Stealing from Thieves: Firm Governance and Performance when States are Predatory

Art Durnev and Larry Fauver

No 2008-12, CEI Working Paper Series from Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University

Abstract: We investigate how predatory government policies (expropriation, lack of property rights protection, corruption, crime) interact with managerial incentives in shaping firm governance structure. Our model shows that owners have lower incentives to encourage valuemaximization by managers if the government is likely to expropriate firm profits. This result emerges because it is more difficult for governments to seize firm profits that managers have already stolen and hidden from the owners. The model also demonstrates that the positive valuation effect of stronger firm governance is lower in states with more predatory governments. We test these predictions using several distinct data sets on firm governance and disclosure practices, and the business and financing obstacles firms face due to government intervention. The empirical results are consistent with the model's predictions. Specifically, we find that firms located in countries with more predatory governments practice weaker governance and disclose less information. Further, the previously documented positive relation between firm governance and firm performance is weaker or disappears altogether when governments pursue predatory policies. Finally, in countries with more predatory governments, firm-specific characteristics are less important in explaining variation in governance and firms have more similar governance structures.

Keywords: Managerial Incentives; Corruption; Expropriation; Property Rights Protection; Taxes; Governance; Disclosure; Valuation (search for similar items in EconPapers)
JEL-codes: G15 G32 G38 K22 K42 (search for similar items in EconPapers)
Pages: 84 pages
Date: 2008-04
New Economics Papers: this item is included in nep-pbe
Note: September 21, 2007
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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