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Erschienen in: Journal of Management and Governance 4/2010

01.11.2010

Regulatory intervention and the effect of changes in corporate governance on firm decisions and market reactions

verfasst von: Giorgio Gotti, Stacy Mastrolia

Erschienen in: Journal of Management and Governance | Ausgabe 4/2010

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Abstract

This paper investigates whether Italian companies that cross-list in the United States between 1993 and 2005 show (1) a change in their internal policies as anticipated by the bonding hypothesis, (2) an increase in market value, or (3) an increase in the access to capital funds. We use the unique environment created by the 1998 Draghi reform which significantly improved the protection of Italian listed companies’ minority shareholders and we further examine the impact of legislated changes in corporate governance in Italy on the decision of Italian companies to cross-list in the United States. Our results indicate that following the Draghi reform (1) firms that cross-list in the United States modify their dividend and cash policies as anticipated by the bonding hypothesis. Contrary to prior research, (2) we do not find evidence that cross-listing serves to enhance shareholder value or (3) is used as a vehicle to more easily access capital funds either before or after the domestic corporate governance is improved. The results of this study provide evidence that country level legislative innovations intended to enhance a weak corporate governance system can be a valid and effective substitute to the bonding mechanism by providing an alternative signal of a firm’s quality.

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Fußnoten
1
February 24, 1998 Law No.58 (Decreto Legislativo 24 febbraio 1998, n. 58).
 
2
This method is primarily used by Canadian and Israeli firms.
 
3
Including NYSE, NASDAQ, and AMEX.
 
4
We calculate return on investment both with and without dividends with the same results.
 
5
Johnson et al. (2000) present an Italian company where the dominant shareholders successfully expropriated wealth from the minority shareholders. Anguissola and Mignani, are minority shareholders of Marcilli, an Italian machinery maker. The controlling shareholder of the company is Sarcem, a Swiss machinery maker, who owns 51% of Marcilli. Sarcem precluded Marcilli from directly exporting its products, charged a very high markup for Marcilli products it sold, and sold Marcilli products under its own trademark, overcharging Marcilli. The court declined to appoint a judicial investigation because Marcilli’s president had duty of care to Sarcem, the controlling shareholder. This case illustrates the risks borne by minority shareholders of Italian companies before the Draghi reform.
 
6
Pyramid structures are defined as follows. Firm Y is said to be controlled through pyramiding if it has an ultimate owner who controls Y indirectly through another corporation that it does not wholly control. For example, if a family owns 15% of Firm X (which owns 20% of Firm Y), then Firm Y is controlled through a pyramid at the 10% threshold. However, at the 20% threshold, we would say that Firm Y is directly controlled by Firm X (which is widely held at the 20% threshold) and no pyramiding would be recorded. If Firm X holds 100% of Firm Y, then again there is no pyramid. Cross holding structures are defined as follows. Cross holdings: Firm Y is controlled by a cross-holding at the 10% (or 20%) threshold if Firm X holds a stake in Firm Y of at least 10% (or 20%), and Y holds a stake in Firm X of at least 10% (or 20%), or if firm Y directly holds at least 10% (or 20%) of its own stock.
 
7
Control rights are measured by voting rights a shareholder can exercise in a shareholders’ meeting, while the cash flow rights are equal to the equity share owned by the shareholder.
 
8
Non-US companies listing or issuing their shares on the United States market through the American Depository Receipts (ADR) program went from 158 in the early 1990s to 2,172 at July 2007 (data from Bank of New York ADR website: http://​www.​adrbny.​com).
 
9
US Congress enacted the Sarbanes-Oxley Act on July 30, 2002 (Pub. L. No. 107-204, 116 Stat. 745).
 
10
Licht (2004) notes that in the United States, current reporting rules require that companies disclose potentially sensitive information such as remuneration, related party transaction, stock-option data, and names of shareholders with more than 5% of the issuer’s voting securities. These rules can reduce managers’ control and financial and non-financial benefits.
 
11
Listed companies can choose from a list of approximately 15 audit firms.
 
12
“It is therefore undoubtful that the Draghi reform has given birth to a real revolution in company law and in practice. This revolution has already brought to important results […]” says Franco Belli, from the University of Siena in his discussion of the paper “Impact of the takeovers and their regulation on company law and practice” at the 2000 conference on “The impact of the Security Markets on Companies and their Regulation.”
 
13
In Pirelli Spa, the controlling stake was reduced from 50% to around 30%. In the disperse ownership cases of Olivetti and SNIA-BPD, coalitions of shareholders worked together to create controlling stakes just below 30% (Bianchi et al. 1998).
 
14
They use the Barclay and Holderness (1989) method to infer the value of private benefits of control for 39 countries. When a control block exchanges hands, they measure the difference between the price paid by the acquirer and the price quoted on the market the day after the sale’s announcement. This difference is called control premium and is used to measure the private benefits of controlling the company.
 
18
Each class of share assigns to the shareholder different voting and cash flow rights (similarly to class A and B shares in the US).
 
19
Net assets are computed as the difference between total assets and cash plus cash equivalents.
 
20
Tobin’s Q is defined as a firm’s market value per dollar of replacement costs of tangible assets. The higher a firm’s Tobin’s Q, the higher the market value of each dollar of replacement cost of tangible assets (or, more simply, each dollar of total assets). The original Tobin’s Q model is calculated as the ratio: "market value of the firm" over "the reproduction cost of its assets.” There are some papers that use a more simplified procedure in which Tobin’s Q is equal to the market value of assets divided by the book value of total assets. Market value of assets is calculated as the book value of assets plus the market value of common stock (total shares outstanding multiplied by the price per share outstanding) less the sum of book value of common equity.
 
21
In this way we adjust for stock splits and other events that affect the firm’s capital structure.
 
22
Untabulated multicollinearity diagnostic tests—VIF—do not show evidence of multicollinearity problem in the sample.
 
23
The growth ratio is calculated as the increase in sales between year t − 1 and t, divided by total sales for year t − 1.
 
25
Nine new Italian ADR program started between 2002 and 2007, while six went inactive. However, in August 2007, the FIAT Group announced its intention to delist its three ADR programs from the NYSE, effective 90 days from the communication to the SEC (http://​www.​reuters.​com/​article/​tnBasicIndustrie​s-SP/​idUSN03342450200​70803), reducing the number of new active ADR programs for the period to six.
 
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Metadaten
Titel
Regulatory intervention and the effect of changes in corporate governance on firm decisions and market reactions
verfasst von
Giorgio Gotti
Stacy Mastrolia
Publikationsdatum
01.11.2010
Verlag
Springer US
Erschienen in
Journal of Management and Governance / Ausgabe 4/2010
Print ISSN: 1385-3457
Elektronische ISSN: 1572-963X
DOI
https://doi.org/10.1007/s10997-009-9105-x

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