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Self-dealing Regulations, Ownership Wedge, and Corporate Valuation: International Evidence


Mingzhi Liu, John Molson School of Business, Concordia University, 1455 de Maisonneuve West, Montreal, Quebec, Canada H3G 1M8. E-mail:


Manuscript Type: Empirical

Research Question/Issue: Prior evidence suggests that investor protection enhances corporate valuation. Focusing on a key investor protection measure, namely, self-dealing regulations, this study examines whether and to what extent the private and public control components of that measure affect firm value. Private control of self-dealing regulations emphasize disclosure and shareholder approval mechanisms, while public control of self-dealing regulations imply enforcement through prison terms, fines, etc. Our analysis takes into account potential agency problems resulting from an ownership wedge, i.e., situations in which cash flow rights are not consistent with control rights. Such situations are quite common in many countries outside of the United States.

Research Findings/Results: Based on 4,634 firms from 22 countries, our empirical evidence indicates that private control of self-dealing regulations enhances firm value, while public control regulations lower firm value. In addition, a high ownership wedge, which proxies for agency problems between controlling shareholders and minority investors, dampens the positive association between private control of self-dealing regulations and corporate valuation. However, ownership wedge has no impact on the negative association between public control of self-dealing regulations and corporate valuation.

Theoretical Implications: This study represents a refinement and extension of prior work on the value implication from investor protection regulations. It seeks to better define the implications of investor protection regulations by focusing on some of its key components, thus leading to a better understanding of the relations between investor protection regulations, ownership, and firm value. Moreover, the study contributes to the current debate about the importance of country-level institutions (versus firm-level governance as proxied by ownership wedge) in determining firm outcomes such as value.

Practitioner Implications: The paper's empirical findings may help policy markers better understand how investors react to regulations about private and public control of self-dealing, thus enhancing their capability to enact more effective regulations.