Corporate governance,shareholder rights and firm diversification: An empirical analysis

Grounded in agency theory, this study investigates how the strength of shareholder rights influences the extent of firm diversification and the excess value attributable to diversification. The empirical evidence reveals that the strength of shareholder rights is inversely related to the probability to diversify. Furthermore, firms where shareholder rights are more suppressed by restrictive corporate governance suffer a deeper diversification discount. Specifically, we document a 1.1–1.4% decline in firm value for each additional governance provision imposed on shareholders. An explicit distinction is made between global and industrial diversification. Our results support agency theory as an explanation for the value reduction in diversified firms. The evidence in favor of agency theory appears to be more pronounced for industrial diversification than for global diversification.     

Managerial entrenchment and capital structure: The effect of diversification

This paper empirically examines how diversification influences the relation between corporate governance and capital structure. Consistent with the creditor alignment hypothesis, we find a positive relation between managerial entrenchment and leverage in diversified firms. In contrast, we find a negative relation between managerial entrenchment and leverage in focused firms, which supports the managerial entrenchment hypothesis. These effects are stronger or only exist in samples with low excess values, which supports the agency channel through which governance influences leverage decisions. Our results are robust to different measures of leverage, diversification, and governance, and continue to hold when we attempt to account for selection bias and the joint endogeneity of leverage, diversification, and governance.     

成长性、代理冲突与公司财务政策

本文基于成长性、代理冲突与公司财务政策之系统关联的多维视角分析,着眼于将成长性差异作为一个关键变量时,考察其是否可以成为影响公司代理冲突及其治理与公司财务政策选择的一个重要基础。本文理论分析表明:作为一种制度环境———尤其是作为新兴/转轨经济国家行业与公司的典型特征,成长性差异显著影响公司财务政策;公司治理与公司业绩的关系受制于成长性的高低,成长性通过投资决策、融资选择与股利政策等关键财务政策的中介作用影响公司治理与其价值的相关性;在财务政策中投资决策更具有基础性,融资政策与股利政策都基于提高投资效率而进行选择,将成长性差异影响与公司投资决策相结合、或在公司的投资等关键财务政策的研究和实践之中深入考量成长机会影响,将使得代理冲突及其公司治理更具有针对性和有效性;高成长性可以成为公司治理环境改善的一种有效基础,深入关注(高)成长性的显著"公司治理效应",可以为公司代理冲突及其治理、以及其投融资选择等关键财务政策提供更为清晰的决策信号。     

Firm diversification and the value of corporate cash holdings

This paper studies the effect of firm diversification on the value of corporate cash holdings. We develop two hypotheses based on efficient internal capital market and agency problems. We find that the value of cash is lower in diversified firms than in single-segment firms, and that firm diversification is associated with a lower value of cash in both financially unconstrained and constrained firms. We find that firm diversification has a negative (zero) impact on the value of cash among firms with a lower (higher) level of corporate governance. These findings are consistent with the interpretation that firm diversification reduces the value of corporate cash holdings through agency problems.     

Ownership concentration and corporate performance from a dynamic perspective: Does national governance quality matter?

In this paper, the relationship between ownership concentration and financial performance of companies in Singapore and Vietnam is investigated in a dynamic framework. By focusing on two different types of national governance systems (well-developed vs. under-developed), we observe how the relationship is moderated by the national governance quality. We find that the performance effect of concentrated ownership persists in these markets even after the dynamic nature of the ownership concentration–performance relationship is taken into consideration. Our finding supports the prediction of agency theory about the efficient monitoring effect of large shareholders in markets with highly concentrated ownership. In addition, we find that national governance quality does matter when explaining the ownership concentration–performance relationship. The positive effect of concentrated ownership on performance of firms operating in the under-developed national governance system (Vietnam) tends to be stronger than that in the well-established system (Singapore). This finding is consistent with the argument that ownership concentration is an efficient corporate governance mechanism which can substitute for weak national governance quality. Econometrically, our findings still hold even after controlling for dynamic endogeneity, simultaneity, and unobserved time-invariant heterogeneity, inherent in the corporate governance–performance relationship.     

Institutional investors’ site visits and corporate employment decision-making

This study examines the effect of institutional investors’ site visits on corporate employment decision-making. Using a unique dataset of corporate site visits (CSVs) to the listed firms in China, we find that CSVs are associated with less labor investment inefficiency. The effect is more pronounced in firms with lower information quality, worse corporate governance, and severe financial constraints. Our results are robust to endogeneity concerns. Further analysis suggests that labor investment inefficiency leads to lower future performance. Overall, our results are consistent with the view that CSVs improve information quality, corporate governance, and access to finance, which in turn, mitigates inefficient labor investment.     

ACTIVITY STRATEGIES,AGENCY PROBLEMS,AND BANK RISK

We investigate whether diversification affects bank risk taking in the U.S. banking industry, and whether this relation is partially explained by agency theory. Our results show that U.S. banks with a relatively high share of noninterest income become riskier when moving toward non-interest-income-generating activities, especially activities from investment banking, proprietary trading, and so on. Diversification not only affects conditional average risk, but also the dispersion of risk. Moreover, diversified banks that received assistance from the Troubled Asset Relief Program (TARP) become riskier than diversified nonrecipients after TARP capital injections. Our main findings are robust to a battery of robustness tests. The results are partially explained under agency frameworks related to poor corporate governance.     

The existence and independence of audit committees in France

This paper uses an agency theory framework to investigate the determinants of audit committees in France. Empirical tests address a cross-sectional sample of 285 listed companies for the fiscal year 1997, which is two years after the first Viénot report recommending the creation of audit committees among listed companies. Multivariate analyses show that the existence of an audit committee, and the committee's independence, are both negatively correlated with insider ownership, consistent with the owner-manager agency theory that considers audit committees as devices aimed at strengthening the monitoring system, the quality of financial reporting and the whole corporate governance environment. The existence of an audit committee that complies with corporate governance recommendations (i.e., a minimum of three directors, all of whom are non-executive directors) also positively depends on leverage if the firm has a high-IOS (Investment Opportunity Set). The quality of accounting numbers thus seems important in shareholder-debtholder relationships if lenders are potentially more exposed to default risk and expropriation mechanisms. However, this result might be sensitive to the IOS measurement and classification of high- and low-IOS companies. Finally, the presence of an audit committee is found to be positively correlated with board size, firm size, auditor reputation, and with the diversity of the company's operations.     

Corporate Pyramids,Conservatism and Cost of Debt: Evidence From Taiwan

This study investigates the extent to which the span of corporate pyramids (as measured by the number of ownership layers) is associated with higher agency costs of debt, and whether conservatism can moderate the agency cost. Consistent with corporate pyramids generating higher agency costs and information asymmetries between corporate insiders and outside creditors, we find a positive association between the number of investment layers and cost of debt. However, we also find that multi-layered firms mitigate organizational opaqueness through increased financial reporting conservatism, which results in lower cost of debt capital. These findings provide new insights into the relationship between organizational structure and financial reporting quality.     

金融资产配置与违约风险:蓄水池效应,还是逐利效应？

本文以2007—2016年中国A股上市公司为研究对象,检验了企业金融资产配置对违约风险的影响。实证研究发现:金融资产持有量越多,企业的违约风险越低,金融资产配置的“蓄水池效应”显著;在货币政策宽松时期,金融资产配置导致的代理冲突显现,宽松的货币政策会抑制金融资产投资对违约风险的降低作用。政府规制也会有一定的公司治理作用,将产业政策纳入讨论发现:对于产业政策支持的行业来说,企业金融资产配置能够降低违约风险,但是宽松的货币政策会刺激管理层的短视投资行为,抑制政府规制的公司治理作用。进一步地,本文提出会计稳健性的提升是企业金融资产配置降低违约风险的重要路径。本文的研究结论丰富了企业金融资产配置动机和违约风险影响因素的讨论,能够为政府部门防范经济运行中的内在风险提供有益借鉴。     

Does national culture affect international corporate cash holdings?

The current literature frequently examines the effects of shareholder rights protection on corporate cash holdings in the context of agency theory. In this study, we show that national culture influences corporate managers’ cash holding behavior beyond the effects of corporate governance and financial market developments in each country through the perception of agency costs and value of financial flexibility. Using Hofstede's cultural dimension indices, we find that corporations hold larger cash and liquid balances in countries where the people tend to avoid uncertainty more, are culturally more masculine, and have longer term orientation.     

Agency Problems,Equity Ownership,and Corporate Diversification

We provide evidence on the agency cost explanation for corporate diversification. We find that the level of diversification is negatively related to managerial equity ownership and to the equity ownership of outside blockholders. In addition, we report that decreases in diversification are associated with external corporate control threats, financial distress, and management turnover. These findings suggest that agency problems are responsible for firms maintaining value-reducing diversification strategies and that the recent trend toward increased corporate focus is attributable to market disciplinary forces.     

Financial Globalization,Governance, and the Evolution of the Home Bias

We merge portfolio theories of home bias with corporate finance theories of insider ownership to create the optimal corporate ownership theory of the home bias. The theory has two components: (1) foreign portfolio investors exhibit a large home bias against countries with poor governance because their investment is limited by high optimal ownership by insiders (the “direct effect” of poor governance) and domestic monitoring shareholders (the “indirect effect”) in response to the governance and (2) foreign direct investors from “good governance” countries have a comparative advantage as insider monitors in “poor governance” countries, so that the relative importance of foreign direct investment is negatively related to the quality of governance. Using both country‐level data on U.S. investors' foreign investment allocations and Korean firm‐level data, we find empirical evidence supporting our optimal corporate ownership theory of the home bias.     

ESG for All? The Impact of ESG Screening on Return,Risk, and Diversification

A large body of research has documented a positive relationship between different measures of sustainability—such as indicators of employee satisfaction and effective corporate governance—and corporate financial performance. Nevertheless, many investors still struggle to quantify the value of ESG to investment performance. To address this issue, the authors tested the effects of using different ESG filters on an investable universe that serves as the starting point for a fund manager. In this way, they attempted to determine the extent to which ESG data can add value to any investment approach, regardless of preferences towards sustainable investing. The authors report “an unequivocally positive” contribution to risk‐adjusted returns when using a 10% best‐in‐class ESG screening approach (one that effectively removes companies with the lowest 10% of ESG rankings), both on a global and a developed markets universe. More specifically, as a result of such screening, both the global and developed markets portfolios show higher returns, lower (tail) risk, and no significant reduction of diversification potential despite the reduction in the number of companies. Use of a 25% screening filter was also found to add value, especially by reducing tail risks, but with a larger deviation from the unscreened universe. Overall, then, the authors’ finding is that the incorporation of ESG information contributes to better decision‐making in every investment approach, with the optimal configuration depending on a fund manager's preferences and willingness to deviate from an unscreened benchmark.     

Governance and Performance Implications of Diversification Strategies: Evidence from Large U.S. Firms

Recent research focuses on explaining the diversification discount. However, there is little direct evidence regarding the relation among ownership structure, corporate governance, and corporate diversification. The results in this paper suggest that agency issues do not account for firms adopting a particular diversification strategy. Also, the performance consequences of the shift in the diversification strategy and the subsequent changes in institutional and block ownership structures are not related to agency issues. In fact, investors seem not to avoid diversified firms per se. We suggest that observed board and ownership differences between diversified and focused firms are due to their being at different stages of corporate evolution.     

Dividend Payouts and Corporate Governance Quality: An Empirical Investigation

Motivated by agency theory, we investigate how a firm's overall quality of corporate governance affects its dividend policy. Using a large sample of firms with governance data from The Institutional Shareholder Services, we find that firms with stronger governance exhibit a higher propensity to pay dividends, and, similarly, dividend payers tend to pay larger dividends. The results are consistent with the notion that shareholders of firms with better governance quality are able to force managers to disgorge more cash through dividends, thereby reducing what is left for expropriation by opportunistic managers. We employ the two‐stage least squares approach to cope with possible endogeneity and still obtain consistent results. Our results are important as they show that corporate governance quality does have a palpable impact on critical corporate decisions such as dividend policy.     

Consequences of local social norms: A review of the literature in accounting,finance, and corporate governance

We synthesise the empirical archival research on the consequences of local social norms on accounting, finance, and corporate governance outcomes in an international setting. The literature reviewed is premised on the theory that corporations do not make decisions, but managers do, and managers are likely to be influenced by the socioeconomic environment of the region in which they operate and/or by the people with whom they interact. To provide a structure to our review, we identify social capital, religiosity, gambling norms, and corruption culture, as four constructs of local social norms and link these with financial reporting and external auditing, financial, investment, and dividend decisions, capital market consequences and finally, corporate governance and corporate social responsibility behaviour of firms. We highlight some limitations of the existing research and offer some suggestions for future research.     

Corporate governance and the spinoff decision

Using a sample of 102 spinoffs in the period 1981 to 1997, we investigate the relation between corporate governance and the spinoff decision. Diversified firms conducting a spinoff have characteristics previously hypothesized to be associated with more effective corporate governance, such as greater ownership by outside board members, more heterogeneous boards, and fewer board members, in comparison to a set of peer firms. Post spinoff, relative valuation measures increase a significantly greater extent than for peer firms. These findings are consistent with the view that agency problems are a contributing factor in firms maintaining value destroying diversification strategies.     

Exploring the Agency Cost of Debt: Evidence from the ISS Governance Standards

Corporate governance is usually viewed in the context of strengthening shareholder rights and enhancing shareholders’ welfare. However, the impact of corporate governance on bondholders is much less understood. We explore how corporate governance influences the cost of debt financing. Using broad governance metrics encompassing fifty governance attributes reported by The Institutional Shareholder Services (ISS), we document that stronger corporate governance is associated with a higher cost of debt. As governance strengthens by one standard deviation, the cost of debt rises by as much as 11 %. The results are robust even after controlling for both firm-specific and issue-specific characteristics. Our results are important because they suggest that corporate governance has a palpable effect on critical corporate outcomes such as credit ratings and bond yields. More importantly, we show that, while corporate governance may mitigate the agency conflict between managers and shareholders, it appears to exacerbate the agency conflict between shareholders and bondholders (the agency cost of debt).     

The effect of financial reporting quality on corporate investment efficiency: Evidence from the Tunisian stock market

Positive Accounting Theory (Watts and Zimmerman, 1978) stipulates that financial reporting has two dimensions: market signaling and monitoring managerial behaviors. Through these signaling and stewardship means, a better financial reporting quality would have significant economic consequences in terms of efficient resources allocation, which results in improving firms’ investment decision. In this paper, we examine the impact of financial reporting quality on corporate investment efficiency. Our sample is based on 25 Tunisian listed companies for the period 1997–2013. The findings confirm that some characteristics of the financial information, namely, reliability and smoothness, appear to increase the investment inefficiency, while others, i.e., conservatism and relevance, seem have no significant effect on investment decisions. We attribute such results mainly to the contextual specificities of the Tunisian environment, such as, the institutional bodies and settings, the cultural values and some characteristics of the corporate governance system.