||petition. Automatic stay prevents secured creditors from gaining<br>possession of their security. It equals zero if such a restriction does exist<br>in the law.||
|---|---|---|
|Secured creditors<br>first|Equals one if secured creditors are ranked first in the distribution of the<br>proceeds that result from the disposition of the assets of a bankrupt firm.<br>Equals zero if non-secured creditors, such as the government and<br>workers, are given absolute priority.|Bankruptcy and<br>reorganization laws;<br>LLSV (1998)|
|Management does<br>not stay|<br>Equals 1 when an official appointed by the court, or by the creditors, is<br>responsible for the operation of the business during reorganization.<br>Equivalently, this variable equals one if the debtor does not keep the<br>administration of its property pending the resolution of the<br>reorganization process. Equals zero otherwise.|Bankruptcy and<br>reorganization laws;<br>LLSV (1998)|
|Creditor rights|<br>An index aggregating different creditor rights. The index is formed by<br>adding “one” when: (1) the country imposes restrictions, such as<br>creditors' consent or minimum dividends to file for reorganization; (2)<br>secured creditors are able to gain possession of their security once the<br>reorganization petition has been approved (no automatic stay); (3)<br>secured creditors are ranked_first_in the distribution of the proceeds that<br>result from the disposition of the assets of a bankrupt firm; and, (4) the<br>debtor does not retain the administration of its property pending the<br>|Bankruptcy and<br>reorganization laws;<br>LLSV (1998)|
|Legal reserve<br>requirement|resolution of the reorganization. The index ranges from zero to four.<br>The minimum percentage of total share capital mandated by corporate<br>law to avoid the dissolution of an existing firm. It takes a value of zero<br>for countries without such a restriction.|Company law or<br>commercial code;<br>LLSV (1998)|
|Legal Formalism<br>Index|The index measures substantive and procedural statutory intervention in<br>two types of judicial cases (collection of a bounced check and eviction<br>of a non-paying tenant; we took the average of these two indexes) at<br>lower-level civil trial courts, and is formed by adding up the following<br>dummies: (i) professionals vs. laymen, (ii) written vs. oral elements, (iii)<br>legal justification, (iv) statutory regulation of evidence, (v) control of<br>superior review, (vi) engagement formalities, and (vii) independent<br>procedural actions. The index ranges from 0 to 7, where 0 means a<br>lowest level and 7 means a higher level of control or intervention in the<br>judicial process|<br>Survey of judges and<br>lawyers from Lex Mundi;<br>DLLS (2003)|
|Corruption<br>Perception Index|.<br>The index (and ranking) is based on the survey of businessman on<br>whether corruption is prevalent in government and legal institutions<br>when conducting business in a country. It ranges from 0 to 10, with 0<br>meaning most corrupted and 10 meaning most clean.|Transparency International<br>(2005)|
|Disclosure<br>Requirement|<br>The index of disclosure equals the arithmetic mean of scores on the<br>disclosure requirements of: (1) Prospect; (2) Compensation; (3)<br>Shareholders; (4) Inside ownership; (5) Contracts Irregular; (6) and<br>Transactions; each of them is a dummy variable. One means the<br>disclosure of an item is required. The Index ranges from zero to one,<br>with zero meaning no disclosure requirement for anything, and one<br>meaning disclosure of everything|LLS (2006)|
|Earnings<br>Management Score|.<br>The aggregate score is the average rank across four measures of<br>earnings management. H_igher_scores imply_more_earnings management<br>and lower score implies_less_earnings management.|Leuz, Nanda and Wysocki<br>(2003)|
|Legality Index|<br>Composite index measuring the effectiveness of legal institutions: Use 5<br>legality proxies (each range from 0 to 10) from LLSV(1998) and<br>principal components analysis to aggregate the individual legality<br>proxies into a single Legality Index. The first component accounts for<br>84.6 percent of the total variance, and is given by Legality =<br>0.381*(Efficiency of Judiciary) + 0.578_*_(Rule of Law) +<br>0.503*(Absence of Corruption) + 0.347*(Risk of Expropriation) +<br>0.384*(Risk of Contract Repudiation). The index ranges from 0 to 21<br>with a higher score meaningbetter legal environment.|International Country Risk<br>Guide; Berkowitz, Pistor,<br>and Richard (2003)|

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