Dividends and Expropriation

Whereas most U.S. corporations are widely held, the predominant form of ownership
in East Asia is control by a family, which often supplies a top manager. These
features of "crony capitalism" are actually more pronounced in Western Europe. In
both regions, the salient agency problem is expropriation of outside shareholders by
controlling shareholders. Dividends provide evidence on this. Group-afiliated
corporations in Europe pay higher dividends than in Asia, dampening insider
expropriation. Dividend rates are higher in Europe, but lower in Asia, when there
are multiple large shareholders, suggesting that they dampen expropriation in
Europe, but exacerbate it in Asia. (JEL G34, G35)

Failures in East Asian corporate governance
have recently attracted wide attention through
being blamed for the East Asian financial crisis.
Based only on journalistic anecdotes, the accusations
of "crony capitalism" met regional scepticism
and are now being shmgged off as East
Asian economies recover. This paper provides a
comprehensive analysis of the ownership and
control stiucture of East Asian corporations,
with West European corporations as benchmarks.
We document that the problems of East
Asian corporate governance are, if anything,
more severe and intractable than suggested by
commentators at the height of the financial crisis.
These problems we locate in an extraordinary
concentration of control, whereby eight
groups control more than one-quarter of the
corporations in the nine most advanced East
Asian economies. This control is obscured behind
layers of corporations, hence insulated
against the forces of competition on less-than-transparent capital markets. By examining how
dividend behavior is related to the structure of
ownership and control, we find evidence of systematic
expropriation of the outside shareholders
of corporations at the base of extensive
corporate pyramids. Thus, the controlling shareholders
can extract high returns from projects
that yield negative returns to the corporation.
The piling up of such projects in East Asia, with
their burden of unrepayable debt, helped precipitate
the financial crisis. Moreover, the concentration
of corporate control is such that these
problems should be recognized as problems of
political, not merely corporate, governance. In
Western Europe, corporate control is also
highly concentrated, but we identify critical differences
in the ownership and control stiucture,
such that macroeconomic problems are unlikely
to result.