Financial development,corporate governance and cost of equity capital

Existing research suggests that external governance is more relevant than internal governance in affecting a firm’s value. We contribute to the literature by explicitly examining the interactive role played by country-level financial development and legal institutions in influencing the impact of firm-level governance on the cost of equity capital. Using a comprehensive sample of 7380 firm years drawn from 22 developed countries, we show that firm-level corporate governance attributes affect the cost of equity capital primarily in the Common Law countries with high levels of financial development. Our study is the first to highlight the complementary effects of legal origin, financial development and firm-level governance attributes in influencing the cost of equity capital.     

A cross-country comparison of corporate governance and firm performance: Do financial structure and the legal system matter?

We blend the corporate governance and the financial structure/legal system literature streams to study whether firm performance is enhanced when its governance structure embodies the demands of the host country’s financial structure and legal system. Using a sample of 1736 unique firms representing 22 countries, we find that the joint effect of a country’s financial structure and legal system does matter when explaining the relationship between performance and the overall level of corporate governance in a given country. The results also suggest that firms operating in the market/common combination countries tend to command higher market valuations than firms with a comparable level of corporate governance that operate in the bank/civil combination countries.     

Privatization,financial development,property rights and growth

This study analyzes how prevailing institutional arrangements i.e., property rights, contracting rights, political institutions, and corporate governance practices affect privatized firms’ performance, capital markets development, and economic growth. Most of the studies surveyed show that privatization enhances privatized firms performance, efficiency, and profitability, which percolates to economic growth. Privatized firms performed better in countries with better regulatory and legal frameworks. Partial privatization may be beneficial in countries with weak institutions, namely, the French civil law countries. The stronger the economic and the governing institutions, the easier it is for privatized firms to thrive and contribute to economic growth. Overall, privatization allows firms to achieve improved efficiency while driving the development of the financial sector.     

Institutional development and bank stability: Evidence from transition countries

This paper takes advantage of the dynamic nature of institutional reforms in transition economies and explores the causal effects of those reforms on bank risk. Using a difference-in-difference approach, we show that banks’ financial stability increases substantially after these countries reform their legal institutions, liberalize banking, and restructure corporate governance. We also find that the effects of legal and governance reforms on bank risk may critically depend on the progress of banking reforms. A further examination of alternative risk measures reveals that the increases in financial stability among banks mainly come from the reduction of asset risk. Banks tend to have lower ROA volatility and fewer nonperforming loans after reforming the institutional environment. Finally, we split our sample into foreign and domestic banks and find that the enhancement of financial stability is more pronounced for domestic banks.     

Corporate Social Responsibility Amid Social Distancing During the COVID-19 Crisis: BRICS vs. OECD Countries

This paper compares today’s corporate management in developing markets (BRICS countries) vs. developed markets (the OECD countries). The influence of determining a new social corporate management season considering social distancing amid the COVID-19 pandemic on emerging markets' economic growth is ascertained and set apart from corporate management in developing markets. This paper helps clarifying and better understanding the role of corporate social responsibility in the conditions of an economic crisis against the background of the COVID-19 pandemic. This work provides scientific arguments that allow solving critical discussions regarding the advantages (growth of quality of life, an increase of business's competitiveness) and costs (limitation of economic growth, non-commercial use of profit, and increased price for goods and services) of domestic production and consumption. In the long-term, responsible financial practices return all investments and allow countries to better cope with a crisis. The research supplies a new view of corporate social responsibility as a measure of crisis management. It reflects its advantages at a time of social distancing in the conditions of the COVID-19 pandemic. The institutionalization of corporate social responsibility in emerging countries is not predetermined by internal factors (approach to doing business or organizational culture), if not by external factors (market status, state regulation, and consumer awareness). These circumstances prove the high complexity of strengthening corporate social responsibility in developing countries. In the conditions of social distancing – due to the COVID-19 pandemic – corporate social responsibility goes to a new level. In both developing and developed countries, one of the most widespread manifestations of corporate social responsibility is the entrepreneurship's transition to the remote form of activities. This envisages the provision of remote employment for workers and the online purchase of goods and services for consumers.     

The influence of financial and legal institutions on firm size

Theory does not predict an unambiguous relationship between a country’s financial and legal institutions and firm size. Using data on the largest industrial firms for 44 countries, we find that firm size is positively related to financial intermediary development, the efficiency of the legal system and property rights protection. We do not find any evidence that firms are larger in order to internalize the functions of the banking system or to compensate for the general inefficiency of the legal system.     

Development of financial reporting environment in Malaysia

The purpose of our paper is to examine the development of the financial reporting environment in Malaysia. We explore the influence of environmental factors such as social, political, economic, legal and cultural in the development of accounting and Malaysia’s recent move towards the adoption of International Financial Reporting Standards (IFRS). We find that Malaysia’s colonial past and the reformation of corporate governance have significantly influenced the country’s financial reporting practices. Although there are a number of reforms in place more needs to be done in order to improve the transparency of corporate financial reporting practices in Malaysia. Our conclusion suggests the necessity to improve the quality of financial reporting practices and to build the confidence of stakeholders and potential investors. The findings of our study are particularly important to the standard-setters, regulators and accounting professionals to improve the financial reporting practices in Malaysia and other developing countries throughout the world.     

Is knowledge powerful? Evidence from financial education and earnings quality

Previous studies emphasize the importance of investor legal protection on financial reporting quality. We argue that investors’ awareness of their legal rights and understanding of the financial products play complementary roles. Financially well-educated investors are more likely to be able to understand investment-related information and less likely to be tricked, hence can pressure managers to eschew misappropriate behavior. This paper explores the role of investor financial education as a corporate governance mechanism in the context of earnings quality. Using data from 43 countries during the sample period of 1994–2012, we find that earnings quality is higher in countries with better financial education after controlling for various institutional environments. Interestingly, the positive effect of financial education on earnings quality exists only in countries with stronger investor legal protection, indicating a complementary role of financial education. Our study provides evidence on the role of financial education in investor protection.     

Patent pledge policy and stock price crash risk: Evidence from China

This study examines the influence of China’s patent pledge policy on the stability of stock prices for Chinese listed businesses. We find that when businesses use patent rights as collateral for loans, the probability of stock price crash increases. Additionally, this unfavorable effect is more pronounced in businesses with strong financial standing, excessive managerial confidence, and serious agency problems than in businesses with weak financial standing, non-excessive managerial confidence, and non-serious agency problems. Indeed, a mechanism analysis reveals that the patent pledge policy aggravates management’s excessive investment and contributes to stock price instability. Furthermore, the pledge financing process and corporate financing goals are not sufficiently transparent and lack internal and external supervision, due to the challenges associated with determining the value of patent rights, the lack of awareness of risk control in the pledge process, and the imperfections in pertinent policies and systems.     

National culture and corporate debt maturity

We investigate the influence of national culture on corporate debt maturity choice. Based on the framework of Williamson, we argue that culture located in social embeddedness level can shape contracting environments by serving as an informal constraint that affects human actors’ incentives and choices in market exchange. We therefore expect national culture to be related to debt maturity structure after controlling for legal, political, financial, and economic institutions. Using Hofstede’s four cultural dimensions (uncertainty avoidance, collectivism, power distance, and masculinity) as proxies for culture, and using a sample of 114,723 firm-years from 40 countries over the 1991-2006 period, we find robust evidence that firms located in countries with high uncertainty avoidance, high collectivism, high power distance, and high masculinity tend to use more short-term debt. We interpret our results as consistent with the view that national culture helps explain cross-country variations in the maturity structure of corporate debt.     

How banks go abroad: Branches or subsidiaries?

We examine the factors influencing international banks’ organizational form, using an original database on the operations in Latin America and Eastern Europe of the world’s top 100 banks. We find that banks are more likely to operate as branches in countries that have higher taxes and lower regulatory restrictions on bank entry and on foreign branches. Subsidiary operations are preferred by banks seeking to penetrate host markets by establishing large retail operations. Finally, economic and political risks have opposite effects, suggesting that legal differences in parent banks’ responsibilities associated with branches and subsidiaries are important determinants of banks’ organizational form.     

The role of corporate board structure in attracting foreign investors

A long-recognized phenomenon in capital markets is the underinvestment in foreign equity securities, known as equity home bias. Our study examines the effect of board independence on the firm's ability to attract foreign equity capital. After accounting for potential endogeneity, we document that U.S. and non-U.S. foreign investors exhibit a strong preference for firms with more independent corporate boards. Further, our analysis indicates that the positive relation between board independence and foreign ownership is significantly stronger in countries with less developed legal institutions and poor external protection of investor rights. We suggest that it is in these countries that firm-determined characteristics such as independent boards can be most beneficial in attracting capital. We also find that institutional investors are more responsive to the impact of independent corporate boards than are other types of investors.     

Political rights and equity pricing

We examine the influence of political rights on the implied cost of equity capital using a sample of firms from 44 countries. We find that firms' equity financing costs are lower when political rights are stronger. We further find that political institutions' direct impact on the cost of equity capital is incremental to that of legal institutions. Economically, our results imply that a one standard deviation increase in political rights is associated with a 38 basis point decrease in corporate cost of equity capital. In additional analyses, we find that the effect of political rights on equity pricing is more pronounced in countries with weak legal institutions.     

Financial integration and emerging markets capital structure

This paper investigates the impact of country-level financial integration on corporate financing choices in emerging economies. Examining 4477 public firms from 24 countries, we find that corporate leverage is positively related to credit market integration and negatively related to equity market integration. As integration proceeds to higher levels, high-growth firms seem to obtain more debt than low-growth firms; large firms seem to obtain more debt - especially long-term debt - and issue more equity than small firms. Also, there is evidence that firms are able to borrow more funds in countries with more efficient legal systems during integration process.     

How do corporate websites contribute to the information environment? Evidence from the U.S. and Taiwan

We study corporate website disclosures in the U.S. and Taiwan, two countries with different regulatory and market environments, to provide insights into the uniformity of website content and its contribution to the information environment. We observe significant variation in content both within and between the two countries. U.S. firms with higher analyst following tend to create more transparent financial information environments and provide disclosures that are complementary to analysts’ analyses through their corporate websites. They also tend to provide easier access to investor relations (IR) services if analyst coverage is light or nonexistent. However, neither effect is true in Taiwan where the securities analysis industry is less mature. Individual investors have greater ownership share in U.S. firms with more information about IR services on their websites; however, their ownership share drops as financial disclosure on the firm’s website increases, consistent with institutions diluting individual ownership in firms with more transparency in financial reporting. In Taiwan, however, institutions dilute individual ownership share in firms with less financial information and more trading information on their websites. These results are consistent with Barber et al.’s (2009) findings that institutions find Taiwan firms that attract the aggressive, speculative trading of individuals to be extremely profitable investments. Website disclosures in both countries have some effect on the stock-price response to mandatory earnings releases, but their impact is greater in the U.S. Our findings indicate that website disclosures contribute to the information environment and are related to the degree of interest in the firm by sophisticated market participants. Thus, they provide insights to regulators of both countries as they seek to improve disclosure and “level the information playing field.”     

Financial Integration and EMU

This paper investigates the effect of European Monetary Union on the integration of the financial services industry within European using data on the announcements of M&A's within the industry. We find some evidence that EMU has helped financial integration within the euro area. In addition, financial institutions in EMU countries became more active in initiating integration between EMU and non‐EMU partners, which also contributed to overall regional integration within European. The more active role of EMU institutions suggests that institutions residing in the eurozone became stronger players in the corporate control market. However, EMU does not facilitate the entry of non‐European institutions into European.     

Corporate debt maturity in the MENA region: Does institutional quality matter?

We investigate corporate debt maturity structure in the MENA region and its firm and institutional determinants using a sample of 444 listed firms over the 2003–2011 period, or 3717 firm-year observations. We find a very limited use of long-term debt by MENA firms; long-term debt represents only 3.41% of the typical MENA firm's total debt, which is much less than what is reported in prior literature on other parts of the world. Consistent with the predictions of debt maturity theories and prior empirical findings, we find that leverage, firm size, and asset tangibility are positively associated with the use of more long-term debt while firms facing a higher risk of default tend to use more short-term debt. In addition, we find that better quality institutions lead to the use of more long-term debt in MENA. Specifically, stronger rule of law, better regulatory effectiveness, better legal protection of creditors, and more developed financial intermediaries are associated with greater use of long-term borrowing by MENA firms. Our findings have important policy implications as they illuminate the path toward needed reforms that would enhance MENA firms' access to long-term debt, which may ultimately result in more private investment and jobs.     

Trust and corporate cash holdings

We examine the relation between the level of trust in a country and corporate cash holdings. The precautionary savings motive predicts that firms located in countries with less trusting societies will hoard more cash in order to compensate for reduced access to capital markets. The agency hypothesis predicts that shareholders in countries with low levels of societal trust will pressure firms to disgorge cash. The first theory predicts a negative relation between trust and corporate cash holdings while the second theory predicts a positive relation between these two variables. Using data on firms located in 54 countries around the world, we find evidence in favor of the agency-based explanation for the relation between trust and corporate cash holdings. Overall, our results highlight the role played by informal institutions in shaping corporate financial management.     

How do firm- and country-level governance mechanisms affect firms’ disclosure?

This paper examines how a country’s regulatory environment interacts with firms’ institutional corporate governance arrangements to affect the disclosure that these firms provide in their annual reports. Prior literature indicates that firms with stronger corporate governance arrangements demonstrate higher levels of disclosure. We investigate whether this effect varies with the legal environment. The transparency-increasing effect of strong corporate governance might be reinforced by a strong legal environment, suggesting a complementary relationship between these two factors with respect to transparency. However, strong corporate governance arrangements may serve as bonding mechanisms in weak legal environments, suggesting a substitutive relationship between corporate governance and the regulatory environment. Using a sample of listed firms from 16 European countries, we find evidence suggesting that corporate governance arrangements and the legal environment substitute with respect to their effects on corporate disclosure.     

Corporate legal structure and bank loan spread

This study examines how a firm's corporate legal structure may affect its borrowing costs. Corporate legal structure refers to the legal fragmentation of a firm into multiple, separately incorporated entities. This fragmentation is bound to be a factor when lenders determine the pricing of debt and design of contract terms because they can enter into legally enforceable agreements only with specific legal entities. Using a sample of private loans to parent companies in the United States, I find that a more complex corporate legal structure is associated with higher loan spread. The findings are robust to several firm and loan characteristics and are incremental to the effects of other forms of organizational structure, namely business and geographic diversification. Subsequent evidence suggests that the effect of a corporate legal structure on borrowing costs is, at least partly, explained by recovery risk.