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Essays on the Link between Institutions and Finance
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- Author / Creator
- Shou, Chenxing
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This thesis consists of three essays linking institutional quality and finance. The first essay shows that the positive relationship between corporate social responsibility (CSR) and firm value is stronger for firms located in countries with higher levels of individualism. I posit that firm-level capital allocation efficiency is a plausible yet unexplored channel driving this seemingly counter-intuitive observation. Using the seminal investment-Q framework, I provide concrete evidence that CSR reduces investment sensitivity to Tobin’s Q, while increasing investment sensitivity to cash flow, more so for firms with lower corporate governance ratings. Such firms are more prevalent in countries with a collectivistic culture, which has been shown to hamper institutional development and foster inferior corporate governance practices. The positive moderating effects of individualism and better corporate governance on the value of CSR remain strong after controlling for other potentially confounding factors, using a propensity-score-matched sample, or implementing instrumental variables estimation. Taken together, my findings call attention to the environment under which managers may engage in value-destroying activities in the name of corporate social responsibility.
The second essay presents an event study involving Russian oligarchs. As transaction costs between two free-standing firms are oftentimes excessive in an economy with underdeveloped formal institutions, firms will try and reduce these costs by affiliating with those possessing economic powers, making economically powerful figures valuable not only to their own but also to other firms in such an economy. Using the unanticipated arrests of Russian oligarchs from 2000 to 2019 as exogenous shocks to the Russian stock market, we find that the average value of all firms declines by 0.4% around the arrest day in a statistically significant manner (p-value is less than 0.01). Firm value drops the most for those under the oligarch’s direct control (-15%), less for those within the oligarch’s industries (-0.6%), and the least for those outside the oligarch’s industries (-0.3%). These drops in firm value are statistically significant for the first two categories of firms, but insignificant for the third category (p-values are 0.01, 0.06, 0.26, respectively). Furthermore, firms with higher leverage ratios derive more value from the oligarchs - ceteris paribus, their values declined more when the arrests took place.
The third essay assesses the integrity of the Doing Business report, a World Bank flagship publication that produces the renowned “Ease of Doing Business” indicators. The indicators were originally straightforward measures assessing the regulatory burden in key aspects of business transactions for a given country, but had become increasingly complex over time due to repeated methodological changes. We conduct an in-depth audit of the indicators, in response to former World Bank Chief Economist Paul Romer’s highly publicized criticism that the World Bank’s ongoing attempts to refine the indicators had raised concerns of politically motivated data manipulation. Our audit concludes that the World Bank economists were innocent of any external political pressures, but had been encouraged to continually “improve” the indicators, which indeed rendered the indicators incomparable across years, reducing their value to politicians, the media, and researchers. Our audit bridges a crucial gap in the literature on the Doing Business project as it pays equal attention to the project’s pros and cons, while offering unique insights into the World Bank's database management that prominent development and financial economists could benefit from.
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- Subjects / Keywords
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- Graduation date
- Fall 2020
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- Type of Item
- Thesis
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- Degree
- Doctor of Philosophy
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- License
- Permission is hereby granted to the University of Alberta Libraries to reproduce single copies of this thesis and to lend or sell such copies for private, scholarly or scientific research purposes only. Where the thesis is converted to, or otherwise made available in digital form, the University of Alberta will advise potential users of the thesis of these terms. The author reserves all other publication and other rights in association with the copyright in the thesis and, except as herein before provided, neither the thesis nor any substantial portion thereof may be printed or otherwise reproduced in any material form whatsoever without the author's prior written permission.