Critical Finance Review > Vol 5 > Issue 1

Problems Using Aggregate Data to Infer Individual Behavior: Evidence from Law, Finance, and Ownership Concentration

Clifford G. Holderness, Boston College, USA, clifford.holderness@bc.edu
 
Suggested Citation
Clifford G. Holderness (2016), "Problems Using Aggregate Data to Infer Individual Behavior: Evidence from Law, Finance, and Ownership Concentration", Critical Finance Review: Vol. 5: No. 1, pp 1-40. http://dx.doi.org/10.1561/104.00000028

Published: 12 May 2016
© 2016 C. G. Holderness
 
Subjects
 
Keywords
C18G15G32G34
Aggregation biasLaw and financeOwnership concentration
 

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In this article:
1. The Fundamental Question of Interest
2. Two Fundamentally Different Methodological Approaches
3. Revisiting Aggregate Findings with Individual Data
4. Underlying Assumptions with the Choice of Methodology
5. Conclusion
References

Abstract

Cross-country comparisons in finance use two distinct approaches. Some analyze country averages; others analyze the underlying firm-level data. The influential finding of an inverse relation between the law and ownership concentration is shown to be spurious because country averages have produced misleading results. When data from existing studies is used on a firm basis, the relation between the Anti-Director Rights Index and ownership concentration changes sign, while those involving legal origins and the Anti-Self-Dealing Index lose all significance. The results change because country averages do not control for firm-specific influences, such as firm size, and because firms from tiny countries are over weighted. The use of country averages instead of the underlying firm data is unnecessary and requires implausible assumptions. Other individual and firm-level inferences will also be unreliable when the supporting tests are based on country aggregation.

DOI:10.1561/104.00000028