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Around the world, large corporations usually have controlling owners, who are usually very wealthy families. Outside the U.S. and the U.K., pyramidal control structures, cross shareholding and super voting rights are common. Using these devices, a family can control corporations without making a commensurate capital investment. In many countries, such families end up controlling considerable proportions of their countries'' economies. Three points emerge. First, at the firm level, these ownership structures vest dominant control rights with families who often have little real capital invested n creating agency and entrenchment problem simultaneously. In addition, controlling shareholders can divert corporate resources for private benefits using transactions within the pyramidal group. The result is a poor utilization of resources. At the economy level, extensive control of corporate assets by a few families distorts capital allocation and reduces the rate of innovation. The result is an economy-wide misallocation of resources, and slower economic growth.Second, political influence is plausibly related to what one controls, rather than what one owns. The controlling owners of pyramids thus have greatly amplified political influence relative to their actual wealth. They appear to influence the development of both public policy, such as property rights protection and enforcement, and institutions like capital markets. We denote this phenomenon economic entrenchment. Third, we conceive of a relationship between the distribution of corporate control and institutional development that generates and preserves economic entrenchment as one equilibrium; but not the only one. Based on the literature, we identify key determinants of economic entrenchment. We also identify many gaps where further work exploring the political economy importance of the distribution of corporate control is needed. Randall

Arguments can be made on both sides of the question of whether a stringent global corporate environmental standard represents a competitive asset or liability for multinational enterprises (MNEs) investing in emerging and developing markets. Analyzing the global environmental standards of a sample of U.S.-based MNEs in relation to their stock market performance, we find that firms adopting a single stringent global environmental standard have much higher market values, as measured by Tobin's q, than firms defaulting to less stringent, or poorly enforced host country standards. Thus, developing countries that use lax environmental regulations to attract foreign direct investment may end up attracting poorer quality, and perhaps less competitive, firms. Our results also suggest that externalities are incorporated to a significant extent in firm valuation. We discuss plausible reasons for this observation.direct investment in developing countries, firm value, firm-level environmental policy

To illustrate how such agency problems might be socially destructive, we consider investment in innovation, which current economic theory holds responsible for the larger part of economic growth. Schumpeterian "creative destruction" creates new wealth for entrepreneurs, while destroying the value of old capital. Established wealthy families who own the latter might be reluctant to back much innovation. Recent empirical findings on R&D spending are consistent with this hypothesis, but it clearly requires much more proof. Moreover, although this would certainly slow economic growth, it might also be desirable from some perspectives. For example, it might ease social problems associated with redundant workers and obsolescent industries.The contribution of this article is to underscore that concentrated corporate control need not eradicate agency problems, especially in the large family business groups common outside the United States and United Kingdom. Without taking a final position on its social welfare consequences, we argue that much more research is needed on family control. This need is especially urgent at present because postcommunist and emerging economies are presently choosing between the Anglo-U.S. and the family business group models of corporate ownership. Research into the problems of widely held firms is abundant, while research on family business groups is only beginning-perhaps because the latter are absent in the United States and United Kingdom, where most corporate governance research is done. This asymmetric focus could color critical policy decision in some countries. [B]eing the managers of other people's money than of their own, it cannot well be expected that [the managers of widely held corporations] should watch over [public investors' wealth] with the same anxious vigilance with which partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they . . . consider attention to small matters as not for their master's honour and very easily give themselves a dispensation from having it. Negligence and profusion therefore must prevail more or less in the management of such a company. Agency Problems in Large Family Business Groups

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Economic value is created by the efficient allocation of an economy's capital. Much of many countries' capital is proffered to corporations controlled by a small number of very wealthy families. This could be desirable if these families provide optimal corporate management. This paper raises the possibility that the currently observed allocation of corporate control may in fact be suboptimal in such countries.The basic finding of this paper is that countries in which billionaire heirs' wealth is large relative to GDP grow more slowly than other countries at similar levels of development while countries in which self-made entrepreneur billionaire wealth is large relative to GDP grow more rapidly than other countries at similar levels of development. We consider several explanations for this finding. First, old wealth may entrench poor management, and control pyramids may distort their incentives. Second, a sharply skewed wealth distribution may create market power in capital markets, causing inefficiency. Third, entrenched billionaires have a vested interest in preserving the value of old capital and thus in slowing creative destruction. Fourth, old money becomes entrenched through control of the political system and, most especially, by rearing barriers to capital mobility. In contrast, substantial self-made billionaires' wealth is observed where such forces are ineffectual and creative destruction occurs. We use micro-level evidence to support or refute these macro-level explanations. Canadian data are useful for this purpose because the large firms in that country exhibit a large range of ownership structures, with billionaire-controlled and widely held firms both abundant enough for statistical analyses. Also, the Canada-US. free trade agreement causes a useful regime change that generates testable predictions of our proposed explanations.Our evidence is consistent with corporate control by heirs leading to slow growth because of inefficiency due to entrenched corporate control, capital market power, high barriers against outside investment, and perhaps also low investment in innovation. We hypothesize that this "Canadian disease" may be a generalizable explanation of our basic crosscountry finding. Obviously, further investigation into micro-level data for other countries is called for. Table 11.1 displays the 1993 wealth of Forbes 1,000 billionaire residents by country of residence and scaled by 1993 GDP.' Our sample was constructed as follows. We began with all countries having 1997 GDP greater than U.S.$1 billion. We drop all postsocialist countries, such as China, the Czech Republic, Hungary, Poland, and Russia; all countries currently subject to economic sanctions, such as Cuba, Iran, and Iraq; the oil sheikdoms Bahrein and Brunei; the tax havens Liechtenstein and Luxembourg; Ethiopia, Kuwait, and Lebanon, which are undergoing postwar reconstruction; Sri Lanka and the Democratic Republic of the Congo, which are currently experiencing civil war; and Bangladesh, Egypt, El Salvador, Ghana, Jordan, Kenya, N...

We document a robust cross-sectional positive association across industries between a measure of the economic efficiency of corporate investment and the magnitude of firmspecific variation in stock returns. This finding is interesting for two reasons, neither of which is a priori obvious. First, it adds further support to the view that firm-specific return variation gauges the extent to which information about the firm is quickly and accurately ref lected in share prices. Second, it can be interpreted as evidence that more informative stock prices facilitate more efficient corporate investment. CORPORATE CAPITAL INVESTMENT should be more efficient where stock prices are more informative. Informed stock prices convey meaningful signals to management about the quality of their decisions. They also convey meaningful signals to the financial markets about the need to intervene when management decisions are poor. Corporate governance mechanisms, such as shareholder lawsuits, executive options, institutional investor pressure, and the market for corporate control, depend on stock prices. Where stock prices are more informative, these mechanisms induce better corporate governance-which includes more efficient capital investment decisions.Our objective in this paper is to examine empirically whether capital investment decisions are indeed more efficient where stock prices are more informative. To do this, we require a measure of the efficiency of investment and a measure of the informativeness of stock prices.