Relative information asymmetry as a determinant of the market reaction to corporate financing announcements

Information-asymmetry-based models predict that the market should react negatively to unanticipated external financing. Previous empirical studies lend limited support to these conjectures. This study examines the anticipation issue using financial analysts' earnings-forecast errors as a proxy for information available prior to the external-financing announcement. The conjecture is that external financing would be less anticipated for firms which financial analysts cannot accurately predict their earnings. Event study results indicate that high-prediction-error firms exhibit significantly lower announcement period returns than lowprediction-error firms for non-convertible debt, convertible debt, and common stock offerings.     

Outside director compensation and firm performance

Compensation given to outside directors has come under increasing scrutiny. However, little empirical work exists which examines outside director compensation. A study of more than 225 major corporations over a five-year period indicates that the number of board meetings and the size of the company are major factors in outside director compensation levels, while organization performance and Chief Executive Officer remuneration do not appear to be significantly related. These findings suggest that market-driven compensation systems are the dominant form used by large organizations to pay outside directors, with a major goal being the attraction and retention of these directors.     

财务报表重述与公司非效率投资行为

以在2006—2010年的年报附注中披露会计差错更正的上市公司为重述样本,运用倾向得分匹配等两种方法产生控制样本,实证检验财务报表重述公告前后公司投资效率的变化,为财务报告信息质量与公司投资效率间的因果联系提供了更为直接的证据。结果发现：（1）财务报表重述之前,存在融资约束的重述公司会投资不足,不存在融资约束的重述公司倾向于投资过度;（2）报表重述公告后,重述公司投资效率显著提高。     

Who Appoints Them,What Do They Do? Evidence on Outside Directors from Japan

Although reformers often claim Japanese firms appoint inefficiently few outside directors, the logic of market competition suggests otherwise. Given the competitive product, service, and capital markets in Japan, the firms that survive should disproportionately be firms that tend to appoint boards approaching their firm‐specifically optimal structure. The resulting debate thus suggests a test: do firms with more outsiders do better? If Japanese firms do maintain suboptimal numbers of outsiders, then those with more outsiders should outperform those with fewer; if market constraints instead drive them toward their firm‐specific optimum, then firm characteristics may determine board structure, but firm performance should show no observable relation to that structure. We explore the issue with data on the 1000 largest exchange‐listed Japanese firms from 1986 to 1994. We first ask which firms tend to appoint which outsiders to their boards. We find the appointments decidedly nonrandom. Firms appoint directors from the banking industry when they borrow heavily, when they have fewer mortgageable assets, or when they are themselves in the service and finance industry. They appoint retired government bureaucrats when they are in construction and sell a large fraction of their output to government agencies, and they appoint other retired business executives when they have a dominant parent corporation or when they are in the construction industry and sell heavily to the private sector. Coupling OLS regressions with two‐stage estimates on a subset of the data, we then ask whether the firms with more outside directors outperform those with fewer, and find that they do not. Instead, the regressions suggest—exactly as the logic of market competition predicts—that firms choose boards appropriate to them.     

Derivative Usage by Nonfinancial Firms in Sweden with an International Comparison

This paper provides survey evidence on the use of derivatives among Swedish nonfinancial firms. The evidence is compared with the findings by Bodnar et al. (1995, 1996) and Berkman et al. (1997) for the USA and New Zealand, respectively. By comparing firms in Sweden with firms in New Zealand and the USA differences in derivative usage can be related to differences in their underlying economies and history of trading in derivatives. Among other issues, the results showed that (1) 52% of the nonfinancial firms in Sweden used derivatives compared with 53% in New Zealand and 39% in the USA; (2) the usage of derivatives was more common among larger than among smaller firms; (3) the principal use of derivatives was for hedging purposes and those firms that engaged in speculative activity tended to be larger rather than smaller firms; and (4) lack of knowledge about derivatives within the firm was the issue of most concern for financial directors. The latter was in contrast with the USA where lack of knowledge was the issue of least concern.     

Directors’ prior life experience and corporate donations: Evidence from China

We use a recent dataset of 16,082 firm-year observations from publicly traded Chinese firms to show that directors who have prior foreign study or work experience make more corporate donations, a result that supports the path dependency theory related to the effect of prior experiences on subsequent behaviors. The relationship between a director’s prior life experiences and corporate charitable contributions is robust across different types of ownership and industry. We show that corporate donations enable firms to have better access to bank loans, reducing their financial constraints. In addition, these directors appear to consume fewer perquisites, implying lower agency cost with corporate donations.     

Recruiting outside board members in the small family business: an ideological challenge

The focus of this paper is to explore how contrasting ideologies influence the selection process of outside directors in the small family business. Small family businesses donot just represent smallscale economic activity but they are the outcome of entrepreneurial ambition and family involvement. This means that willpower and emotional commitment blend with calculative considerations. As emotional as well as cognitive constructs the family, management and entrepreneurship each represent an ideology: paternalism, managerialism and entrepreneurialism. The proposed ideological framework is positioned against alternative approaches to the study of board selection processes. Two sets of data are presented. A piloting survey of 12 family businesses is used to substantiate the theoretical assumption that entrepreneurial firms avoid having outside directors and managerial firms welcome outside directors, leaving paternalistically-run family businesses ambivalent. Repeated in-depth interviews in two family businesses, one founder-managed and entrepreneurial, the other established and traditional, reveal how the professionalization of the board enforces managerialism, challenging thus far dominating ideologies, entrepreneurialism and paternalism. The outcome of this ideological contest, if properly orchestrated, is an energized and more competitive family business.     

Outside Directors on Korean Boards: Governance and Institutions

Drawing on institutional theory, this study examines the factors that pressured Korean firms to appoint outside directors to their boards. While this practice could be considered to be a management innovation in Korea, in the Anglo‐American corporate governance system it has long been used as one of several mechanisms to mitigate agency costs between management and shareholders. As such, this response by Korean firms, following the 1997–98 currency crisis in Asia, could be seen as an example of corporate governance convergence on the Anglo‐American model, where higher levels of outside director representation on the board are the norm. We examine the antecedents of having a higher proportion of outside directors on Korean boards. Our findings indicate that larger firms that are under stricter control by the government have higher representation of outside directors on the board. We also find a positive and significant relationship between the proportion of outside directors and business group affiliation, poor prior firm performance, higher levels of debt and foreign ownership.     

Mandated Recognition of Employee Stock Option Expense – The Case of Canada

On December 18, 2003 the Accounting Standards Board of Canada announced that all firms registered in Canada would be required to expense stock options‐based compensation effective January 1, 2004. While a few firms had voluntarily opted to expense stock options prior to this date, the vast majority of firms had not. This study investigates the market reaction to this announcement by listed firms in the Toronto Stock Exchange that continued to disclose option expense rather than report it in the financial statement. We find no average market reaction by our sample firms affected by this mandate around the announcement date, but a significantly negative market reaction during the 5‐day window around the issuance date of the exposure draft. However, in cross‐sectional tests around the mandated expense announcement date, we find a significant negative relationship between the cumulative abnormal returns and the Black–Scholes value (and number) of options outstanding and of options granted the previous year. These results suggest that the magnitude of the market reaction to the mandated expense announcement is related to the firm's usage of options. Our results provide further evidence that stock prices may not fully impound information disclosed in footnotes.     

The Impact of Profit Sharing on the Performance of Financial Services Firms*

abstract Relying on macro theories (agency and organizational control) as well as micro theories (goal setting and expectancy), this study investigates the impact of profit‐sharing plan (PSP) adoption on the value creation process of financial services firms. The study relies on a comprehensive methodological approach that is both quantitative, with a dual cross‐sectional/longitudinal (pre‐post) design that compares PSP adopters with a control group of PSP non‐adopter firms, and qualitative through interviews with some adopting firms’ managing directors. Results show that firms adopting a PSP enhance their profitability in comparison to both their own prior performance and to firms that are not adopting a PSP. Results also show that the adoption of a PSP: (a) positively influences only profit drivers that are under employee control; and (b) is more likely to have a long term, positive impact on external profit drivers than on internal profit drivers. Qualitative data from field interviews corroborate and enrich these quantitative findings.     

Gender and management on Spanish SMEs: an empirical analysis

Few studies have investigated the presence of women on the boards of directors of companies. Those that have been done have focused on large firms. In this study we analyzed the gender diversity of a sample of Spanish small and medium enterprises. These firms are of great importance in terms of their number, the employment they provide, and their sales. Furthermore, there is an open debate in Spain about gender equality after the passing of several laws against gender discrimination. We found that women's presence on boards generates a negative impact on firm performance and this result may be due to less risky strategies implemented by women directors. This finding is interesting because it sheds light on how women can affect the functioning of a board. We also found that family firms and firms with a financial institution as the main shareholder tend to have more women on the board. Finally, we show that firms with less debt, more assets, and larger boards have more women as directors.     

The adoption of outside boards by small private US firms

The research issue motivating the present study is concerned with why some small private firms adopt an ‘outside board’ (i.e. larger boards in which the majority of directors are neither managers of the firm nor relatives of the Chief Executive Officer (CEO)) and others do not. This issue is addressed by investigating whether differing contextual conditions distinguish adopters from non-adopters of outside boards. The authors consider the adoption of an outside board to be one part of a larger organizational life-cycle process in which organizations implement more ‘professional management’ structures and practices in response to their evolving internal and external contexts. The authors examine simultaneously three contextual pressures that commonly confront small private firms as they develop over time- firm growth and larger size, the succession of the CEO, and the diffusion of equity to individuals outside the firm- to determine which of these are salient in explaining the presence of an outside board. Logistic regression results (3070 respondents toa cross-industry mail survey) indicate that outside boards are more likely when more equity is held by individuals outside the firm, CEOs are older and CEOs do not intend to implement an intra-family transition of leadership. The results suggest that firms adopt outside boards primarily to satisfy the desires of external owners, and only secondarily for the service and resource benefits that outside directors provide.     

Should Directors Have Term Limits? – Evidence from Corporate Innovation

This paper examines the effect that directors with extended tenure have on corporate innovation based on a sample of US firms from 1996 to 2006. Using the propensity-score matched-pair research design, I find that firms with a higher portion of outside directors enjoying extended tenure produce significantly fewer patents and that these patents receive fewer subsequent citations. These firms also have lower research and development (R&D) productivity and exploration intensity than their matched control firms, although I found no significant difference in their R&D investment intensity. Difference-in-differences tests based on director deaths and regulatory changes in the early 2000s suggest that the adverse effect of long director tenure on innovation performance is causal. I also find that the effect is mitigated when long-tenured directors have more years of overlap in service with CEOs, and when long-tenured directors are executives at other firms. Finally, I find that boards with extended tenure attenuate the contributions of innovation outputs to future firm value and performance. These findings shed new light on the debate over length of board tenure and provide another justification for imposing term limits on directors.     

The Massachusetts Classified Board Law

This study investigates the impact of the Massachusetts Classified Board Law on shareholder wealth. This state law is the first law to explicitly require a change in the structure of the board of directors of every firm within the state. In addition, restrictive rules on replacing members of the board of directors enable directors to insulate themselves from takeover attempts. We find this law decreased share values by 16 percentage points for firms without anti-takeover amendments. However, firms with a golden parachute outperformed firms without golden parachutes by 23 percent. This supports the hypothesis that financial markets consider many firm characteristics when evaluating the impact of state anti-takeover legislation. The management entrenchment hypothesis is supported for firms without prior anti-takeover charter amendments. The shareholder interest hypothesis is supported for firms with golden parachutes.     

The stock performance of America's 100 Best Corporate Citizens

We consider the stock performance of America's 100 Best Corporate Citizens following the annual survey by Business Ethics. We examine both possible short-term announcement effects around the time of the survey's publication, and whether longer-term returns are higher for firms that are listed as good citizens. We find some evidence of a positive market reaction to a firm's presence in the Top 100 firms that are made public, and that holders of the stock of such firms earn small abnormal returns during an announcement window. Over the year following the announcement, companies in the Top 100 yield negative abnormal returns of around 3%. However, such companies tend to be large and with stocks exhibiting a growth style, which existing studies suggest will tend to perform poorly. Once we allow for these firm characteristics, the poor performance of the highly rated firms declines. We also find companies that are newly listed as good citizens and companies in the Top 100 but outside the S&P 500 can provide considerable positive abnormal returns to investors, even after allowing for their market capitalization, price-to-book ratios, and sectoral classification.     

Board of directors’ effects on financial distress evidence of family owned businesses in Lebanon

The objective of this paper is to determine the managerial governance characteristics related to financial distress companies. The boards failed to accomplish their monitoring duties, which seemed to be one of the main reasons behind the actual financial distress and bankruptcy that swept the companies across the planet. Through the analysis of a sample of 178 Lebanese non listed and owned family firms, the results showed that the boards (that have a higher proportion of outside directors) are less inclined to face a financial distress than the boards with a lower proportion. Besides, a different conclusion proves that the board’s size and financial distress are directly linked. The paper highlights the extent to which financial distress is associated with corporate governance from a Euro Mediterranean country. It would be a source of education to Lebanese investors who excessively go for short-term returns and of help for regulatory authorities in the framework of making policies on corporate governance reformation.     

Empirical evidence on the effects of delisting from the National Market System

This study analyzes empirical evidence related to changes in market value and liquidity characteristics of stocks, which are delisted from the National Market System (NMS) due to an elevation of NMS listing standards. Our results are thus relatively independent of the financial conditions of the firms prior to delisting. We document significant increase in bid-ask spreads and decrease in trading volume after delisting. A significant negative stock price reaction around the delisting announcement period is also observed. Both sets of findings suggest that delisting from NMS increases a firm’s cost of capital by adversely affecting the liquidity of its stock. (JEL: G14)     

Capital Market Reactions to Accounting Earnings Announcements in an International Context

This study examines the association of four factors with U.S. securities market reactions to annual earnings announcements by non-U.S. multinational corporations and by a control sample of U.S. firms. The four factors examined are firm size, the magnitude of earnings change, timeliness, and the presence or absence of a concurrent dividend announcement. The non-U.S. corporations are from five countries - Israel, Japan, Netherlands, Philippines, and United Kingdom. Results for the group of non-U.S. firms indicate that firm size and timeliness are significant explanatory variables. For the control sample of U.S. firms, only size is significant.     

Examining the behavior of renewable‐energy fund investors

Mutual fund investors could contribute to sustainable development by encouraging fund managers to channel their savings into the funding of sustainable energy projects adopted by firms. This study examines whether renewable‐energy investors take into account financial and/or nonfinancial factors when making the decision to invest in a specific fund, comparing their investment behavior with that of black‐energy and conventional investors. To this end, we have gathered information about 4,368 mutual funds (76 renewable‐energy funds, 109 black‐energy funds, and 4,183 conventional mutual funds) from January 2007 to December 2017. For this sample, we adopt a panel‐data approach with Petersen's standard errors clustered by fund and year. Our results indicate that renewable‐energy fund investors are less sensitive to past financial performance than are black‐energy and conventional fund investors, indicating that the former derive their utility from nonfinancial attributes whereas black‐energy investors derive their utility from a conditional multiattribute and conventional fund investors derive their utility from financial attributes.     

The Influence of Board Monitoring,Executive Incentives,and Corporate Strategy on Employment Stability

This study examines the effects of corporate governance and diversification strategy on organizational employment stability. Calls for reform in the governance of public corporations have led to the adoption of practices that render senior executives more accountable to shareholders. However, the extant corporate governance literature suggests that mechanisms which make managers more accountable to shareholders might introduce a short-term bias to top managers’ decision-making. Arguing that employment stability reflects a long-term decision-making orientation, results of this study show that firms with boards comprised of a greater proportion of independent, or “outside,” directors have lower levels of aggregate employment stability. In contrast, findings indicate that more diversified firms tend to have higher levels of aggregate employment stability.