Todd Mitton

A Cross-Firm Analysis of the Impact of Corporate Governance on the East Asian Financial Crisis

In a sample of 398 firms from Indonesia, Korea, Malaysia, the Philippines, and Thailand, firm-level differences in variables related to corporate governance had a strong impact on firm performance during the East Asian financial crisis of 1997 to 1998. Significantly better stock price performance is associated with firms that had indicators of higher disclosure quality (ADRs and auditors from Big Six accounting firms), with firms that had higher outside ownership concentration, and with firms that were focused rather than diversified. The results suggest that individual firms have some power to preclude expropriation of minority shareholders if legal protection is inadequate. JEL classification: G15; G32; G34

The Value of Connections in Turbulent Times: Evidence from the United States

The announcement of Timothy Geithner as nominee for Treasury Secretary in November 2008 produced a cumulative abnormal return for financial firms with which he had a connection. This return was about 6% after the first full day of trading and about 12% after ten trading days. There were subsequently abnormal negative returns for connected firms when news broke that Geithners confirmation might be derailed by tax issues. Excess returns for connected firms may reflect the perceived impact of relying on the advice of a small network of financial sector executives during a time of acute crisis and heightened policy discretion.

Why Have Debt Ratios Increased for Firms in Emerging Markets

I study trends in capital structure between 1980 and 2004 in a sample of over 11,000 firms from 34 emerging markets. The average firms book-value debt ratio rose by 10 percentage points over this quarter century; market-value debt ratios rose by 15 percentage points. I study how this rise in leverage was influenced by the firm-level demand for and the country-level supply of debt financing. The central finding is that the increase in debt ratios can largely be attributed to changes in the characteristics of emerging market firms over this period. For the average firm, the most prominent determinants of capital structure -- size, profitability, asset tangibility, and growth opportunities -- all shifted in the direction implying a higher optimal level of debt. On the supply side, increased financial development within the country is associated with lower debt ratios, but increased financial openness to foreign markets is associated with higher debt ratios.

The value of connections in turbulent times: Evidence from the United States

The announcement of Timothy Geithner as nominee for Treasury Secretary in November 2008 produced a cumulative abnormal return for financial firms with which he had a prior connection. This return was about 6% after the first full day of trading and about 12% after ten trading days. There were subsequently abnormal negative returns for connected firms when news broke that Geithner’s confirmation might be derailed by tax issues. Personal connections to top executive branch officials can matter greatly even in a country with strong overall institutions, at least during a time of acute financial crisis and heightened policy discretion.

Malaysian Capital Controls; Macroeconomics and Institutions

We analyze the capital controls imposed in Malaysia in September 1998. In macroeconomic terms, these controls neither yielded major benefits nor were costly. At the same time, the stock market interpreted the capital controls (and associated events) as favoring firms with stronger political connections, and some connected firms reportedly received advantages immediately following the crisis. Analysis of financial accounts indicates that connected firms outperformed unconnected firms before the 1997-98 crisis but not afterward. After the crisis, connected firms were either not supported as much as the market had expected or the benefits they received were not manifest in their published accounts.

The Wealth of Subnations: Geography, Institutions, and Within-Country Development

I study determinants of economic development in a new dataset covering 1867 subnational regions from 101 countries, focusing on within-country effects of geography and institutions. Several geographic factors have significant explanatory power for within-country differences in per-capita GDP, including terrain ruggedness, tropical climate, ocean access, temperature range, storm risk, and natural resources such as oil, diamonds, or iron. Institutions have a significant positive effect on income among subnational regions with greater autonomy, suggesting that strong subnational institutions enhance development when not dominated by national institutions.

Investability and Firm Value

We study how investability, or openness to foreign equity investors, affects firm value in a sample of over 1,400 firms from 26 emerging markets. We find that, on average, investability is associated with a 9% valuation premium (as measured by Tobins q). However, in firm-fixed effects regressions this valuation premium disappears, suggesting that investability does not have a causal effect on firm value. Analysis of the components of Tobins q shows that firms that become investable experience significant increases in both market values and physical investment. These effects are strongest for firms that face country-level or firm-level financial constraints prior to becoming investable

Inefficient Labor or Inefficient Capital? Corporate Diversification and Productivity around the World

I study the relation between corporate diversification and labor productivity in a sample of over 500,000 firms from 46 countries. Across the entire sample, greater diversification is associated with significantly lower labor productivity. The negative relation between diversification and labor productivity is not stronger in countries with more burdensome employment regulation, but it is significantly stronger in countries with better financial development. In addition, the negative relation is stronger in industries with high capital/labor ratios. Overall, the results suggest that the lower productivity in diversified firms is due more to the misallocation of capital than to the inefficient use of labor.

Controlling for Size

Corporate finance regressions are appearing with greatly increasing frequency in top finance journals. Firm size is the most common control variable in these regressions, but on the question of which size control to use, the existing literature offers little theoretical guidance or empirical consistency. However, the choice of a size control has important implications, as different size controls can produce conflicting results for findings reported in the literature. Based on theoretical, empirical, and econometric considerations, I recommend guidelines for the use of size controls in the most common types of corporate finance regressions.