Paper of S. Stepanov in the Journal of Banking and Finance
Congratulations to Sergey Stepanov, ICEF assistant professor, on acceptance of his paper "Firm Value in Crisis: Effects of Firm-Level Transparency and Country-Level Institutions" (co-authored with Ruben Enikolopov (Institute for Political Economy and Governance, Universitat Pompeu Fabra, NES) and Maria Petrova (NES, Institute for Political Economy and Governance, Universitat Pompeu Fabra)) for publication in the Journal of Banking and Finance.Abstract:
Recent empirical research suggests that country-level and firm-level governance institutions are substitutes with respect to their effect on firm value. In this paper we demonstrate that during a crisis these institutions may actually become complements. Specifically, we find that the decline in companies' valuation during the financial crisis of 2007-2009 was more sensitive to firm-level transparency in countries with stronger investor protection. We propose a theoretical model that reconciles our findings with the results in the literature. In our model, during "normal times" strong firm-level governance is crucial to attract outside financing in countries with weak investor protection, but is less important in countries with good investor protection. During a crisis, however, investment opportunities decline even in countries with strong investor protection, and, as a result, relative importance of firm-level governance increases in such places.