Corporate GovernanceCorporate Governanceand Stakeholdersand Stakeholders

E. Han KimE. Han Kim

Ross School of BusinessRoss School of BusinessUniversity of MichiganUniversity of MichiganAnn Arbor, MichiganAnn Arbor, Michigan

Keynote speech at 2008 NTU International Keynote speech at 2008 NTU International Conference on Finance, December 11, TaiwanConference on Finance, December 11, Taiwan

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Corporate GovernanceCorporate Governance A nexus of implicit and explicit contracts among various A nexus of implicit and explicit contracts among various

stakeholdersstakeholders ObjectivesObjectives

– Maximize value creation for Maximize value creation for allall stakeholders stakeholders– Prevent value expropriation by controlling shareholders or Prevent value expropriation by controlling shareholders or

managementmanagement Excessive compensation, tunneling, and/or stealingExcessive compensation, tunneling, and/or stealing

Effectiveness of contracts enforcementEffectiveness of contracts enforcement– Priority given to shareholder valuePriority given to shareholder value– TransparencyTransparency– Board of directorsBoard of directors– Institutional investorsInstitutional investors– Market for corporate controlMarket for corporate control

1.1.

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Focus on shareholder Focus on shareholder valuevalue

Rationale: Stockholders are residual Rationale: Stockholders are residual claimholders. claimholders. – If the stakeholder with the most junior claim is If the stakeholder with the most junior claim is

taken care of, long-run interests of other taken care of, long-run interests of other stakeholders will also be servedstakeholders will also be served

Separation of control from ownershipSeparation of control from ownership– Gives incentive for excessive private benefits Gives incentive for excessive private benefits

of controlof control– Diverting $100 for private uses provides a net Diverting $100 for private uses provides a net

gain of $98 to a CEO with 2% share ownershipgain of $98 to a CEO with 2% share ownership– Such misallocation of resources destroys valueSuch misallocation of resources destroys value

Korean ChaebolKorean Chaebol

Kim and Kim (2008): Over 1997-2005, Kim and Kim (2008): Over 1997-2005, – Controlling families’ average share ownership = 22%,Controlling families’ average share ownership = 22%,– But they control 69% of voting rights through cross- But they control 69% of voting rights through cross-

and circular-holdingsand circular-holdings Bigger wedge before the 1997 Korean crisis Bigger wedge before the 1997 Korean crisis Kim, Kim, and Yi (1998): Over 1992-1996, Kim, Kim, and Yi (1998): Over 1992-1996,

– Only 27% of listed firms created or maintained Only 27% of listed firms created or maintained shareholder value (the cumulative EVAs > 0) shareholder value (the cumulative EVAs > 0)

– The rest destroyed value during the five year period The rest destroyed value during the five year period preceding the crisis preceding the crisis

their average operating profits < cost of capitaltheir average operating profits < cost of capital How do we control such problems?How do we control such problems?

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Law and FinanceLaw and Finance

Stronger legal protection of investors leads to:Stronger legal protection of investors leads to:– Better corporate governanceBetter corporate governance– Higher firm valuation Higher firm valuation – More reliance on external financingMore reliance on external financing– Greater financial and economic developmentGreater financial and economic developmentLa Porta et al. (1997), Rajan and Zingales (1998), Demirguc-Kunt and Maksimovic (1998), Wurgler La Porta et al. (1997), Rajan and Zingales (1998), Demirguc-Kunt and Maksimovic (1998), Wurgler

(2000), La Porta et al. (2002)(2000), La Porta et al. (2002)

These studies focus only on investors and cross country variation, These studies focus only on investors and cross country variation, ignoringignoring– LaborLabor– Within country variationWithin country variation

How firm governance varies within a country?How firm governance varies within a country? What’s the labor’s role in governance?What’s the labor’s role in governance?

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Within country variationWithin country variation

Do Do allall firms in weak legal firms in weak legal environments have bad governance? environments have bad governance? – Do Do allall firms in strong legal regimes firms in strong legal regimes

practice good governance?practice good governance? Wide within country variation in Wide within country variation in

governance and disclosure practicesgovernance and disclosure practices The variation increases as legal The variation increases as legal

environment gets less investor-environment gets less investor-friendlyfriendly

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Explaining the VariationsExplaining the Variations

The wider variation in weaker legal regimes The wider variation in weaker legal regimes is the result of some firms choosing good is the result of some firms choosing good governance to mitigate harmful effects of governance to mitigate harmful effects of weak investor protectionweak investor protection– The Coase Theorem(1960), as applied to The Coase Theorem(1960), as applied to

governance and investor protectiongovernance and investor protection What kind of firms choose better What kind of firms choose better

governance? governance? Are better governed firms valued higher in Are better governed firms valued higher in

stock markets? stock markets? – Is it economically significant for corporate Is it economically significant for corporate

decision-makers to take notice?decision-makers to take notice?

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A Model of Optimal A Model of Optimal DiversionDiversion

Durnev and Kim (2005)Durnev and Kim (2005) A controlling A controlling shareholder with shareholder with ownership ownership

decides how much to divert (steal)decides how much to divert (steal) His total benefits = His total benefits = ( (cash flows generated cash flows generated

from investments ) + diversion - cost of from investments ) + diversion - cost of diversiondiversion

Cost of diversion increases with the strength of Cost of diversion increases with the strength of legal investor protection.legal investor protection.

He will invest only if a project increasesHe will invest only if a project increases

His cash flows > Net benefits of diversionHis cash flows > Net benefits of diversion

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PredictionsPredictions

Better investment opportunitiesBetter investment opportunities => =>better governancebetter governance..

– More profitable investment opportunities increase the More profitable investment opportunities increase the controlling shareholder’s cash flows => he will invest controlling shareholder’s cash flows => he will invest more and divert lessmore and divert less

Firms choose better governance Firms choose better governance

– When controlling shareholders have higher cash flow When controlling shareholders have higher cash flow rightsrights

– When firms need more external financingWhen firms need more external financing

These relations are stronger in weaker legal regimesThese relations are stronger in weaker legal regimes

Firms with better governance are valued higherFirms with better governance are valued higher

– The effect is greater in weaker legal regimesThe effect is greater in weaker legal regimes

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Empirical ResultsEmpirical Results

Country random effects regressions with Country random effects regressions with CLSA corporate governance scores of 494 firms in 24 emerging marketsCLSA corporate governance scores of 494 firms in 24 emerging markets S&P Transparency ranking of 573 companies in 16 emerging markets and S&P Transparency ranking of 573 companies in 16 emerging markets and

3 developed countries, both in 20003 developed countries, both in 2000

Firms with Firms with better investment opportunities better investment opportunities more external financing needsmore external financing needs greater controlling shareholder share ownershipgreater controlling shareholder share ownership

have have higherhigher governance and transparency rankings governance and transparency rankings Firms with bigger wedge in controlling shareholders’ Firms with bigger wedge in controlling shareholders’

voting rights and cash flow rightsvoting rights and cash flow rightshave have lowerlower governance and transparency ranking governance and transparency ranking..

Valuation effectsValuation effects

Better governance and greater Better governance and greater transparency increase firm value:transparency increase firm value:– One standard deviation increase in governance One standard deviation increase in governance

ranking increases firm value by 9%ranking increases firm value by 9% Valuation effects are greater in weaker Valuation effects are greater in weaker

investor protection countries:investor protection countries:– Mexico, the weakest in the sample:Mexico, the weakest in the sample:

Firm value increases by 13.2% for a standard Firm value increases by 13.2% for a standard deviation increase in corporate governance rankingdeviation increase in corporate governance ranking

– Hong Kong, the strongest:Hong Kong, the strongest:Firm value increase by 4.6% for the same increaseFirm value increase by 4.6% for the same increase

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ImplicationsImplications

Investors should not assume all Investors should not assume all firms in weak investor protection firms in weak investor protection countries are badly governedcountries are badly governed– Firms adapt to weak legal institutions Firms adapt to weak legal institutions

to establish efficient governanceto establish efficient governance It pays to have good governanceIt pays to have good governance

– Firms with better governance are Firms with better governance are rewarded with higher stock valuations rewarded with higher stock valuations and lower costs of capitaland lower costs of capital

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LaborLabor

Law and finance focuses only on Law and finance focuses only on investor protectioninvestor protection

The firm is where labor meets capital The firm is where labor meets capital – Without workers, capital is of little useWithout workers, capital is of little use– Labor is an equally important stakeholderLabor is an equally important stakeholder

Labor may influence governanLabor may influence governancece– Board representationBoard representation

Austria, China, Czech, Denmark, Egypt, Germany, Austria, China, Czech, Denmark, Egypt, Germany, Norway, Slovenia, and SwedenNorway, Slovenia, and Sweden

– Voting rights of shares held in ESOPsVoting rights of shares held in ESOPs– Collective, industrial, and political actions Collective, industrial, and political actions

Is workers’ influence in Is workers’ influence in governance desirable?governance desirable? Positive effects, ifPositive effects, if

– It restrains controlling shareholders or It restrains controlling shareholders or management from excessive compensation, management from excessive compensation, payouts, and/or diversion of resources for private payouts, and/or diversion of resources for private useuse

– Participation in governance improves morale and Participation in governance improves morale and team work, increasing worker productivity team work, increasing worker productivity

Negative effects, if value creation is Negative effects, if value creation is sacrificed to benefit worker welfaresacrificed to benefit worker welfare

Net effects onNet effects on– Corporate decision making processesCorporate decision making processes– Long term welfare of workers and investorsLong term welfare of workers and investors

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Restructuring decisions by Restructuring decisions by firms suffering a sudden, sharp firms suffering a sudden, sharp drop in operating performancedrop in operating performance

Atanassov and Kim (2009)Atanassov and Kim (2009) Conflicts among stakeholders become Conflicts among stakeholders become

more acute when the economic pie shrinksmore acute when the economic pie shrinks– Restructuring in general increases shareholder Restructuring in general increases shareholder

valuevalue The gains may come at the expense of workersThe gains may come at the expense of workers

Two possible outcomes:Two possible outcomes:– Workers may rally to improve save the firmWorkers may rally to improve save the firm– Conflicts between workers and investors may Conflicts between workers and investors may

lead to further deteriorationlead to further deterioration Outcome depends on managementOutcome depends on management

– the agent between investors and workersthe agent between investors and workers

Managerial allegiance Managerial allegiance

To shareholders, if they are more influentialTo shareholders, if they are more influential– Value enhancing restructuring decisions are Value enhancing restructuring decisions are

more likely.more likely. To workers, if labor is influential enough to To workers, if labor is influential enough to

help retain underperforming managementhelp retain underperforming management– May refrain from wage cuts and worker May refrain from wage cuts and worker

layoffs to garner worker supportlayoffs to garner worker support– May have to sell valuable assets to finance May have to sell valuable assets to finance

the current payrollthe current payroll– Such (in)actions may lead to further Such (in)actions may lead to further

deterioration deterioration 1616

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Empirical IssuesEmpirical Issues

How does the relative influence of investors How does the relative influence of investors vis-a-vis labor affect the likelihood of:vis-a-vis labor affect the likelihood of:– Large scale employee layoffs?Large scale employee layoffs?– Top management turnover?Top management turnover?– Major asset sales?Major asset sales?

The relative influence is determined by The relative influence is determined by social and political factors unique to each social and political factors unique to each countrycountry

Proxy: The relative strength of legal Proxy: The relative strength of legal institutions protecting investors and laborinstitutions protecting investors and labor

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Worker Layoffs and Worker Layoffs and Management Turnover Management Turnover

Both may create conflicts betweenBoth may create conflicts between– Workers and investorsWorkers and investors– Management and investorsManagement and investors

Layoffs and turnovers are more likely when investors’ Layoffs and turnovers are more likely when investors’ legal rights are stronger legal rights are stronger

Mutual conflicts may lead to a worker-management Mutual conflicts may lead to a worker-management alliance:alliance:– Labor may attempt to protect managementLabor may attempt to protect management– Management may refrain from layoffs and wage cuts to Management may refrain from layoffs and wage cuts to

garner worker support garner worker support Strong union laws may helpStrong union laws may help

– RetainRetain underperforming managementunderperforming management– Prevent layoffs Prevent layoffs

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Asset salesAsset sales

Generally considered value enhancingGenerally considered value enhancing– Redeploying under-utilized assets to Redeploying under-utilized assets to

higher valued uses by other firmshigher valued uses by other firms– May create conflicts with workersMay create conflicts with workers– Require strong investor protectionRequire strong investor protection

Can be a means to delay layoffs and Can be a means to delay layoffs and wage cutswage cuts– Worker-friendly management may sell Worker-friendly management may sell

valuable assets to minimize payroll cutsvaluable assets to minimize payroll cuts– Will lead to further deteriorationWill lead to further deterioration– Possible with weak investor protectionPossible with weak investor protection

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Summary statisticsSummary statistics

9,923 firms in 41 developing and 9,923 firms in 41 developing and developed countries, 1993-2004developed countries, 1993-2004

Sudden and sharp drop in EBITDA/TASudden and sharp drop in EBITDA/TA– Initially, above the industry medianInitially, above the industry median– Drops 50% in the following yearDrops 50% in the following year

Labor laws are negatively correlated with Labor laws are negatively correlated with investor protectioninvestor protection

All three types of restructuring increaseAll three types of restructuring increase Layoffs and asset sales are positively Layoffs and asset sales are positively

correlated with each othercorrelated with each other– But not with top management turnoverBut not with top management turnover

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Empirical designEmpirical design Estimate the likelihood of each restructuring Estimate the likelihood of each restructuring

measure using Logit regressions with measure using Logit regressions with – time and industry fixed effects time and industry fixed effects – country random effectscountry random effects

Explanatory variables: Explanatory variables: – Legal variables:Legal variables:

investor protectioninvestor protection union lawsunion laws employment contract lawsemployment contract laws

– Firm-level variables: leverage, ownership Firm-level variables: leverage, ownership concentrationconcentration

– Controls : size, previous year performance Controls : size, previous year performance

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Table V, Panel A: Regression analysis using Employee Layoffs as the dependent variable .

Layoffs

(1) (2) (3) (4) (5) (6)

Financier 0.162** 0.054* 0.162** 0.348*** 0.241** 0.352***

Union -1.087*** -1.088*** -1.072**

Emp_Cont 0.081 0.085 0.337

Leverage 0.605*** 0.618 0.630* 0.615*** 0.606 1.013**

Own 0.437** 0.359** 0.336 0.342** 0.215** 0.209

Size -0.047*** -0.047*** -0.047*** -0.062*** -0.062*** -0.062***

Performance -0.457*** -0.457*** -0.457*** -0.449*** -0.449*** -0.450***

Lev*Financier 0.457* 0.456*

Lev*Union 0.058*

Lev*Emp_Cont 0.965

Observations 10013 10013 10013 10013 10013 10013

Pseudo R-squared 0.037 0.038 0.037 0.035 0.035 0.035

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Table V, Panel B: Regression analys is using Management Turnover as the dependent variable . (1) (2) (3) (4) (5) (6)

Financier 0.104 0.188* 0.106 0.183** 0.268** 0.186**

Union -0.666** -0.664** -0.570

Emp_Cont -0.110 -0.110 0.005

Leverage 0.148* 1.117* 0.323 0.163* 1.144 0.343

Own 0.302* 0.255 0.241 0.273 0.444 0.351

Size 0.030** 0.031** 0.030** 0.017 0.017 0.017

Performance -0.062 -0.063 -0.062 -0.059 -0.059 -0.059

Lev*Financier 0.376 0.381*

Lev*Union -0.374

Lev*Emp_Cont -0.451

Observations 7309 7309 7309 7309 7309 7309

Pseudo R-squared 0.039 0.040 0.040 0.033 0.034 0.034

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Layoffs and Layoffs and management turnovermanagement turnover

Strong investor protection makes Strong investor protection makes employee layoffs and management employee layoffs and management turnover more likelyturnover more likely

Strong labor laws reduce the likelihood ofStrong labor laws reduce the likelihood of– employee layoffs employee layoffs – management turnovermanagement turnover

Leverage Leverage – strengthens investors’ ability to force layoffsstrengthens investors’ ability to force layoffs– weakens union’s ability to prevent layoffsweakens union’s ability to prevent layoffs

More concentrated ownership makes More concentrated ownership makes employee layoffs more likelyemployee layoffs more likely– Not so for management turnoverNot so for management turnover– Need to control for the manager-owner effect Need to control for the manager-owner effect

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Table VI. Regression analysis using Layoffs, Management Turnover, or Asset Sales as the dependent variable while controlling for major shareholder-top-manager.

Layoffs Turnover Asset Sales

(1) (2) (3) (4) (5) (6)

Financier 0.092** 0.227** 0.091* 0.089* -0.333*** -0.742***

Emp_Cont 0.047 -0.335 2.549***

Union -1.902*** -0.352* 0.333

Leverage 0.997*** 0.999*** 0.572* 0.555* 0.337* 0.460*

Own 0.229** 0.298* 0.099 0.215* 0.271* 0.166

Mgmt/Own -0.272 -0.243 -0.709** -0.736** -0.415* -0.388*

Size -0.117*** -0.056** -0.015 0.004 -0.134*** -0.164***

Performance -0.546*** -0.551*** -0.111* -0.113* -0.397*** -0.356***

Observations 3902 3902 2914 2914 4283 4283

Pseudo R-squared 0.052 0.060 0.041 0.041 0.102 0.068

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Owner/managers vs. Owner/managers vs. Hired-handsHired-hands

Owner/managers are less likely Owner/managers are less likely – To be dismissed for poor performanceTo be dismissed for poor performance– To undertake major asset salesTo undertake major asset sales

When top managers are hired-hands, When top managers are hired-hands, – More concentrated ownership makes More concentrated ownership makes

their dismissal and asset sales more their dismissal and asset sales more likelylikely

Asset sales are negatively related to Asset sales are negatively related to investor protectioninvestor protection– Are they harmful to investors?Are they harmful to investors?

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Table VII, Panel A. A comparison of subsequent firm operating performance and percentage o f firms dropping from the sample between firms with and without asset sales for top and bottom Financier quartile countries.

Top financier quartile Bottom financier quartile Top financier Š

Bottom financier

Measure Median (t+1,t+2) Š

Median (t) Median (t+1,t+2) Š

Median (t) Median

Asales=1 EBITDA/TA 0.122*** -0.041** 0.163*** Asales=0 EBITDA/TA 0.117** 0.058*** 0.059*

Difference EBITDA/TA 0.005** -0.099*** 0.104***

Asales=1 Sales/TA 0.080** -0.019* 0.099*** Asales=0 Sales/TA 0.029** 0.013 0.016*

Difference Sales/TA 0.064** -0.039*** 0.083***

Asales=1 Percent dropping

from sample -3.4% -8.7% 5.3%***

Asales=0 Percent dropping

from sample -4.2% -2.6% -1.6%

Difference Percent dropping

from sample 0.8% -6.1%*** 6.9%***

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Value effects of Asset Value effects of Asset salessales

In top quartile investor protection In top quartile investor protection countries countries – Asset sales improve subsequent Asset sales improve subsequent

operating performanceoperating performance– Asset sales are value enhancingAsset sales are value enhancing

In bottom quartile investor In bottom quartile investor protection countriesprotection countries– Asset sales worsen subsequent Asset sales worsen subsequent

operating performanceoperating performance– Assets sales are value reducingAssets sales are value reducing

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Table VIII. Regression analysis using Asset Sales as the dependent variable for firms located in countries above and below the median of Financier protection.

Financier>Median Financier<Median

(1) (2) (3) (4) (5) (6) (7) (8)

Financier 0.715*** 0.877*** 0.053* 0.131* -0.310*** -0.361** -0.497*** -0.528***

Emp_Cont 2.666*** 2.657*** 2.296*** 2.297***

Union -0.450* -0.462 1.580*** 1.581***

Leverage 0.012* 2.245** 0.016* 2.592* 0.135** 0.319 0.200* 0.074

Own 0.318* 0.174 0.197* 0.105 0.309** 0.337 0.375* 0.217

Size -0.044** -0.045** -0.089*** -0.089*** -0.178*** -0.178*** -0.236*** -0.236***

Performance -0.339*** -0.339*** -0.340*** -0.339*** -0.483*** -0.484*** -0.492*** -0.492***

Lev*Financier 0.736* 0.840 -0.222* -0.134

Observations 5323 5323 5323 5323 5318 5318 5318 5318

Pseudo R-squared 0.045 0.046 0.029 0.030 0.144 0.144 0.119 0.119

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Likelihood of Asset sales Likelihood of Asset sales

With strong investor protection, asset With strong investor protection, asset sales become more likely assales become more likely as– investor protection gets strongerinvestor protection gets stronger– union power gets weakerunion power gets weaker

With weak investor protection, asset With weak investor protection, asset sales become more likely assales become more likely as– investor protection gets weakerinvestor protection gets weaker– union power gets strongerunion power gets strongerAre these asset sales benefiting Are these asset sales benefiting

workers?workers? How do asset sales affect layoffs?How do asset sales affect layoffs?

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Table IX: Regression analysis of Employee Layoffs in year t+1 on Asset Sales in year t for firms located in countries above and below the median of Financier protection.

Financier>Median Financier<Median

(1) (2) (3) (4) (5) (6)

Asset Sales 1.707*** 1.706*** 1.699*** 0.648 0.660 0.643

Financier 0.262** 0.028** 0.288 0.921*** 1.848*** 0.916***

Union -1.004* -1.027* -1.807** 0.700 0.745 -0.275

Asset Sales*Union -1.612* -1.633* -1.604* -1.276 -1.277 -1.270

Leverage 1.216*** 4.758** 0.117 -0.032 7.700*** 2.265*

Own 0.315** 0.228 0.209 0.331** 0.216 0.182

Size -0.005 -0.006 -0.007 -0.090*** -0.089*** -0.091***

Performance -0.347*** -0.348*** -0.350*** -0.448*** -0.436*** -0.443***

Lev*Financier 1.166 0.657

Lev*Union 2.682* 4.250*

Observations 3897 3897 3897 3550 3550 3550

Pseudo R-squared 0.059 0.061 0.060 0.034 0.039 0.036

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Table X: Regression analysis using Management Turnover as the dependent variable for firms located in countries above and below the median of Financier protection. Financier>Median Financier<Median

(1) (2) (3) (4)

Financier 0.072* 0.216** 0.209** 0.394*

Union -0.696 -0.711 -0.589** -0.599**

Leverage 0.121* 2.092 0.226* 1.856

Own 0.183** 0.215 0.189* 0.228*

Size 0.017 0.017 0.043** 0.044**

Performance -0.070* -0.071* -0.052* -0.051

Lev*Financier 0.651 0.775*

Observations 3607 3607 3646 3646 Pseudo R-squared 0.028 0.029 0.041 0.042

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Union power on layoffs Union power on layoffs and management and management turnoverturnover

With strong investor protectionWith strong investor protection– Asset sales lead to more layoffsAsset sales lead to more layoffs– Union power has no effect on Union power has no effect on

management turnovermanagement turnover With weak investor protectionWith weak investor protection

– Asset sales have no impact on layoffsAsset sales have no impact on layoffs proceeds are used to maintain the payrollproceeds are used to maintain the payroll

– Strong union laws protect under-Strong union laws protect under-performing managersperforming managers

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Management-Labor Management-Labor alliancealliance

When unions are strong and investors are When unions are strong and investors are weak weak

Management facing possible dismissal for Management facing possible dismissal for underperformanceunderperformance– refrain from cutting wages and laying off workersrefrain from cutting wages and laying off workers– by selling off valuable assetsby selling off valuable assetsLeading to worse operating performanceLeading to worse operating performance

Workers help retain such management Workers help retain such management throughthrough– their representatives on the board of directorstheir representatives on the board of directors– collective, industrial and/or political actions collective, industrial and/or political actions – voting with management during takeover contests voting with management during takeover contests

Such alliance destroys value and the firm’s Such alliance destroys value and the firm’s sustainabilitysustainability

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Conclusions on LaborConclusions on Labor

Studies of corporate governance must include laborStudies of corporate governance must include labor– Workers play an important role in shaping governance Workers play an important role in shaping governance

Legal protection of investors and labor should be Legal protection of investors and labor should be studied togetherstudied together– They are closely intertwined in influencing firms’ responses They are closely intertwined in influencing firms’ responses

to the conflicting interests between investors, labor, and to the conflicting interests between investors, labor, and managementmanagement

Strong labor laws lead to undesirable consequencesStrong labor laws lead to undesirable consequences– Strong union laws protect under-performing Strong union laws protect under-performing

managementmanagement– Rigid employment contract laws discourage Rigid employment contract laws discourage

investmentsinvestments Lead to more major asset sales during distressLead to more major asset sales during distress

Implications for Implications for TaiwanTaiwan

Of the 41 countries we examined, Of the 41 countries we examined, Taiwan ranksTaiwan ranks

– 3333thth in union laws (only 7 have more flexible in union laws (only 7 have more flexible laws)laws)

Helping Taiwan’s economic resilienceHelping Taiwan’s economic resilience

– 2020thth in employment contract laws (19 have more in employment contract laws (19 have more flexible laws)flexible laws)

Can benefit from more flexible employment lawsCan benefit from more flexible employment laws

– 2525thth in investor protection (only 15 have weaker in investor protection (only 15 have weaker laws)laws)

Strengthening legal protection will increase Taiwanese Strengthening legal protection will increase Taiwanese firm valuation and reduce their costs of capitalfirm valuation and reduce their costs of capital

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Robustness checksRobustness checks

Omitted variables affecting both the legal and the restructuring Omitted variables affecting both the legal and the restructuring variables variables – Control for levels and changes in Log (GDP/capita), changes in Control for levels and changes in Log (GDP/capita), changes in

unemployment levels unemployment levels Asset sales to pay off debtAsset sales to pay off debt

– Replace leverage with changes in short term and total debtReplace leverage with changes in short term and total debt Pre-existing conditionsPre-existing conditions Currency crisis: only 57 observations Currency crisis: only 57 observations Alternative definitions of the legal variables Alternative definitions of the legal variables

– Only the anti-director index or only the anti-self-dealing index is Only the anti-director index or only the anti-self-dealing index is used to measure the protection of minority shareholders, instead of used to measure the protection of minority shareholders, instead of the sum of the twothe sum of the two

Alternative sample selection criteriaAlternative sample selection criteria– Extending the base period for two yearsExtending the base period for two years– 30% and 40% drop in EBITDA/TA in the distress year 30% and 40% drop in EBITDA/TA in the distress year

Alternative definitions for the restructuring variablesAlternative definitions for the restructuring variables Alternative measures of leverage and ownership concentrationAlternative measures of leverage and ownership concentration

DataData

Financial, ownership, and restructuring data:Financial, ownership, and restructuring data:– Worldscope, Amadeus, ISI emerging markets, local stock Worldscope, Amadeus, ISI emerging markets, local stock

exchanges, company websitesexchanges, company websites Legal variables:Legal variables:

– Financier protectionFinancier protection A combination of A combination of de-jurede-jure and and de-factode-facto legal variables legal variables Sum of the revised anti-director index, the anti-self-Sum of the revised anti-director index, the anti-self-

dealing index by Djankov et al. (2005), the creditor dealing index by Djankov et al. (2005), the creditor index by La Porta et al. (1998), and the Law and index by La Porta et al. (1998), and the Law and Order indexOrder index

– Labor protection: Botero et al. (2004)Labor protection: Botero et al. (2004) Employment contract laws (Emp_Cont)Employment contract laws (Emp_Cont):: the rigidity of the rigidity of

labor contractslabor contracts Collective relations laws (Union)Collective relations laws (Union):: labor union power labor union power

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Definition of sharp drop Definition of sharp drop in operating in operating performanceperformance Base year: (EBITDA/TA) is above the Base year: (EBITDA/TA) is above the

industry medianindustry median For management turnoverFor management turnover– A relative measureA relative measure– Distress year: (EBITDA/TA) is in the bottom Distress year: (EBITDA/TA) is in the bottom

industry quartile industry quartile For employee layoffs and asset sales For employee layoffs and asset sales – Distress year: 50% or more drop in EBITDADistress year: 50% or more drop in EBITDA

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Restructuring Restructuring measuresmeasures

Top management turnover Top management turnover – Change in the top two officers in the Change in the top two officers in the

year of distress or the following yearyear of distress or the following year Large scale layoffs Large scale layoffs

– A drop by more than 20% in the A drop by more than 20% in the number of employeesnumber of employees

Major asset sales Major asset sales – A decrease by more than 15% in net A decrease by more than 15% in net

plants, property, and equipmentsplants, property, and equipments