The Asian Crisis and Corporate Governance: Ownership Structure, Debt Financing, and Corporate Diversification.

The Asian Crisis and Corporate Governance: Ownership Structure, Debt Financing, and Corporate Diversification.

The article is about the 1997 Asian financial crisis that continues to confound experts: a region whose countries had long been considered paragons of successful economic development was mired in financial collapse and a deep recession.

The authors land straight to the heart of the matter and go right into explaining the traditional theory on the crisis suggesting that the financial crisis was the result of private and investment related problems, instead of public and consumption-related difficulties. The mechanism of the currency crisis is then described by the authors using the contagion model that involves a circular process in reverse: falling asset prices made the insolvency of intermediaries visible, forcing them to cease operations, leading to further asset deflation. This circularity, in turn, can explain both the remarkable severity of the crisis and the apparent vulnerability of the Asian economies to self-fulfilling crisis - which in turn helps us understand the phenomenon of contagion between economies with few visible economic links.

After collecting firm-level data (1994-2000) from the Worldscope database for all firms in the five East Asian countries in crisis, eliminating all the firms that can not be taken into account and using ROA, ROE and PMA as principal performance indices of individual firms, the results found by the writers show that the financial crisis had different impacts, as opposed to a uniformly negative, on Asian corporate governance.

Furthermore, the article scrutinizes the influence of the Asian crisis from the view point of corporate governance and starts with the characteristics and issues family control generates. The authors open the debate of the ownership and the agency problem, and state that the separation of ownership and control leads to an agency problem whereby management operates the firm aligning with their own interests, not those of shareholders. This creates opportunities for managers to spend firm resources maximizing their utilities rather than owners' utilities. Agency problem not only occurs in the conflict of interests between managers and owners, but also in broader conflict areas, such as shareholders through managers versus bondholders, and major (dominant) shareholders versus minor ones.

The article then investigates another important side to this family ownership structure, the problem of voting rights exceeding cash-flow rights. Voting rights indicate the actual control of firms, while cash-flow rights the ownership of firms. Expropriation of outside investors by controlling shareholders occurs easily with separation of voting rights and cash-flow rights. That is because when voting rights exceed cash-flow rights, the controlling shareholders' portion remains relatively lower