Dissertation Proposal

Topic: Essays on Legal institutions and international equity markets

Introduction
The Law and Finance approach to corporate governance has recently brought back under the economic spotlight the role that legal and judicial institutions plays in the workings of financial markets. In the standard textbook model, Dissertation is provide by Custom Thesishttp://www.400190.com/complete and costlessly enforceable contracts resolve any problems arising from the conflict of interests between a corporation’s inside management and its outside shareholders. In the real world, however, separation between ownership and control generates agency costs. Proponents of the Law and Finance approach have argued that, if properly designed in such a way as to safeguard investors’ property rights, both the letter of the Law and its enforcement by the courts can reduce these agency costs, thus encouraging the development of financial markets by reducing agency costs.
While these ideas are not new , the approach is new :beginning with the seminal work of La Porta, Lopez de Silanes, Shleifer, and Vishny, a whole line of research has developed, which attempts to support them with extensive empirical analysis.
Indeed, important insights have been gained from cross-country comparative studies of corporate governance standards and their impact on the structure of financial sys tems. Two examples may suffice.
First, La Porta, Lopez de Silanes , Shleifer and Vishny have shown that countries in the Anglo-Saxon legal family protect minority shareholders to a significantly greater extent than do countries in the French legal tradition. This may help explain why firms in the Anglo-Saxon legal tradition use more external equity than do firms in the
French legal family. Similarly, the German legal tradition protects debt holders more than it protects shareholders (and more than other legal families around the world do ).This may explain why debt features so prominently as a source of finance for firms in countries whose commercial odes follow the German one.
Second, significant progress has been made towards the resolution of the issue of the “causality link ” in the relationship between financial development ad economic growth by taking legal and judicial institutions explicitly into account. Rajan and Zingales, for example , instrument financial development with legal origin variables and show that the extent of financial development that is due to legal institutions (and is, therefore, arguably exogenous to future economic development ) is positively and significantly associated with subsequent economic growth.#p#分頁標題#e#
Recent research in corporate financeDissertation is provide by Custom Thesishttp://www.400190.com/ has highlighted the importance of legal institutions and judicial enforcement for the performance of capital markets. Equity markets are generally thought to be the most sensitive to the legal provisions in favor of financiers and to the effectiveness of judicial enforcement of these provisions. By definition, shareholders are residual claimants to the income stream generated by companies: their income rights are less tightly specified than those of debt holders. Therefore, they are more exposed to the danger of opportunistic behavior by managers, be it diversion of corporate resources or non-value-maximizing decisions (such as nepotistic appointments, pursuit of unprofitable “pet” projects, low managerial effort, etc.). The main limit to such opportunistic is the set of legal rules protecting shareholders (often referred to s corporate governance legal standards), the effectiveness of courts in enforcing such rules and the ability of shareholders to verify if their rights have been violated. The latter in turn depends on the transparency of corporate accounts and on the quality and timeliness of the information that companies disseminate. It is generally believed that improving corporate governance rules, their enforcement and the quality of accounting standards should result in greater reliance on equity financing by companies. This could occur either because such institutional changes directly limit the amount of corporate resources diverted by managers or because they allow shareholders to monitor managers more cheaply and effectively. The hypothesis that stronger protection of shareholder rights leads to a broader market for external equity is central to the recent work by La Porta, Lopez de Silanes, Shleifer, and Viashny.
The presumption that better corporate governance rules and stricter judicial enforcement should lead to larger mount of equity funding appears reasonable, being borne out by a host of microeconomic models of agency costs in corporate finance, starting with the seminal paper by Jensen and Meckling. However, the literature hs been silent on the effect that such improvements in the institutional framework should have on the equilibrium rate of return on equity and on the cost of capital faced by companies. This is not surprising, considering that microeconomic models of corporate financing take the opportunity cost of funds as exogenously given. For instance, Jensen and Meckling(1976) portray financiers as competing risk-neutral individuals who require companies to pay an expected rate of return equal (net of agency costs) to the interest rate, and the latter is assumed to be fixed. Perhaps this has induced many to presume that rate of return on equity is unaffected by changes in the legal environment. However, this need not be true if one shifts focus from a single company to the equity market as a whole. We show that the effect of the legal environment on the return on equity depends on the specific mechanism through which this change impacts the equity market. For instance, consider two different experiments. The first is a reduction of the private benefits that managers can extract from the company, for instance by introducing legal limits to transactions with other companies that may dilute the income rights of minority shareholders (mergers, asset sales, ets. ). The second experiment is a reduction of the legal and auditing costs that shareholders #p#分頁標題#e#Dissertation is provide by Custom Thesishttp://www.400190.com/must bear to prevent managerial opportunism. Such cost reduction may for example result from the introduction of class action suits or voting by mail. These two types of institutional change can have opposite effects on the observed equilibrium rate of return on equity, controlling for undiversifiable risk, even though they both reduce agency costs and boost the size of the equity market. We also show that the size of these effects on the equilibrium rate of return is increasing in the degree of international segmentation of equity markets. In fact, a by-product of our analysis is the conclusion that the magnitude of these effects providers new evidence on the degree of international segmentation of stock markets. The degree of international integration also determines who gains and who loses from legal reforms and therefore who will support or resist them. For instance, if legal rules re unexpectedly changed so as to reduce managerial diversion of corporate resources, in a fully integrated economy the gains are entirely reflected in a increase of stock prices (with no change in the rate of return) and therefore are reaped only by existing shareholders. In contrast, in an internationally segmented stock market, only a fraction of the benefits materializes in a stock price increase: the remainder translates into an increase of the expected rate of return, which accrues to future shareholders as well.
Problem
How to determine the size of a country’s capital markets are its legal rules and the effectiveness of enforcement .This dissertation investigates whether the law and finance approach to corporate governance can also help improve our understanding of international stock returns, a goal that has so far proved elusive for the Capital Asset Pricing Model (CAPM).
Theory
In the essays, I use economic theory to set models to capture an improvement of the legal system along this dimension – a reduction in managerial private benefits. We model the increase in the index of legal and judicial efficiency L, which shifts out the marginal productivity of physical capital and therefore the demand for equity funding by domestic firms. We also use models to study three different factors on the equilibrium on the domestic equity market. We do so first under the assumption of perfect international integration of the equity market and then under the assumption of internationally segmented equity market.
Method
A theoretical framework is first introduced that departs from the perfect-markets assumption of the classical CAPM to analyze the effects of the efficiency of the judicial system or the legal protection of investors’ property rights on the equilibrium of the equity market. These institutions influence the supply of equity (to the extent that they affect the costs that shareholders must bear to monitor and audit management and enforce their claims through the courts). They also affect firms’ demand for equity financing, as more efficient institutions boost the marginal productivity of physical capital.#p#分頁標題#e#
We then investigate whether the observed risk-adjusted return differentials across countries-usually taken as prima facie evidence for equity markets’ segmentation can be explained with different enforcement costs for minority shareholders resulting from different legal and judicial institutions. We document that, across countries, there is a positive (as opposed to negative) correlation between judicial efficiency (or rule of law) and risk-adjusted expected rates of return. This represents strong evidence that the causes for segmentation among national equity markets are not confined to differences in the degree of protection of shareholders’ rights.
Finally, we use a panel of industry-level data to identify econometrically the effect segmentation and other residual country-specific (and industry-specific) fixed effects. We document that investors demand a significantly lower expected return following improvements in the quality of the institutional environment.

Literature Review
L. Renneboog, J.McCahery, P. Moderland, and T . Raaijmakers(Eds.), Convergence and diversity of corporate governance regimes and capital markets. Oxford University Press.
Loughran, T. J. R. Ritter, and K. Rydqvist (1994). Initial public Dissertation is provide by Custom Thesishttp://www.400190.com/offerings: Inernational insights. Pacific-Basin Finance Journal 2, 165-199
Martin, P. and H. Rey (1999,November). Financial integration and asset returns. Discussion Paper 2282, CEPR.
Mauro, P.(1995). Corruption and growth. Quarterly Journal of Economics 110(3), 681-721.
Merton, R.C.(1987). A simple model of capital market equilibrium with incomplete information. Journal of Finance 42(3), 483-510.
Mishkin, F.S.(1984). Are real interest rates equal across countries? An empirical investigation of international parity conditions. Journal of Finance 39,1345-57.
Modigliani, F.and E. Perotti (2005). Protection of minority interests and development of security markets. Managerial and Decision Economics 18, 519-528
Mossin,J.(2004). Equilibrium in a capital asset market. Econometrica35, 768-783.
North, D.C.(1990). Institutions, institutional change ad economic performance. Cambridge University Press.
North, D. C. (1994). Economic performance through time. American Economic Review 84(3), 359-368.
Olson, M. (1996). Big bills left on the sidewalk: Why some nations are rich, and others are poor . Journal of Economic Perspectives 10(2)，3-24.
Solnic, B.H. (1977). Testing international asset pricing: Some pressimistic views. Journal of Finance 32(2), 503-512.
Internet
www.fast.org.uk , The Bulletin for Corporate Members of FAST.#p#分頁標題#e#
www.uspto.gov, Mellor C.
www.times.com, The US Times.
www.usa.ft.com, The Financial Times.
Material from the US will be accessed via the World Wide Web through
University of Wolverhampton subscriptions such as Athens (www.wlv.ac.uk/lib)
and Westlaw (www.westlaw.co.uk).
These websites are a useful tool to obtain up to date recent developments
including: Cases, Statutes and Reports. Many journals can be found online
through the Dissertation is provide by Custom Thesishttp://www.400190.com/University search tools. This will also be a useful source to
obtain information from the US
Schedule

Timetable