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

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 overweighted. The use of country averages instead of the underlying firm data is unnecessary and requires implausible assumptions. Other individual-firm inferences will also be unreliable when the supporting tests are based on country aggregation