To Steal or Not to Steal

THE JOURNAL OF FINANCE • VOL. LX, NO. 3 • JUNE 2005

To Steal or Not to Steal: Firm Attributes, Legal Environment, and Valuation

ART DURNEV and E. HAN KIM∗ ABSTRACT

Data on corporate governance and disclosure practices reveal wide within-country variation that decreases with the strength of investors’ legal protection. A simple model identifies three firm attributes related to that variation: investment opportunities, external financing, and ownership structure. Using firm-level governance and transparency data from 27 countries, we find that all three firm attributes are related to the quality of governance and disclosure practices, and firms with higher governance and transparency rankings are valued higher in stock markets. All relations are stronger in less investor-friendly countries, demonstrating that firms adapt to poor legal environments to establish efficient governance practices.

PREVIOUS STUDIES SHOW THAT BETTER LEGAL PROTECTION for investors is associated with higher valuation of the stock market (La Porta et al. (2002)), higher valuation of listed firms relative to their assets or changes in investments (Wurgler (2000)), and larger listed firms in terms of their sales and assets (Kumar, Rajan, and Zingales (1999)). Furthermore, industries and firms in better legal regimes rely more on external financing to fund their growth

∗ Durnev is with University of Miami Business School and Kim is with the University of Michigan Business School, Ann Arbor. The authors are grateful for helpful comments and suggestions by Sugato Bhattacharyya, Serdar Dinc, Mara Faccio, Daniel Ferreira, Michael Fuerst, ¸ Kathleen Fuller, Rick Green, Charles Hadlock, Simon Johnson, Elaine Kim, Woochan Kim, Rafael La Porta, Florencio Lopez-de-Silanes, Vojislav Maksimovic, John McConnell, Todd Mitton, M. P. Narayanan, Andrei Shleifer, David Smith, Andrey Ukhov, Michael Weisbach, Daniel Wolfenzon, Bernard Yeung, and especially the referee of the Journal. We also thank the...