Working Paper: NBER ID: w14218
Authors: Ren M. Stulz
Abstract: As barriers to international investment fall and technology improves, the cost advantages for a firm's securities to trade publicly in the country in which that firm is located and for that country to have a market for publicly traded securities distinct from the capital markets of other countries will progressively disappear. However, securities laws remain an important determinant of whether and where securities are issued, how they are valued, who owns them, and where they trade. The value of public firms depends on these laws, so that identical firms subject to different laws are likely to have different values. We show that mandatory disclosure through securities laws can decrease agency costs between corporate insiders and minority shareholders, but only provided the investors can act on the information disclosed and the laws cannot be weakened ex post too much through lobbying by corporate insiders. With financial globalization, national disclosure laws can have wide-ranging effects on a country's welfare, on firms and on investor portfolios, including the extent to which share holdings reveal a home bias. In equilibrium, if firms can choose the securities laws they are subject to when they go public, some firms will choose stronger securities laws than those of the country in which they are located and some firms will do the opposite. These effects of securities laws can be expected to become smaller if differences in national laws and their enforcement decrease and if the costs of private solutions to manage corporate agency conflicts that are substitutes for securities laws fall.
Keywords: No keywords provided
JEL Codes: F30; F36; G10; G15; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Stronger securities laws (G18) | Lower agency costs (G39) |
| Lower agency costs (G39) | Higher firm valuation (G32) |
| Lower agency costs (G39) | Reduced cost of external finance (G32) |
| Weaker securities laws (G18) | Higher agency costs (G39) |
| Higher agency costs (G39) | Lower firm valuations (G32) |
| Strong securities laws (G18) | Differences in firm values across countries (F23) |