A study of firms surrounding the threshold of Sarbanes–Oxley Section 404 Compliance

This study examines whether firms surrounding the Sarbanes–Oxley Section 404 market value compliance threshold behave opportunistically to reduce their market value to avoid compliance with Section 404. We find evidence that those firms reduce their market value temporarily during threshold measurement quarters, whereas control firms experience increasing market value. We find strong evidence of dampened stock returns and some evidence of insider trading as means to reduce the float. Additionally, we find that downward earnings management is used as a mechanism to alter investors’ expectations of firm value in order to temporarily reduce stock prices. We consider this opportunistic evidence of regulatory avoidance. Finally, we find that the likelihood of avoidance increases with the power of the CEO and decreases with the strength of the monitoring of the CEO, which suggest that avoidance is more likely to happen in firms with poor corporate governance mechanisms.     

Corporate Governance and Expected Stock Returns: Evidence from Germany

Recent empirical work shows evidence for higher valuation of firms in countries with a better legal environment. We investigate whether differences in the quality of firm‐level corporate governance also help to explain firm performance in a cross‐section of companies within a single jurisdiction. Constructing a broad corporate governance rating (CGR) for German public firms, we document a positive relationship between governance practices and firm valuation. There is also evidence that expected stock returns are negatively correlated with firm‐level corporate governance, if dividend yields are used as proxies for the cost of capital. An investment strategy that bought high‐CGR firms and shorted low‐CGR firms earned abnormal returns of around 12% on an annual basis during the sample period.     

How corporate governance affect firm value? Evidence on a self-dealing channel from a natural experiment in Korea

Prior work in emerging markets provides evidence that better corporate governance predicts higher market value, but very little evidence on the specific channels through which governance can increase value. We provide evidence, from a natural experiment in Korea, that reduced tunneling is an important channel. Korean legal reform in 1999 changed the board structure of “large” firms (assets > 2 trillion won) relative to smaller firms. In event studies of the reform events, we show that large firms whose controllers have incentive to tunnel earn strong positive returns, relative to mid-sized firms. In panel regressions over 1998–2004, we also show that better governance moderates the negative effect of related-party transactions on value and increases the sensitivity of firm profitability to industry profitability (consistent with less tunneling).     

Real Options,Volatility, and Stock Returns

We provide evidence that the positive relation between firm‐level stock returns and firm‐level return volatility is due to firms’ real options. Consistent with real option theory, we find that the positive volatility‐return relation is much stronger for firms with more real options and that the sensitivity of firm value to changes in volatility declines significantly after firms exercise their real options. We reconcile the evidence at the aggregate and firm levels by showing that the negative relation at the aggregate level may be due to aggregate market conditions that simultaneously affect both market returns and return volatility.     

Corporate Governance and Acquirer Returns

We examine whether corporate governance mechanisms, especially the market for corporate control, affect the profitability of firm acquisitions. We find that acquirers with more antitakeover provisions experience significantly lower announcement‐period abnormal stock returns. This supports the hypothesis that managers at firms protected by more antitakeover provisions are less subject to the disciplinary power of the market for corporate control and thus are more likely to indulge in empire‐building acquisitions that destroy shareholder value. We also find that acquirers operating in more competitive industries or separating the positions of CEO and chairman of the board experience higher abnormal announcement returns.     

Corporate Governance and Value: Evidence from “Close Calls” On Shareholder Governance Proposals

The authors summarize the findings of their recent study of the effects of specific corporate governance provisions on firm value. Using a sample of governance provisions that were subjected to shareholder votes during the period 1997–2011, this study analyzes cases in which shareholder‐sponsored corporate governance proposals were either rejected or passed by a small margin (no more than 5% of the vote). By so doing, this study helps correct two limitations of the existing governance literature: (1) that the effects of expected governance changes are already incorporated in share prices (the “expectations” problem); and (2) that governance policies are often a consequence rather than a cause of other variables such as corporate performance and are thus correlated with many other firm characteristics (the “endogeneity” problem). The authors' findings show that expected improvements in corporate governance through the adoption of particular corporate governance provisions—particularly the removal of anti‐takeover provisions—is associated with both positive abnormal stock returns and improvements in long‐term firm operating performance. The authors estimate that the adoption of such governance proposals increases shareholder value by 2.6%, on average. Moreover, these returns are consistent with, and thus accurate predictors of, future changes in corporate investment (reductions of capital spending, in most cases) and improvements in operating performance.     

Corporate governance and family firm performance during the Global Financial Crisis

We investigate the impact of corporate governance on accounting and market performance relationships of family firms during the Global Financial Crisis (GFC). We expect the monitoring aspects of corporate governance to complement the long-term orientation of family firms, improving the value relevance of accounting and market performance during times of exogenous financial shocks such as the GFC. We find that the family-firm value is more sensitive to book value than earnings changes. We also find better corporate governance, irrespective of whether it is a family firm or non-family firm, is associated with better accounting and market performance during the GFC.     

Management by the Numbers: A Formal Approach to Deriving Informational and Distributional Properties of “Unmanaged” Earnings

We explore the theoretical relation between earnings and market returns as well as the properties of earnings frequency distributions under the assumption that managers use unbiased accounting information to sequentially decide on real options their firms have and report generated earnings truthfully, with the market pricing the firm based on those reported earnings. We generate benchmarks against which empirically observed earnings‐returns relations and aggregate earnings distributions can be evaluated. This parsimonious model shows a coherent set of results: reported losses are less persistent than reported gains, decision making diminishes the S‐shaped market response to earnings and earnings relate to returns asymmetrically in the way documented by Basu [1997]. Furthermore, the implied frequency distribution of aggregate earnings is neither symmetric nor necessarily single‐peaked. Instead, it may exhibit a kink at zero and look similar to the plots reported by Burgstahler and Dichev [1997]. However, within our model, none of these phenomena are due to reporting noise, bias, or some undesirable strategic managerial behavior. They are the natural consequences of using past earnings as the basis for value increasing managerial decision making that in turn generates the future earnings on which future decisions will be based.     

Learning and the disappearing association between governance and returns

The correlation between governance indices and abnormal returns documented for 1990–1999 subsequently disappeared. The correlation and its disappearance are both due to market participants' gradually learning to appreciate the difference between good-governance and poor-governance firms. Consistent with learning, the correlation's disappearance was associated with increases in market participants' attention to governance; market participants and security analysts were, until the beginning of the 2000s but not subsequently, more positively surprised by the earning announcements of good-governance firms; and, although governance indices no longer generated abnormal returns during the 2000s, their negative association with firm value and operating performance persisted.     

Crises,contagion and cross-listings

We investigate whether cross-listing shares in the form of depositary receipts in overseas markets benefits investors in emerging market countries during periods of local financial crisis from 1994 to 2002. We regress cumulative abnormal returns for three windows surrounding the crisis events on the cross-listing status while controlling for cross-sectional differences in firm age, trading volume, foreign exposure, disclosure quality and corporate governance. Further, we examine cross-listing effects in countries popularly thought to experience contagious effects of these crises. We find that cross-listed firms react significantly less negatively than non-cross-listed firms, particularly in the aftermath of the crisis. The results on contagious cross-listing effects are however mixed. Our findings are consistent with predictions based on theories of market segmentation as well as differential disclosure/governance between developed and emerging markets. We do not find evidence that foreign investors “panic” during a currency crisis.     

IS THE BOOK‐TO‐MARKET RATIO A MEASURE OF RISK?

We develop a leverage‐based alternative to traditional asset pricing models to investigate whether the book‐to‐market ratio acts as a proxy for risk. We argue that the book‐to‐market ratio should act as a proxy because of the expected relations between (1) financial risk and measures of capital structure based on the market value of equity and (2) asset risk and measures of capital structure based on the book value of equity. We find no relation between average stock returns and the book‐to‐market ratio in all‐equity firms after controlling for firm size, and an inverse relation between average stock returns and the book‐to‐market ratio in firms with a negative book value of equity.     

Corporate Governance,Product Market Competition,and Equity Prices

This paper examines whether firms in noncompetitive industries benefit more from good governance than do firms in competitive industries. We find that weak governance firms have lower equity returns, worse operating performance, and lower firm value, but only in noncompetitive industries. When exploring the causes of the inefficiency, we find that weak governance firms have lower labor productivity and higher input costs, and make more value‐destroying acquisitions, but, again, only in noncompetitive industries. We also find that weak governance firms in noncompetitive industries are more likely to be targeted by activist hedge funds, suggesting that investors take actions to mitigate the inefficiency.     

Valuation Effects for Asset Sales

This study provides evidence that the outcome for shareholders resulting from asset sales is determined at the time of transaction by the value for the asset sold. Assets sold above market value are followed by positive and significant abnormal returns over the following three months; these returns are magnified in firms where the balance of power in corporate governance favors shareholders. Abnormal returns following undervalued asset sales are insignificant from zero, indicating value-preservation. Value-preservation when the assets are sold below market value becomes less likely as firms approach financial constraints. The reverse is true when assets are sold above market value. This evidence is documented for apartment REITs, which have a large number of comparable transactions available for estimating expected market values.     

Analysing the market–book value relation in large Australian and US firms: implications for fundamental analysis and the market–book ratio

This study compares the market–book relation of Australian and US firms using firm‐level dynamic analysis of using annual data for a long‐run period in error correction modelling. This paper contributes to a recent call for alternative ways of estimating Ohlson‐type linear valuation models (Ohlson and Kim, 2015). Log transformations of the data are used in this study to improve the statistical properties of the models. This study contributes to the findings on linear valuation model estimation for long‐run firms. Based on the returns model estimation, we find evidence of a higher level of co‐integration between market and book values for Australian firms.     

Exchange Rate Exposure at the Firm and Industry Level

Previous work on the exposure of firms to exchange rate risk has primarily focused on U.S. firms and, surprisingly, found stock returns were not significantly affected by exchange‐rate fluctuations. The equity market premium for exposure to currency risk was also found to be insignificant. In this paper we examine the relation between Japanese stock returns and unanticipated exchange‐rate changes for 1,079 firms traded on the Tokyo stock exchange over the 1975–1995 period. Second, we investigate whether exchange‐rate risk is priced in the Japanese equity market using both unconditional and conditional multifactor asset pricing testing procedures. We find a significant relation between contemporaneous stock returns and unanticipated yen fluctuations. The exposure effect on multinationals and high‐exporting firms, however, is found to be greater in comparison to low‐exporting and domestic firms. Lagged‐exchange rate changes on firm value are found to be statistically insignificant implying that investors are able to assess the impact of exchange‐rate changes on firm value with no significant delay. The industry level analysis corroborates the cross‐sectional findings for Japanese firms in that they are sensitive to contemporaneous unexpected exchange‐rate fluctuations. The co‐movement between stock returns and changes in the foreign value of the yen is found to be positively associated with the degree of the firm's foreign economic involvement and inversely related to its size and debt to asset ratio. Asset pricing tests show that currency risk is priced. We find corroborating evidence in support of the view that currency exposure is time varying. Our results indicate that the foreign exchange‐rate risk premium is a significant component of Japanese stock returns. The combined evidence from the currency exposure and asset pricing analyses, suggests that currency risk is priced and, therefoe, has implications for corporate and portfolio managers.     

The Vote Is Cast: The Effect of Corporate Governance on Shareholder Value

This paper investigates whether improvements in the firm's internal corporate governance create value for shareholders. We analyze the market reaction to governance proposals that pass or fail by a small margin of votes in annual meetings. This provides a clean causal estimate that deals with the endogeneity of internal governance rules. We find that passing a proposal leads to significant positive abnormal returns. Adopting one governance proposal increases shareholder value by 2.8%. The market reaction is larger in firms with more antitakeover provisions, higher institutional ownership, and stronger investor activism for proposals sponsored by institutions. In addition, we find that acquisitions and capital expenditures decline and long‐term performance improves.     

Corporate governance,life cycle,and payout precommitment: An emerging market study

We analyze the role of firm‐level corporate governance in determining the precommitment payout policy of emerging market firms and investigate whether there is a precommitment life‐cycle effect. Unlike previous studies of U.S. firms, we find evidence of precommitment only among relatively well‐governed firms, which combine good governance with large dividend payouts to shareholders and large debt‐related repayments to creditors. We also document a strong precommitment life‐cycle effect. Firms in the growth and mature stages of their life cycle tend to use both debt and dividends to precommit to investors, with an increasing proportion of dividends in total payout measures. Our results are robust to an array of control variables, alternate payout proxies, market setting, and firm‐level corporate governance, and it addresses potential endogeneity concerns in the sample.     

It Takes Two: The Incidence and Effectiveness of Co‐CEOs

This study examines the phenomenon of co‐CEOs within publicly traded firms. Although shared executive leadership is not widespread, it occurs within some very prominent firms. We find that co‐CEOs generally complement each other in terms of educational background or executive responsibilities. Our results show that firms most likely to appoint co‐CEOs have lower leverage, a more limited firm focus, less independent board structure, fewer advising directors, lower institutional ownership, and greater levels of merger activity. The governance structure of co‐CEO firms suggests that co‐CEOships can serve as an alternative governance mechanism, with co‐CEO mutual monitoring substituting for board or external monitoring and co‐CEO complementary skills substituting for board advising. An event study indicates that the market reacts positively to appointments of co‐CEOs while a propensity score analysis shows that the presence of co‐CEOs increases firm valuation.     

Corporate governance and capital allocations of diversified firms

We examine how various aspects of corporate governance structures affect the capital allocation inefficiency that drives the value discounts of diversified firms. Diversified firms with more effective internal or external governance mechanisms experience more efficient investment allocations at both the firm and segment levels and show less of a diversification discount. The efficiency of the investment allocation process is better for diversified firms with high board independence, low board busyness, high institutional ownership, high outside director ownership, high CEO equity-based pay, high audit quality, and strong shareholder rights. The results hold after controlling for other potential influences. Our evidence suggests that corporate governance considerations are important in assessing the relation between investment efficiency and firm value for diversified firms.     

The impact on stock prices of deferral and elimination of internal control audit requirement for small firms

This paper examines the cumulative market reaction to the events related to deferral of internal control audit requirement under the Sarbanes-Oxley Act of 2002 and its elimination under the Dodd-Frank Act of 2010 for nonaccelerated filers (small firms). We document that small firms experienced negative cumulative abnormal returns around these events; and the differences between the cumulative abnormal returns for small firms and the two control groups (accelerated and large accelerated filers) were negative and significant at the 1% level. These results support the notion that market participants value the reliability of financial information irrespective of the firm size. Within the small firms, we find no firm characteristic significantly explains the market reaction to the events considered. That is, all small firms lost market value in reaction to the events that delayed and eliminated their internal control audit requirement.