Vikramaditya S. Khanna

Corporate Governance, Enforcement, and Firm Value: Evidence from India

This article analyzes the impact of corporate governance on firm value using a sequence of reforms in India (Clause 49) enacted in 2000, for which more severe penalties were introduced in 2004. The reforms did not apply to all firms and resulted in treatment and control groups of firms with overlapping characteristics. A difference-in-difference approach (controlling for various factors including firm-specific time trends) shows a substantial positive causal effect of the reforms in combination with the 2004 sanction increase. A regression discontinuity analysis, focusing on the thresholds for application of the reforms, leads to similar results. Across various specifications, the estimated effect is at least 6% of firm value. This effect is large, but comparable in magnitude to effects found in other studies of major corporate governance reforms, especially in emerging markets. (JEL G34, G38, K22, O16). The Author 2012. Published by Oxford University Press on behalf of Yale University. All rights reserved. For Permissions, please email: journals.permissions@oup.com, Oxford University Press.

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.

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.

A Public Choice Theory of Criminal Procedure

In this paper we provide an economic justification for the pro-defendant bias in American Criminal Procedure that we argue paints a more complete picture of the extent and breadth of these pro-defendant procedures than the most commonly forwarded justifications to date. The most commonly forwarded rationale for the pro-defendant bias in American Criminal Procedure is that the costs associated with false convictions (i.e., sanctioning and deterrence costs associated with the erroneous imposition of criminal sanctions) are greater than the costs associated with false acquittals. We argue that on closer inspection this rationale does not justify the extent of our pro-defendant criminal procedures. We offer another justification for these protections: to constrain the costs associated with abuses of prosecutorial or governmental authority. In a nutshell, our claim is that these procedural protections make it more costly for self-interested actors, whether individuals or government enforcement agents, to use the criminal process to obtain their own ends. Such protections help to reduce the rent-seeking and deterrence costs associated with abuses of prosecutorial or governmental authority in the criminal sphere. The theory developed here explains several key institutional features of American Criminal Procedure and provides a positive theory of the case law as well. The theory is also corroborated by empirical evidence on corruption from several countries.In this paper we provide a justification for the pro-defendant bias in American Criminal Procedure that we argue paints a more complete picture of the extent and breadth of these pro-defendant procedures than the most commonly forwarded justifications to date. The most commonly forwarded rationale for the pro-defendant bias in American Criminal Procedure is that the costs associated with false convictions (i.e., sanctioning and deterrence costs associated with erroneous imposition of nonmonetary or criminal sanctions) are greater than the costs associated with false acquittals. We argue that on closer inspection this rationale does not, by itself, justify the extent of our pro-defendant criminal procedures. We offer another justification for these protections – to constrain the costs associated with abuses of prosecutorial or governmental authority. In a nutshell, our claim is that these procedural protections make it more costly for self-interested actors, whether individuals or government enforcement agents, to use the criminal process to obtain their own ends. The theory developed here explains several key institutional features of American Criminal Procedure and provides a positive theory of the case law as well. † Professor of Law, Boston University School of Law; J.D., Harvard Law School; Ph.D. (Economics), M.I.T. †† Visiting Associate Professor of Law, Harvard Law School; Associate Professor of Law, Boston University School of Law; S.J.D Harvard Law School. Toward an Economic Theory of Pro-Defendant Criminal Procedure 1 TOWARD AN ECONOMIC THEORY OF PRO-DEFENDANT CRIMINAL PROCEDURE By: Keith N. Hylton† & Vikramaditya S. Khanna† †

Developing the Market for Corporate Bonds in India

The corporate bonds market is not only underdeveloped in India in comparison with the equity market, but also considerably lags that market in point of time. Despite various efforts, the corporate bonds market has not expanded to any meaningful extent. In this paper, we identify the elements of an appropriate legal framework that undergirds a liquid and vibrant corporate bonds market. These elements are the proper and timely enforcement of contracts, a robust corporate insolvency framework, standardization and transparency in the primary markets, and greater protection against opportunistic behavior between creditors and borrowers. Our central argument in this paper is that the weaknesses in these elements in India amount to legal impediments that inhibit the smooth operation of the bonds market in India. Consequently, any reform process ought to address these legal impediments.

Corporate Governance Indices and Construct Validity

We conduct an exploratory analysis of how researchers can address the issue of “construct validity”, which poses a major challenge to all studies of the effect of corporate governance on firm performance. Many corporate governance studies rely on aggregate governance “indices” to measure underlying, unobserved governance. But we are not confident that we know how to build these indices – often we are unsure both as to what is “good” governance, and how one can proxy for this vague concept using observable measures. These are construct validity questions.As the basis for analysis, we begin with our prior work, in which we build governance indices in four major emerging markets (Brazil, India, Korea, and Turkey). In that work, we argue that one must build country-specific indices, which use country-specific elements that reflect local norms, local institutions, and local data availability. We show that these similar-but-not-identical indices predict firm market value in each country and when pooled across countries, in firm fixed-effects (FE) regressions with extensive covariates. This approach puts great stress on the construct validity challenge of assessing how well a governance measure matches the underlying concept. We address here what can be said about how well these four country-specific indices, and subindices for aspects of governance such as board structure or disclosure, measure unobserved, underlying actual governance quality.

Which Aspects of Corporate Governance Matter in Emerging Markets: Evidence from Brazil, India, Korea, and Turkey

There is evidence that a broad measure of corporate governance predicts higher firm values in emerging markets, but little evidence on which specific aspects of governance drive that overall relationship. We study that question by asking which aspects of corporate governance consistently predict firm market value across four major emerging markets (Brazil, India, Korea, and Turkey), using a unique dataset that lets us build country-specific indices in each country for disclosure, board structure, ownership structure, shareholder rights, board procedure, and control of related party transactions. We find that disclosure predicts higher market value in each country (within disclosure, the principal predictor is financial disclosure); board structure has a positive coefficient in all countries and is significant in Brazil and Korea (within board structure, the principal predictor is board independence); and that once one controls for disclosure and board structure, the other indices do not predict firm value. These results suggest that firms, in responding to investor demands for better governance; and investors, in assessing governance quality, can do reasonably well in focusing on disclosure and board structure. The differences between results without firm effects (pooled OLS) and with firm effects (random or fixed effects) support the need to use panel data and firm effects in corporate governance research.

Political Economy of Criminal Procedure

Criminal Law and Economics applies economic theory to explain crime, law enforcement, criminal law and criminal procedure. This pathbreaking book draws together sixteen chapters by leading scholars in the field, summarizing theoretical and empirical work researched to date on criminal law and economics. The topics range from private and public enforcement of the law, criminal procedure and regulation to terrorism, cyber crime and tax evasion. The expert contributors also cover the political economy of criminal law as well as behavioral criminal law and economics.

An analysis of internal governance and the role of the General Counsel in reducing corporate crime

This chapter reviews the empirical literature on the factors related to the likelihood and detection of corporate wrongdoing, which increasingly focuses on internal governance, and examines calls to split the traditional tasks of the General Counsel (GC) between the GC and a Chief Compliance Officer (CCO) who reports directly to the Board. The reason for this is to have more independence and expertise in compliance matters than the GC’s office traditionally provides. This chapter argues that although independence is often valuable in reducing wrongdoing, in this context, it is likely to come with additional costs that may make gathering information on wrongdoing more difficult. In particular, some employees may be more reluctant to provide information as easily to a CCO than to the GC and this might sometimes result in increased wrongdoing and weaker operating performance. These deleterious effects, however, might be somewhat ameliorated by institutional and governance design adjustments. This chapter examines what factors may drive likely outcomes and finds that further empirical inquiry would be valuable and suggests some ways in which future research might engage in this inquiry.

An Introduction to Globalization, Lawyers, and Emerging Economies: The Case of India

This book is the first in a series by the Project on Globalization Lawyers and Emerging Economies (GLEE). GLEE examines how globalization is reshaping the market for legal services in important emerging economies such as India, Brazil, and China and how these developments are in turn contributing to the transformation of the political economy in these countries and the reshaping of the global legal services market. In this first book of the GLEE project, we present original empirical research documenting how India’s legal profession is being transformed by the “global shift” that the world’s largest democracy embarked on in 1991 when it began the process of moving from an essentially closed state-controlled economy to one that is still state-led, but also increasingly open to foreign investment and influence. As the book’s 20 empirical studies demonstrate, this shift in India’s economy has produced a new “corporate legal hemisphere” that is playing an increasingly important role in the Indian legal profession, the development of the Indian economy, the elaboration of its administrative state, and in India’s capacity to exert its influence in the new global order. Together with the GLEE project’s current work in Brazil and China, and the forthcoming expansion of the project to the Middle East, Africa, and the CIS states of the former Soviet Union, this book begins an important and largely unexplored debate about how the creation of a “corporate legal hemisphere” in emerging economies is contributing to the broader processes of globalization.