Bernard S. Black

Methods for multicountry studies of corporate governance: Evidence from the BRIKT countries

This document is an expanded working paper version of Black, de Carvalho, Khanna, Kim, and Yuroglu, Methods for Multicountry Studies of Corporate Governance: Evidence from the BRIKT Countries (2013), http://ssrn.com/abstract=2219525,which contains details on our governance indices and the five countries we study, and additional results, which were omitted from the main paper for space reasons. A replication dataset, accompanying codebook, and replication statistical code for the article and the expanded working paper are available at http://ssrn.com/abstract=2503520. We discuss empirical challenges in multicountry studies of the effect of firm-level corporate governance on firm value, focusing on emerging markets. We assess the severe data, “construct validity,” and endogeneity issues in these studies, propose methods to respond to those issues, and apply those methods to a study of five major emerging markets -- Brazil, India, Korea, Russia, and Turkey. We develop unique time-series datasets on governance in each country. We address construct validity by building country-specific indices which reflect local norms and institutions. These similar-but-not-identical indices predict higher firm market value in each country and when pooled across countries in firm fixed-effects (FE) and random-effects (RE) regressions. In contrast, a “common index” that uses the same elements in each country, has no predictive power. For the country-specific and pooled indices, FE and RE coefficients on governance are generally lower than in pooled OLS regressions; and coefficients with extensive covariates are generally lower than with limited covariates. These results confirm the value of using FE or RE with extensive covariates to reduce omitted variable bias. Bounds on sensitivity to omitted variable bias suggest that individual country results are often fragile.

Tension Between Quality Measurement, Public Quality Reporting, and Pay for Performance

ACCURATE MEASURES OF OUTCOMES ARE NECESSARY TO improve the quality of US health care and address geographic, socioeconomic, and racial/ethnic variations in care quality. However, 2 major initiatives that seek to improve quality—public reporting of outcomes and pay for performance (P4P)—have the potential to reduce the reliabilityof theadministrativedataonwhich theyareoften based and generate spurious estimates of performance.

Shock-Based Causal Inference in Corporate Finance and Accounting Research

We study shock-based methods for credible causal inference in corporate finance research. We focus on corporate governance research, survey 13,461 papers published between 2001 and 2011 in 22 major accounting, economics, finance, law, and management journals; and identify 863 empirical studies in which corporate governance is associated with firm value or other characteristics. We classify the methods used in these studies and assess whether they support a causal link between corporate governance and firm value or another outcome. Only a stall minority of studies have convincing causal inference strategies. The convincing strategies largely rely on external shocks – usually from legal rules – often called “natural experiments†. We examine the 74 shock-based papers and provide a guide to shock-based research design, which stresses the common features across different designs and the value of using combined designs.

Will Tort Reform Bend the Cost Curve? Evidence from Texas

Will tort reform “bend the cost curve?” Health-care providers and tort reform advocates insist the answer is “yes.” They claim that defensive medicine is responsible for hundreds of billions of dollars in health-care spending every year. If providers and reform advocates are right, once damages are capped and lawsuits are otherwise restricted, defensive medicine, and thus overall health-care spending, will fall substantially. We study how Medicare spending changed after Texas adopted comprehensive tort reform in 2003, including a strict damages cap. We compare Medicare spending in Texas counties with high claim rates (high risk) to spending in Texas counties with low claim rates (low risk), since tort reform should have a greater impact on physician incentives in high-risk counties. Pre-reform, Medicare spending levels and trends were similar in high- and low-risk counties. Post-reform, we find no evidence that spending levels or trends in high-risk counties declined relative to low-risk counties and some evidence of increased physician spending in high-risk counties. We also compare spending trends in Texas to national trends, and find no evidence of reduced spending in Texas post-reform, and some evidence that physician spending rose in Texas relative to control states. In sum, we find no evidence that Texas’s tort reforms bent the cost curve downward.

Firm-Level Corporate Governance In Emerging Markets: A Case Study of India

We provide an overview of Indian corporate governance practices, based primarily on responses to a 2006 survey of 370 Indian public companies. Compliance with legal norms is reasonably high in most areas, but not complete. We identify areas where Indian corporate governance is relatively strong and weak, and areas where regulation might usefully be either relaxed or strengthened. On the whole, Indian corporate governance rules appear appropriate for larger companies, but could use some strengthening in the area of related party transactions, and some relaxation for smaller companies. Executive compensation is low by U.S. standards and is not currently a problem area. We also examine whether there is a cross-sectional relationship between measures of governance and measures of firm performance and find evidence of a positive relationship for an overall governance index and for an index covering shareholder rights. We find an overall association, which is stronger for more profitable firms and firms with stronger growth opportunities. A subindex for shareholder rights is individually significant, but subindices for board structure (board independence and committee structure), disclosure, board procedure, and related party transactions are not significant. The non-results for board structure contrast to other recent studies, and suggest that Indias legal requirements are sufficiently strict so that overcompliance does not produce valuation gains.

Outside Director Liability: A Policy Analysis

Outside directors of public companies play a central role in overseeing management. Nonetheless, they have rarely incurred personal, out-of-pocket liability for failing to carry out their assigned tasks, either in the litigation-prone United States or other countries. Historically, as threats to this near-zero personal liability regime have appeared, market and political forces have responded to restore the status quo. We suggest here reasons to believe that this arrangement is justifiable from a policy perspective, at least in countries where reputation and other extra-legal mechanisms provide reasonable incentives for outside directors to be vigilant.

Is Delaware Losing Its Cases

Delaware’s expert courts are seen as an integral part of the state’s success in attracting incorporation by public companies. However, the benefit that Delaware companies derive from this expertise depends on whether corporate lawsuits against Delaware companies are brought before the Delaware courts. We report evidence that these suits are increasingly brought outside Delaware. We investigate changes in where suits are brought using four hand-collected datasets capturing different types of suits: class action lawsuits filed in (i) large MA (iii) derivative suits alleging option backdating; and (iv) cases against public company directors that generate one or more publicly available opinions between 1995-2009. We find a secular increase in litigation rates for all companies in large MA and (ii) suits being filed both in Delaware and elsewhere in large M&A transactions. Overall, Delaware courts are losing market share in lawsuits, and Delaware companies are gaining lawsuits, often filed elsewhere. We find some evidence that the timing of specific Delaware court decisions that affect plaintiffs’ firms coincide with the movement of cases out of Delaware. Our evidence suggests that serious as well as nuisance cases are leaving Delaware. The trends we report potentially present a challenge to Delaware’s competitiveness in the market for incorporations.

Shock-Based Causal Inference in Corporate Finance Research

We study shock-based methods for credible causal inference in corporate finance research. We focus on corporate governance research, survey 13,461 papers published between 2001 and 2011 in 22 major accounting, economics, finance, law, and management journals; and identify 863 empirical studies in which corporate governance is associated with firm value or other characteristics. We classify the methods used in these studies and assess whether they support a causal link between corporate governance and firm value or another outcome. Only a small minority have convincing causal inference strategies. The convincing strategies largely rely on external shocks – usually from legal rules – to generate natural experiments. We examine the 75 shock-based papers and provide a guide to shock-based research design, which stresses the common features across different designs and the value of using combined designs.

Association Between State Medical Malpractice Environment and Surgical Quality and Cost in the United States.

Context:The US medical malpractice system is designed to deter negligence and encourage quality of care through threat of liability. Objective:To examine whether state-level malpractice environment is associated with outcomes and costs of colorectal surgery. Design, Setting, and Patients:Observational study of 116,977 Medicare fee-for-service beneficiaries who underwent colorectal surgery using administrative claims data. State-level malpractice risk was measured using mean general surgery malpractice insurance premiums; paid claims per surgeon; state tort reforms; and a composite measure. Associations between malpractice environment and postoperative outcomes and price-standardized Medicare payments were estimated using hierarchical logistic regression and generalized linear models. Main Outcome Measures:thirty-day postoperative mortality; complications (pneumonia, myocardial infarction, venous thromboembolism, acute renal failure, surgical site infection, postoperative sepsis, any complication); readmission; total price-standardized Medicare payments for index hospitalization and 30-day postdischarge episode-of-care. Results:Few associations between measures of state malpractice risk environment and outcomes were identified. However, analyses using the composite measure showed that patients treated in states with greatest malpractice risk were more likely than those in lowest risk states to experience any complication (OR: 1.31; 95% CI: 1.22–1.41), pneumonia (OR: 1.36; 95%: CI, 1.16–1.60), myocardial infarction (OR: 1.44; 95% CI: 1.22–1.70), venous thromboembolism (OR:2.11; 95% CI: 1.70–2.61), acute renal failure (OR: 1.34; 95% CI; 1.22–1.47), and sepsis (OR: 1.38; 95% CI: 1.24–1.53; all P < 0.001). There were no consistent associations between malpractice environment and Medicare payments. Conclusions:There were no consistent associations between state-level malpractice risk and higher quality of care or Medicare payments for colorectal surgery.

Corporate Governance, Business Groups, and Market Value: Time-Series Evidence from Turkey

Business groups play a large, sometimes dominant economic role in many countries. A number of studies find an association between firm-level corporate governance and market value, but none study the role of business group identity in firm level corporate governance or the value of “group governance.” We begin to fill that gap through a case study of Turkey. We study the corporate governance practices of Turkish business groups and listed firms from 2006 to 2012, relying on hand-collected data covering the vast majority of listed firms. We build a Turkey Corporate Governance Index (TCGI), composed of subindices for board structure, board procedure, disclosure, ownership, and shareholder rights. This index predicts higher market value (proxied by Tobin’s q) at both the firm level (with firm fixed effects) and group level (with group fixed effects); the principal driver of this result is disclosure subindex. We find large differences in the governance choices of different business groups. Some groups invest in governance; others do not; and investors reward those that do with higher market values for group firms.