The distance to here: formal and informal institutions and their impact on firm valuation

Dr. Christopher Hartwell from Bournemouth University will be presenting on "The (institutional) distance to here: formal and informal institutions and their impact on firm valuation" at this lunchtime seminar organised by the Economics and Business Seminar Series.

The application of new institutional economics and new institutionalism in the international business (IB) literature has been one of the exciting advances in IB over the past decade, recognizing the mediating factors within an economy which contribute to firm outcomes. Despite great advances in the concept of “institutional voids” and the acknowledgement of the role of culture, for the most part the institutional IB literature has focused on formal institutions, assumed to be exogenously given over a certain time-frame and with a focus on broad institutional structures more generally. This paper develops a theory of informal institutions and their influence on firm behaviour more generally, focusing on the divergence between legislation and the actual implementation of one particular economic institution, in this case property rights. Examining the theoretical potential property rights embodied in legislation in one particular emerging market economy (Poland), we examine the actual implementation of those rights on the ground and how this implementation is shaped by historical factors and informal institutions. This framework is then utilized to understand how informal institutions, and their deviation from legislation, impact firm valuation; using a newly-assembled database of firm-level data for 218 non-financial companies listed on the Warsaw Stock Exchange between 2007 and 2015, we find that changes in legislation actually lead to lower firm valuations, while our measure of “realized” property rights correlates positively with firm market growth.  This result is consistent across specifications and robustness checks. We conclude that the worth of a firm depends more on the actual implementation of property rights than mere changes in the legislation, and that the gap between informal and formal institutions constitutes “institutional distance” within one country.