Korean modernization revisited : an alternative view from the other side of history
- Korean modernization revisited : an alternative view from the other side of history
- Kim, Kyung-Dong
- Issue Date
- Series/Report no.
- KDI Working Paper Series;04-02
- This study provides evidence of the role of both legal and extra-legal institutions in limiting the income management induced by the detachment of control rights from the cash flow rights of ultimate owners. The tests use a unique, comprehensive data set for firm-level control and ownership structures from nine East Asian and thirteen Western European countries. Univariate regressions show that income management that is induced by the control-cash flow rights wedge is significantly limited in countries with high statutory protection of minority rights (proxied by legal tradition, minority rights protection, the efficiency of the judicial system, or disclosure standards) and effective extra-legal institutions (proxied by the effectiveness of competition laws, diffusion of the press, and tax compliance). Furthermore, multiple regression results show that a common law tradition and an efficient judicial system subsume the effects of the other legal institutions, and that a high rate of tax compliance subsumes the effects of the other extra-legal institutions in curbing insider income management. Surprisingly, a high rate of tax compliance ultimately has a greater effect than legal tradition and the efficiency of the judicial system. While this finding is unexpected, given prior evidence on the dominant roles of legal institutions in macro-economic issues and corporate policies, it is consistent with the recent argument that effective tax enforcement is like a public good in that it can reduce insiders’ private control benefits. An implication of this finding is that closer attention to extra-legal institutions has the potential to enhance our understanding of the institutional reforms needed to limit insider private control benefits.
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