Expropriation - Explained
What is Expropriation?
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Table of ContentsWhat is Expropriation?How does Expropriation Work?Academic Research on Expropriation
What is Expropriation?
Expropriation is a legal term used to describe the government taking control of private assets or property ostensibly for public use. In many countries, an expropriation occurs and private assets are dispossessed without any payment to them. This is illegal in the United States as the 5th Amendment to the Constitution states that private property cannot be expropriated for public use without just compensation.
How does Expropriation Work?
Expropriation is often compared to eminent domain in United States. The the 5th Amendment of US Constitution provides for the doctrine of eminent domain. The US Government uses this power to expropriate assets to build highways, airports, and other projects for public utility.
The 5th amendment states that the Government cannot take away property, assets or business without paying just compensation. There is general agreement internationally that private property owners should be paid compensation in case of expropriation. Unfortunately, the practice is not identical across the world.
Communist or socialist countries may not only expropriate land or property but it may take away domestic business and foreign business operations in the territory. For example, when the communist leader of Cuba came to power in 1959, he had expropriated many oil refineries operating in Cuba that were owned by United States.
In 1952, the president of USA (Harry Truman) expropriated more than 88 steel production companies. The expropriation was ultimately overturned by the U.S. Supreme Court.
Academic Research on Expropriation
- Dividends and expropriation, Faccio, M., Lang, L. H., & Young, L. (2001). American Economic Review,91(1), 54-78. This paper explores dividends and expropriation in family-owned East Asian companies, as opposed to that of US companies.
- On expropriation of minority shareholders: evidence from East Asia, Claessens, S., Fan, J. P., Djankov, S., & Lang, L. H. (1999). This study examines the risk of expropriation in East Asian firms and companies. Using a survey from March 1999 in nine East Asian countries, it is clearly seen that higher cash-flow rights are associated with a higher market valuation and higher control rights with a lower valuation, especially when cash-flow rights are low and control rights are high. This paper aims to show that the risk of expropriation is the major principal-agent problem for large corporations, as proposed by La Porta and co., in 1999.
- Tunneling, propping, andexpropriation: evidence from connected party transactions in Hong Kong, Cheung, Y. L., Rau, P. R., & Stouraitis, A. (2006). Journal of Financial Economics,82(2), 343-386. This paper analyses three expropriation-related questions drawn from the examination of a sample of connected transactions between Hong Kong listed companies and their controlling shareholders.
- Banks versus venture capital: Project evaluation, screening, andexpropriation, Ueda, M. (2004). The Journal of Finance,59(2), 601-621. The author wishes to answer the question posed on the reasons most start-up firms raise funds from banks and others from venture capitalists. To achieve this, a model is developed which analyses the process and inner workings of venture capitalists and banks when it comes to investing in startups. A conclusion is drawn from this research, and more questions are analysed.
- Ownership structure,expropriation, and performance of group-affiliated companies in Korea, Chang, S. J. (2003). Academy of Management Journal,46(2), 238-253. In this study, a sample of group-affiliated public firms in Korea was used to examine simultaneous causality between ownership structure and performance. The results show that performance determines ownership structure but not vice versa and provide strong evidence that controlling shareholders use insider information to take direct and indirect equity stakes in profitable or promising firms and transfer profits to affiliates through intra-group trade. These findings highlight the importance of further studying the "agency problems" that controlling shareholders present for minority shareholders, especially in business groups.
- Financialised capitalism: Crisis and financialexpropriation, Lapavitsas, C. (2009).Historical materialism,17(2), 114-148. This paper focuses on the outcome of the financialization of contemporary capitalism.
- Specific investments in marketing relationships:Expropriationand bonding effects, Rokkan, A. I., Heide, J. B., & Wathne, K. H. (2003).Journal of marketing research,40(2), 210-224. This paper argues that the effect of specific investments on opportunism will shift in a nonmonotonic fashion over the range of different marketing theories. The authors test their research hypotheses empirically through parallel analyses on each side of 198 matched buyer-supplier dyads. The authors discuss the implications of their findings for marketing theory and practice.
- Hazards ofexpropriation: tenure insecurity and investment in rural China, Jacoby, H. G., Li, G., & Rozelle, S. (2002). American Economic Review,92(5), 1420-1447. This paper uses household data from northeast China to examine the link between investment and land tenure insecurity induced by China's system of village-level land reallocation. A proper examination is carried out on expropriation risk using a hazard analysis of individual plot tenures and incorporate the predicted "hazards of expropriation" into an empirical analysis of plot-level investment. The reason for this research is to find the benefits of organic fertilizers on the soil, especially in China.
- Expropriationand inventions: Appropriable rents in the absence of property rights, Anton, J. J., & Yao, D. A. (1994).The American Economic Review, 190-209. We analyze the problem faced by a financially weak independent inventor when selling a valuable, but easily imitated, invention for which no property rights exist. The inventor can protect his or her intellectual property by negotiating a contingent contract (with a buyer) prior to revealing the invention or, alternatively, the inventor can reveal the invention and then negotiate with the newly informed buyer. Despite the risk of expropriation, we find that, in equilibrium, an inventor with little wealth can expect to appropriate a sizable share of the market value of the invention by adopting the latter approach.
- Foreign direct investment and the risk ofexpropriation, Thomas, J., & Worrall, T. (1994). The Review of Economic Studies,61(1), 81-108. This paper explores the risk of expropriation on foreign investments. It further examines and extends previous works on the general under-provision of investment when contracts are incomplete or only partially enforceable to a dynamic context.
- The demise ofexpropriationas an instrument of LDC policy 19801992, Minor, M. S. (1994). Journal of International Business Studies,25(1), 177-188. This paper reports data collected on expropriation activity by developing countries from 1980-1992, extending previous work by Kobrin . Kobrin's assumption that expropriation activity would continue to decrease over time, and his reasons for this assumption, are supported. The paper introduces recent phenomena which further indicate that expropriation is unlikely to resurface in the near future as a source of multinational corporation-developing country contention.
- Expropriation through loan guarantees to related parties: Evidence from China, Berkman, H., Cole, R. A., & Fu, L. J. (2009). Journal of Banking & Finance,33(1), 141-156. This study identifies and analyzes a sample of publicly traded Chinese firms that issued loan guarantees to their related parties (usually the controlling block holders), thereby expropriating wealth from minority shareholders. Results show that the issuance of related guarantees is less likely at smaller firms, at more profitable firms and at firms with higher growth prospects. It also shows that the identity and ownership of block holders affect the likelihood of expropriation.