Corporate Finance

Introduction 
 31

ownership concentration and profitability and firm value. This is indeed the case in some central and Eastern
European countries.^9 A study of 700 Czech firms between 1992 and 1995 finds that the more concentrated
the ownership of a firm the higher is its market value and profitability.

Rip-off by Chief Executive Officer (CEO)/majority shareholder

Board of Directors

Shareholders

CEO Shareholders

Board

CEO

INVESTOR PROTECTION

Shareholders provide equity in exchange for dividend and voting rights. Likewise creditors lend money in
exchange for interest and principal payments and the right to possess collateral when the company defaults
on its payments. The difference in governance in different parts of the world is partly due to the differences
in the rights of shareholders and creditors.^10 A shareholder, as a residual claimant, has the right to attend
annual general meetings and vote on various corporate matters such as asset sales, mergers and acquisitions,
election of directors, etc. Often widely dispersed shareholders do not actively take part in the governance
process. In those countries where voting by mail is not allowed, the company’s management can get away
uncontested. In some countries like Italy and Belgium whose legal systems are based on the French Civil
law, shareholders are not allowed to vote by mail. In general, countries following the common law tradition
(US, UK, Australia, Canada, etc.) provide the best investor protection. Likewise, the creditor rights vary from
country to country. Some countries allow possession of collateral whereas some do not. Again, the common
law tradition provides the best protection to creditors. Further, in many countries companies can issue shares
with different voting rights. The one-share, one-vote rule is followed in the US, the UK, and many other
countries. But it is common in countries like Brazil and Chile to issue shares with different voting rights.
Some companies restrict the voting rights of foreign investors. For example, some companies from Latin
America and Europe have issued (depository) shares with differential voting rights.^11
The shareholders of B-class shares of Saga Petroleum, a Norwegian company, have no voting rights
but holders of A-class shares have full voting rights. Mexican companies have issued L shares that provide

(^9) Claessens, Stijn, Simeon Djankov, and Gerhard Pohl (1997). ‘Ownership and Corporate Governance—Evidence from the
Czech Republic’, Private Sector.
(^10) La Porta et al. (1998), Shleifer and Vishny (1997).
(^11) Pinegar, Michael and R Ravichandran (2001). ‘The Idiosyncratic Nature of Sibling ADRs Issued by Mexican Firms:
A Clinical Study’, Unpublished Working Paper, Northern Arizona University.