analysis using daily market index returns from Firm-level analysis from the Korean equity market from

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43 Risk-sharing hypothesis

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45 Conclusions Evidence is consistent with both discretionary hypothesis and risk-sharing hypothesis. Our evidence provides an answer as to why minority shareholders still buy stocks and bonds of business group firms knowing that there is a possibility of tunneling. –The implicit guarantee of a bailout for member firms of business groups in distress could be attractive to outside investors.

46 Works in progress Stock market liberalization and corporate governance –Do markets or firms with better governance realize higher benefits when stock market is liberalized?

47 Research issues of interest in Korea Evidence of tunneling or propping and how it works. Does liberalization improves corporate governance? Do foreign investors play the role of monitoring? How does family succession affect firm performance?