Did Good Corporate Governance Improve Bank Performance during the Financial Crisis?

This paper focuses on the effects of corporate governance on bank performance during the financial crisis of 2008. Using data on large publicly traded U.S. banks, we examine whether banks with stronger corporate governance mechanisms were associated with higher profitability and better stock market performance amidst the crisis. Our empirical findings on the effects of corporate governance on bank performance are mixed. Although the results suggest that banks with stronger corporate governance mechanisms were associated with higher profitability in 2008, our findings also indicate that strong governance may have had negative effects on stock market valuations of banks amidst the crisis. Nevertheless, we document that banks with strong corporate governance practices had substantially higher stock returns in the aftermath of the market meltdown, indicating that good governance may have mitigated the adverse influence of the crisis on bank credibility.     

Does Financial Openness Matter in the Relationship Between Financial Development and Income Distribution in Latin America?

This article examines the effect of financial development on income distribution by analyzing a sample of Latin American countries according to their degree of financial openness for the 1990–2011 period. The period includes the time before and after financial liberalization for most of the countries in the region. As the literature provides inconclusive results regarding the relationship between financial development and income inequality, we aim to determine whether financial openness plays a role in this relationship. Our results provide an explanation for why some countries regardless of their degree of financial openness cannot achieve a reduction in income inequality.     

What is the Relationship Between REIT Governance and Earnings Management?

The empirical corporate finance literature claims that better corporate governance constrains earnings management, while others argue that the unique legal and reporting structure of REITs may reduce the need for such internal corporate governance. Using a sample of publicly traded REITs for the 2004–2008 time period, we examine the relationships amongst corporate governance, accruals earnings management, manipulation of Funds from Operations (FFO), and real earnings management. We find that corporate governance quality is unrelated to accruals earnings management and manipulation of FFO. At first glance, the findings suggest that managers need less internal oversight because of the more transparent reporting structure of REITs. However, we document that REITs engage in significant real activities manipulation for earnings management purposes. Our empirical findings further show that corporate governance characteristics, in particular board size, independence, number of board meetings and audit committee financial expertise, are essential for constraining such activities. Finally, by focusing on a subset of REITs that act in ways which previous research has identified as more susceptible to earnings management activities, we demonstrate that good corporate governance effectively reduces accruals earnings management and manipulation of FFO for these REITs. Overall, our findings indicate that, despite the unique legal and reporting structure, REITs engage in certain forms of earnings management, and that the ability for REITs to manipulate earnings is reduced when corporate governance is more effective.     

Does Corporate Governance Matter in the Contractual Form of Fund Management Companies in China?

ABSTRACT

Operating under a regulatory environment with weak enforcement of investor protection, the contractual form of fund management companies (FMCs) in China’s emerging fund industry presents some complex governance issues in addition to the conventional agency problems of modern public corporations. Using 288 firm-year observations covering more than 98 percent of FMCs in China, this article presents the first systematic study on whether the quality of corporate governance mechanisms affects the performance of the contractual form of FMCs. Our results suggest that FMCs with good corporate governance do matter in generating favorable performance for fund investors in China.     

Does Financial Regulation Enhance or Impede the Efficiency of China's Listed Commercial Banks? A Dynamic Perspective

Unlike studies investigating only the characteristics of bank regulation that affect the concurrent static efficiency of banks, this paper uses a dynamic, slacks-based measure to study the persistent and intertemporal effects on the dynamic efficiency of banks in the long run. The authors find the following main results. First, the cost-to-income ratio has a significant negative effect on bank efficiency. Second, banks having higher loan-to-deposit and current ratios are more efficient than those with lower ratios. Third, the capital adequacy, provision coverage, and loan-loss provision ratios do not significantly affect bank efficiency.     

Does “Vote No” Change Corporate Governance and Firm Value? Evidence from the Shareholder Activism of the Korean National Pension Service

In this paper, we analyze the effect of shareholder activism on firm value through internal corporate governance in an emerging market. We investigate the shareholder activism by the National Pension Service (NPS) of Korea, the fourth-largest pension fund in the world in 2010. We investigate stock price reaction to a “vote no” press announcement and find that the market does not react in the short run, which reaction is inconsistent with the results from developed countries. We also find that firms experiencing “vote no” and improved internal corporate governance have higher firm valuation. Shareholder activism by the NPS is effective in increasing target firm value through improving internal corporate governance.     

What Drives the Relationship Between Financial Flexibility and Firm Performance: Investment Scale or Investment Efficiency? Evidence from China

Financial flexibility helps improve firm performance. By using data from Chinese listed companies, we examine whether investment scale or investment efficiency drives the relationship between financial flexibility and firm performance via a special mediator testing method that is widely used in the psychology literature (Baron and Kenny, 1986). We find that financial flexibility has a significant and positive effect on both investment and firm performance. However, investment scale rather than investment efficiency seems to drive firm performance. This finding helps us understand that Chinese companies tend to emphasize investment expansion more than they do investment efficiency to improve firm performance.     

Does Corporate Social Responsibility Affect the Cost of Bank Loans? Evidence from China

This article examines the link between corporate social responsibility (CSR) and cost of bank loans (CBL) in China. We find that there exists an inverse U-shape relationship between CSR and CBL. In addition, CSR threshold for state-owned enterprises (SOEs) is higher than for non-SOEs. In particular, CSR threshold for SOEs is lower in regions with high degree of marketization than in regions with low degree of marketization. The findings indicate that value-destroying effect occurs during CSR underinvestment phase, which is different from the overinvestment view. Moreover, the effect of CSR on CBL also depends on contextual factors such as firm ownership and marketization level.     

Corporate Governance Reform,Board Structure,and Its Determinants in the Banking Industry—Evidence from Taiwan

This study employs the data of twenty-seven banks listed on the Taiwan Stock Exchange from 2000–11 to examine the determinants of board structure, e.g., board size and the independent directors ratio. The evidence shows that bank size, the degree of revenue diversification, and the CEO’s shareholding are positively associated with the independent directors ratio. A higher outside block shareholding is correlated with a larger board size and a higher independent directors ratio. As the creditors’ stake decreases, a larger board and greater board independence are required to maintain internal corporate governance. Finally, banks with M&A activity tend to downsize their board sizes and reduce board independence in the subsequent period.     

Managers’ Escalation Behavior in Equity Investment Decisions and the Role of Corporate Governance

The aim of this study is to investigate the relationship between free cash flows and escalation behavior in the long-term stock buying decisions for the firms listed in Taiwan. The main findings include: (1) Managers tend to exhibit the escalation behavior in the long-term equity investment. (2) There is a positive association between the level of free cash flows and the magnitude of managers’ behavioral escalation. (3) The corporate governance mechanisms play a contributory role in mitigating the escalation behavior. The evidence is robust across subsamples for electronic versus non-electronic industries, growth versus value firms, and loss versus gain firms.     

Do Corporate Governance Analysts Matter? Evidence from the Expansion of Governance Analyst Coverage

T his paper examines the economic consequences of the initiation of governance analyst coverage. Governance analysts process, enhance, and disseminate governance‐related information to capital market participants via, for example, governance reports and ratings. Using an exogenous shock in the United Kingdom, I find that an increase in governance analyst coverage results in increased governance quality, improved liquidity, increased financial analyst following, and improved investor breadth. These findings are consistent with governance analysts creating value for firms via monitoring, information dissemination/production, and investor recognition.     

How Do Central Bank Governors Matter? Regulation and the Financial Sector

Do past employment characteristics of central bank governors affect financial regulation? To answer this question, we construct a new data set based on curriculum vitae of all central bank governors around the world in 1970–2011. We interpret work experiences as indicators of preferences toward deregulation. Over the average duration in office (5.6 years), a governor with financial sector experience is associated with three times more deregulation than a governor without experience in finance. Similar results hold for past experience at the IMF; in contrast, past experience at the BIS and the UN are associated with less deregulation.     

Does the Quality of Financial Advice Affect Prices?

Using a large data sample of 58,562 new municipal issues covering the period from 1984 to 2002, we examine whether the quality of advice provided by a financial advisor affects new issue interest costs. We find that higher‐quality financial advisors are associated with statistically significant decreases in new issue yields. The effect of advisor quality on yields is more pronounced for revenue, negotiated, and opaque bond issues than for general obligation and competitively sold issues. However, issuers of revenue or negotiated bonds are more likely to choose a low‐quality advisor.     

The Relationship Between Sovereign Spreads and International Reserves: Does the Exchange Rate Regime Matter?

International reserves have been put forward as an important factor affecting sovereign spreads in the literature. This article empirically analyzes whether the relationship between international reserves and sovereign spreads depends on exchange rate policy in emerging markets. The analysis is carried out using exchange rate classifications based on both the officially declared regimes and the actual exchange rate behavior. The results show that international reserves reduce sovereign spreads for all levels of exchange rate flexibility using both classifications. Reserves have a similar effect on spreads for all exchange rate categories, except for hard pegs, under which the effect is larger.     

Do US Corporate Governance Standards Effectively Discourage Risk in the Emerging Markets?

This study provides an examination of the effect of various corporate governance factors on the management of the risks inherent in business and the potential divergent impact of these factors on US firms and firms in emerging countries. In particular, the study scrutinises corporate governance and corporate risk‐taking behaviour across different political and socioeconomic environments. In a cross‐sectional time‐series setting, two‐step generalised least squares regression outcomes reveal that the impact of corporate governance on corporate risk taking demonstrates similar implications for US and emerging markets firms in several ways. Nonetheless, the findings also indicate that although some of the US governance standards are effective in the emerging markets, further strengthening of governance standards may be required. Specific governance aspects of the emerging markets, such as board and committee composition, are still lacking when compared to those of the US. Regardless of these differences, the outcomes reveal that those US governance standards adopted by the firms in the emerging markets strengthen governance structures and discourage corporate risk‐taking behaviour.     

Does Bancassurance Reduce the Price of Financial Service Products?

I assess the impact of bancassurance on the price of retail financial services. I find that service fees in a product bundle increase less than proportionally to the number of services; that an increase in the number of clients in each product bundle market reduces fees by 1.5%; that the degree of competition in the markets of each bundle also reduces fees; that premium products have higher average costs; and finally, that cross-holdings reduce prices by about 5% and bancassurance reduces prices by just over 6%. The price reduction declines if both strategies are combined.

The Consequences of Issuing Convertible Bonds: Dilution and/or Financial Restructuring?

Historically, most convertible bond (CB) issues have been converted to equity sooner or later. The announcement of a CB issue will bring about a future dilution of the firm's capital, and is often followed by a drop in share price. However, a CB issue by itself creates future value for the shareholders if it enables the firm to make profitable investments. It can also issue a positive signal regarding the restructuring of the firm's financial liabilities and its attempts to optimise its financial structure. These positive effects, if they occur, will develop gradually after the issue, and cannot be identified by a simple short‐term event analysis of a CB issue announcement. In this paper, we test the significance of the dilution effect, coupled with a possible value creation effect, using data from the French stock market. We introduce a comparison between dilutive convertibles and non‐dilutive exchangeable bonds. By integrating different corrections and by selecting a window of analysis over a longer period after the announcement of the issue, we show that the negative cumulative average abnormal returns generally observed in previous studies become non‐significant. This absence of global incidence is indicative of large differences in individual behaviour by issuers of CBs, and leads us to take into account the strategic choices linked to the issue of a CB. Two goals, often described as ‘investment financing’ or ‘financial restructuring’, may exist when issuing, and may appear to explain the size of the abnormal returns.     

Does Fair Value Accounting Exacerbate the Procyclicality of Bank Lending?

This study investigates whether fair value accounting contributes to the procyclicality of bank lending. Using banks’ approval/denial decisions on residential mortgage applications to capture banks’ supply of credit, I find no evidence that fair value accounting has procyclical effects on bank lending over the past two business cycles. I further identify two reasons for this result. First, the main accounting item distinguishing fair value accounting from historical cost accounting—unrealized gains and losses on available‐for‐sale securities—does not affect lending decisions. Second, unrealized gains and losses on available‐for‐sale securities are not procyclical, as the risk‐free interest rate rises during some expansionary periods, resulting in unrealized losses, while the risk‐free interest rate (and sometimes the default spread) falls during some recessionary periods, resulting in unrealized gains.     

Financial Contagion in the Laboratory: Does Network Structure Matter?

We explore the role of interbank network structure and premature liquidation costs for the likelihood of financial contagions in a laboratory experiment. We consider complete versus incomplete networks of banks linked together by interbank deposits, and we further vary premature liquidation costs. Subjects play the role of depositors deciding whether or not to withdraw funds from their interconnected bank. We find that when liquidation costs are high, a complete network structure is significantly less vulnerable to financial contagions than an incomplete network structure. However, when liquidation costs are low, network structure is less important for the frequency of financial contagions.     

Does Endogenously Determined Ownership Matter on Performance? Dynamic Evidence from the Emerging Taiwan Market

This paper reexamines the relationship between ownership and firm performance. Using an unbalanced panel data in the emerging Taiwan market, we adopt a simultaneous equations framework to explore the persistence of the relationship across the life cycle of firms over time. Empirical results suggest that firm performance is a function of institutional ownership, especially in the mature stage. Through dynamic specification, evidence appears to account for lack of persistence of the impacts of ownership on performance over time. To alleviate a potential simultaneity issue, we construct a lagged specification to examine the sensitivity of our results. Consequently, the main results are found to be robust.