Balabala Bala - Academia.edu (original) (raw)
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Papers by Balabala Bala
Why does capital market competition among firms not eliminate private benefits by inducing them t... more Why does capital market competition among firms not eliminate private benefits by inducing them to adopt more shareholder friendly governance provisions? What determines the heterogeneity of the governance provisions among companies? Why do corporate governance choices matter for stock returns if the stock market fully prices the insiders' use of company resources to enjoy private benefits? To address these questions we propose a model that incorporates the determination of the amount of private benefits, a key dimension of corporate governance, in the CAPM framework. Corporate governance a §ects the disutility of managerial e §ort in that a weaker governance gives managers more scope for initiative which, in turn, increases firm cash flows. The quality of the corporate governance is chosen endogenously trading o § the benefits of a stricter governance, which limits the cost of the extraction of private benefits, against the cost of lower managerial initiative. The model predicts that across firms the quality of the corporate governance correlates positively with the firm and the firm idiosyncratic volatility. We have tested these predictions on a sample of U.S. firms where the quality of corporate governance is measured by the index of Gompers, Ishii, and Metrick (2003) of antitakeover provisions. We found that the quality of the corporate governance is worse in firms with lower and with lower idiosyncratic volatility.
Why does capital market competition among firms not eliminate private benefits by inducing them t... more Why does capital market competition among firms not eliminate private benefits by inducing them to adopt more shareholder friendly governance provisions? What determines the heterogeneity of the governance provisions among companies? Why do corporate governance choices matter for stock returns if the stock market fully prices the insiders' use of company resources to enjoy private benefits? To address these questions we propose a model that incorporates the determination of the amount of private benefits, a key dimension of corporate governance, in the CAPM framework. Corporate governance a §ects the disutility of managerial e §ort in that a weaker governance gives managers more scope for initiative which, in turn, increases firm cash flows. The quality of the corporate governance is chosen endogenously trading o § the benefits of a stricter governance, which limits the cost of the extraction of private benefits, against the cost of lower managerial initiative. The model predicts that across firms the quality of the corporate governance correlates positively with the firm and the firm idiosyncratic volatility. We have tested these predictions on a sample of U.S. firms where the quality of corporate governance is measured by the index of Gompers, Ishii, and Metrick (2003) of antitakeover provisions. We found that the quality of the corporate governance is worse in firms with lower and with lower idiosyncratic volatility.