Most of the existing evidence on the effectiveness of large shareholders in corporate governance has been restricted to a handful of developed countries, notably the UK, US, Germany and Japan. This paper provides evidence on the role of large shareholders in monitoring company value with respect to a developing and emerging economy, India, whose corporate governance system is a hybrid of the outsider-dominated market-based systems of the UK and the US, and the insider-dominated bank-based systems of Germany and Japan. The picture of large-shareholder monitoring that emerges from our case study of Indian corporates is a mixed one. Like many of the existing studies, while we find blockholdings by directors to increase company value after a certain level of holdings, we find no evidence that institutional investors, typically mutual funds, are active in governance. We find support for the efficiency of the German/Japanese bank-based model of governance; our results suggest that lending institutions start monitoring the company effectively once they have substantial equity holdings in the company and that this monitoring is reinforced by the extent of debt holdings by these institutions. Our analysis also highlights that foreign equity ownership has a beneficial effect on company value. In general, our analysis supports the view emerging from developed country studies that the identity of large shareholders matters in corporate governance.
*We would like to thank Sudipto Bhattacharya, Sudipto Dasgupta, Jayendra Nayak, Sheridan Titman (editor), and anonymous referee, the participants of the conference on Financial Market Development in Emerging and Transition Economies, held at London Business School, September 2000, and the participants of the India and Southeast Asia Conference of the Econometric Society, held at Indian Statistical Institute, New Delhi, December 1998, for their helpful comments and suggestions. The usual disclaimer applies. An earlier version of this paper appeared as IGIDR Discussion Paper No.153 in January 1999.
Why Doesn't the Black-Scholes Model Fit Japanese Warrants and Convertible Bonds?
In this paper, we investigate the systematic departures of traded prices of Japanese equity warrants and convertible bonds from their theoretical Black-Scholes values. We briefly consider transactions costs and the dilution adjustment as potential explanations of the discrepancy. However, our major focus is on shifts in volatility of the prices of the underlying stocks as a function of the stock price changes; such shifts are not taken into account in the Black-Scholes values. We assume that the pseudo-probability distributions of prices of stocks of cross-sections of companies which are roughly similar in size are identical. This simple assumption, which can be generalized, enables us to infer the implied probability distribution and binomial tree for stock price changes using the Derman and Kani (1994), Ruvinstein (1994) and Shimko (1993) approach.The cross-section of warrant prices implies an inverse volatility smile and a positively skewed probability density for stock prices. Rubinstein's identifying assumptions generate an implied binomial tree in which the relative size of up-steps and down-steps, and thus volatility, changes systematically as stock prices change. We briefly consider potential explanations for the implied behavior, and for the difference in the smile pattern between index options and the warrants and convertibles.
*Early parts of this paper were written while the second author was a Visiting Professor of Finance at the University of Tokyo. He is grateful to Yamaichi Securities Co. Ltd for support through the Yamaichi Chair in Finance at the University of Tokyo. We are also grateful to Bill Kierstead, Takao Kobayashi, and Mark Rubinstein for help.
This paper studies a unique change in regulation governing the transfer of share ownership in New Zealand. The new regulation requires all listed firms to adopt one of three proposed takeover regimes, ranging from almost free transferability of shares to a uniform pricing rule. Our empirical results indicate that a higher proportion of shares held by blockholders makes adoption of a liberal takeover regime more likely. We also find that an increase in the proportion of non-beneficial shares held by directors and shares held by trust companies increases the probability that a firm adopts a more restrictive takeover regime. Furthermore, the results from an event study show that firms adopting the liberal takeover regime experience substantial positive abnormal returns compared to firms adopting the standard or restrictive regime.
*We thank Jerry Bowman, Mike Sher, Michael Wijdeveld and the participants at Otago University, the New Zealand Finance Colloquium and the Australasian Conference on Banking and Finance for their helpful comments. We also acknowledge the helpful comments of one anonymous referee and Sheridan Titman. This research was partially supported by the School of Business, The University of Auckland. Correspondence should be directed to Farshid Navissi.