Bernard Yeung

Agency Problems in Large Family Business Groups

Greater managerial ownership in family firms need not mitigate agency problems, especially when each family controls a group of publicly traded and private firms, as is the case in most countries. Such structures give rise to their own set of agency problems, as managers act for the controlling family, but not for shareholders in general. For example, to avoid what we call “creative self–destruction,” a family might quash innovation in one firm to protect its obsolete investment in another. At present, we do not know whether these agency problems are more or less serious impediments to general prosperity than those afflicting widely held firms.

Family Control and the Rent-Seeking Society

A high level of trust within a small elite, like a low level of trust in society at large, may be a serious impediment to economic development. This is because such concentrated high trust among the elite promotes political rent seeking, known to retard growth. We propose that entrusting the governance of a countrys great corporations to a few wealthy families promotes this undesirable distribution of trust. Preliminary empirical evidence and arguments grounded in game theory support this view.

Internalization : An event study test

Abstract The internalization theory of multinational firms proposes that direct international investment occurs when a firm has information-related intangible assets with public good properties. We find that firms with characteristics suggesting the presence of information-based assets experience a significantly positive stock price reaction upon announcing a foreign acquisition. On the other hand, firms apparently lacking such assets experience at best zero abnormal returns upon announcing overseas acquisitions.

THE EFFECT OF OWN-FIRM AND OTHER-FIRM EXPERIENCE ON FOREIGN DIRECT INVESTMENT SURVIVAL IN THE UNITED STATES, 1987-92

We argue that foreign firms operating in a host country generate information spillovers that have potential value for later foreign direct investment. We test two predictions. First, we expect foreign direct investments by firms with experience in a host country to be more likely to survive than investments made by first-time entrants. Second, foreign direct investments will be more likely to survive the greater the foreign presence in the target industry at the time of investment, subject to two contingencies. The first contingency is that the relationship will be weak or nonexistent among firms with no experience in the host country, because these firms have difficulty evaluating and taking advantage of the information spillovers. The second contingency is that the presence of other foreign firms will not affect investment survival among firms that already have a presence in the target industry and undertake expansion. These firms already possess general information about the target industries and are unlikely to gain additional benefit from information spillovers. We find supportive evidence based on the survival to 1992 among 354 U.S. investments undertaken by foreign firms in manufacturing industries during 1987.

Firm-Specific Variation and Openness in Emerging Markets

This paper compares the comovement of individual stock returns across emerging markets. Campbell et al. (2001) and Morck et al. (2000) show that the US in the post war period saw rising firm specific stock return variations and thus declining comovement. We detect a similar, albeit weaker, pattern in most, but not all, emerging markets. We further find that higher firm-specific variation is associated with greater capital market openness, but not goods market openness. Moreover, this relationship is magnified by institutional integrity (good government). Goods market openness is associated with higher market-wide variation.

Capital markets and capital allocation: Implications for economies in transition*

Recent work showing that a sounder financial system is associated with faster economic growth has important implications for transition economies. Stock prices in developed economies move in highly firm-specific ways that convey information about changes in firms’ marginal value of investment. This information facilitates the rapid flow of capital to its highest value uses. In contrast, stock prices in low-income countries tend to move up and down en masse , and thus are of scant use for microeconomic capital allocation. Some transition economy markets are coming to resemble those of developed economies, others those of low-income countries. Stock return asynchronicity is highly correlated with the strength of private property rights in general and public shareholders’ rights in particular. Other recent work suggests that small entrenched elites in low-income countries preserve their sweeping control over the corporate sectors of their economies by using political influence to undermine the financial system and deprive entrants of capital. The lack of cross-sectional independence in some transition economies’ stock returns may be a warning of such economic entrenchment . Sound property rights, solid shareholder rights, stock market transparency, and capital account openness appear to check this, and thus contribute to efficient capital allocation and economic growth. JEL classifications: O16, P2, F21.

Big business stability and economic growth: Is what's good for General Motors good for America? ☆

What is good for big business need not generally advance a country%u2019s overall economy. Big business turnover correlates with rising income, productivity, and (in high income countries) faster capital accumulation; consistent with Schumpeter%u2019s (1912) creative destruction and recent formalizations like Aghion and Howitt (1992). Turnover appears to %u201Ccause%u201D growth; and disappearing behemoths, more than rising stars, drive our results. Stronger findings suggest more intense creative destruction in countries with higher incomes, as well as those with smaller governments, Common Law courts, smaller banking systems, stronger shareholder rights, and more open economies. Only the last matters more in lower income countries.

Dividend Taxation and Corporate Governance

The U.S. government subjects corporate dividends to double taxation: It first taxes corporate income, then taxes the same income again when shareholders receive dividends paid out of corporate income. Until 2003, individuals were taxed on dividend income at the same rates as on other forms of income, resulting in overall taxes on dividends much higher than those in most other countries (PriceWaterhouse-Coopers, 2003a, b). After the passage of the Job Growth and Taxpayer Relief Reconciliation Act of 2003, dividends are still paid out of after-tax corporate income, but the individual tax rate on dividend income was cut to a maximum of 15 percent. We argue that this act, by substantially reducing double taxation of dividends but not eliminating such taxation, strikes a useful balance between competing objectives. Many economists have long opposed the double taxation of dividends because of the high overall tax rates this imposed on corporate income. They argued that double taxation deterred corporate investment and distorted corporate financing decisions, favoring debt over equity financing and earnings retention over dividend payouts. More recently, financial economists stressed how higher dividends (and consequently reduced retained earnings) can improve corporate governance by discouraging empire-building financed by retained earnings.

Rent Seeking, Protectionism and Innovation in the American Steel Industry

Trade protection in a declining industry can cause damages beyond those revealed in the usual trade diagram analysis. Using data on the U.S. steel firms, the authors show that trade protection in that industry rewards poor performance, reduces incentives to innovate, and frustrates the normal Schumpeterian process of creative destruction. Copyright 1996 by Royal Economic Society.

External sector closing rules in applied general equilibrium models

Abstract This paper examines formulations of external sector behavior adopted in some of the recent applied general equilibrium models. In many cases these models are constructed for single economies and the model-builder attempts to use a convenient external sector specification to close the model. Issues and difficulties with export demand and import supply functions for foreigners which satisfy trade balance, and the modeling of small economy price taking behavior are explored.