We develop a model to illustrate that controlling shareholders choose the level of investor protection that maximizes their own interests. Controlling shareholders in companies with complicated control structures can easily extract private benefits and are thus reluctant to enhance investor protection which would necessitate increased transparency. In contrast, controlling shareholders in compa...

This paper examines the differences in accrual-based and real earnings management across countries from the perspective of investor protection. Following prior research (Leuz et al., 2003), we hypothesize that accrual-based earnings management is more constrained by strict discipline in countries with stronger investor protection. For real earnings management in countries with stronger investor...

Corporations in most countries are run by controlling shareholders, who have substantially smaller cash flow rights than their control rights in the firm. This separation of ownership and control allows the controlling shareholders to pursue private benefits at the cost of outside minority investors by diverting resources away from the firm and distorting corporate investment and payout policie...

This study examines the effect of corporate liquidity and investor protection on the relation between financial distress and equity returns using a European sample over the 2002-2016 period. The results show that returns are hump-shaped and decreasing for increasing default risk. This can be rationalized by corporate liquidity indicating that higher cash holdings decrease liquidity risk. Moreov...

This paper tests the hypotheses that poor investor-protection environments lead to higher information asymmetry in security markets. We compare China-based stocks, which operate in a relatively unprotected environment, to Hong Kong-based stocks. The information component in the market friction of China stocks is shown to be up to 20% larger than that of Hong Kong-based stocks. The effect is rob...

We present a model in which wage-setting structures explain cross-country variation in corporate governance. The model predicts a nonmonotonic relationship between the level of centralization in wage-bargaining institutions and the levels of firm ownership concentration and investor protection legislation. Low and high degrees of centralization yield less concentrated ownership and more investo...

This paper presents a political economy model where there is mutual feedback between investor protection and stock market development. Better investor protection induces companies to issue more equity and thereby leads to a broader stock market. In turn, equity issuance expands the shareholder base and increases support for shareholder protection. This feedback loop can generate multiple equili...