Stock Price Informativeness and Corporate Governance: An International Study

This study investigates the cross‐country relationship between firm‐level corporate governance and stock price informativeness. Using firm‐level data from 22 developed countries, we find that stock price informativeness, as measured by firm‐specific stock return variation and future earnings response coefficients, increases with the quality of a firm's corporate governance. Further analyses show that all mechanisms except board‐related governance relate positively to stock price informativeness. Finally, firm‐level corporate governance plays a more significant role in strengthening the stock return–earnings associations for firms in countries with strong institutional environments. This evidence highlights the role of country‐level legal investor protections in shaping the relationship between firm‐level corporate governance and stock price informativeness.     

Large Shareholder Activism in Corporate Governance in Developing Countries: Evidence from India

Most of the existing evidence on the effectiveness of large shareholders in corporate governance has been restricted to a handful of developed countries, notably the UK, US, Germany and Japan. This paper provides evidence on the role of large shareholders in monitoring company value with respect to a developing and emerging economy, India, whose corporate governance system is a hybrid of the outsider‐dominated market‐based systems of the UK and the US, and the insider‐dominated bank‐based systems of Germany and Japan. The picture of large‐shareholder monitoring that emerges from our case study of Indian corporates is a mixed one. Like many of the existing studies, while we find blockholdings by directors to increase company value after a certain level of holdings, we find no evidence that institutional investors, typically mutual funds, are active in governance. We find support for the efficiency of the German/Japanese bank‐based model of governance; our results suggest that lending institutions start monitoring the company effectively once they have substantial equity holdings in the company and that this monitoring is reinforced by the extent of debt holdings by these institutions. Our analysis also highlights that foreign equity ownership has a beneficial effect on company value. In general, our analysis supports the view emerging from developed country studies that the identity of large shareholders matters in corporate governance.     

Corporate cash holdings,uncertainty avoidance,and the multinationality of firms

We examine the relationship between uncertainty avoidance, multinationality and firm cash holdings. We develop several hypotheses from corporate finance and multinational firm theory, positing that cultural factors as well firm multinationality influence corporate cash holdings. In particular, firms in countries with high uncertainty avoidance hold more cash as a way to hedge against undesired states of nature. At the same time, firm multinationality moderates the effects culture has on the firm's holdings of liquid assets. Based on a large panel of firms in fifty countries, we present evidence consistent with these hypotheses. Firms in countries with high levels of uncertainty avoidance tend to hold more cash. Against commonly held views in cash management, the degree of multinationality of the firm is positively correlated with holdings of cash. At the same time, the effect of national culture on firm's cash holdings is lower for multinationals. These results are economically significant.     

Is ‘Good’ governance good for business? A cross-national analysis of firms in African countries

Good governance can reduce uncertainty, transaction, search and production costs, and ultimately affect firm performance. In this paper, we explore the link between good governance and the profitability of individual firms in African countries. We employ the governance indices developed at the World Bank and assemble a sample of companies from 21 countries over four years. Contrary to prior research that found a negative association between institutional development and profitability, our evidence shows that an improvement of good governance in countries currently with low levels of governance ratings has greater positive effects on the firm profitability than a similar improvement in countries with relatively higher ratings of good governance. Good governance reduces the variability of the company's profitability, leading to high-return and low-risk investments. Finally, we find that the role of good governance depends upon the country's income level. When the income level is lower, an improvement in public governance is more likely to impact firm performance than when the income level is relatively higher. Good governance is more important for the stability of the profitability of firms in countries with higher levels of good governance ratings than lower ratings.     

Effect of corporate governance on default risk in financial versus nonfinancial firms: Canadian evidence

This paper investigates the influence of corporate governance variables on default risk of Canadian firms after the 2008 financial crisis. We provide evidence that important governance mechanisms have differential impacts between Canadian financial and nonfinancial firms. Ownership structure, (e.g., institutional ownership and insider ownership), has a significant impact on the default risk of financial firms but not on nonfinancial firms. Nonfinancial firms with more independent boards are associated with lower default risk, while financial firms with larger boards and more independent boards have higher default risk. In addition, although cross‐listing in the US reduces the default risk for Canadian nonfinancial firms, it actually increases the risk for Canadian financial firms during the postcrisis period. Copyright © 2016 ASAC. Published by John Wiley & Sons, Ltd.     

The Effect of Governance Mechanisms on Small and Medium‐Sized Enterprise Cash Holdings: Evidence from the United Kingdom

This paper investigates the impact of governance mechanisms on small and medium‐sized enterprise (SME) cash holdings from 2000 to 2009, employing static and dynamic panel data analyses. We find no evidence that firm governance index and insider ownership affect cash holdings. This might indicate that governance mechanisms in SMEs are relatively weak. We also report that chief executive officer compensation has a positive effect on cash holdings. Firm‐specific factors such as firm size, leverage, and liquidity negatively affect cash holdings, whereas the research and development ratio and operating risk are positively associated with them. Finally, SMEs have target cash holdings and adjust to these.     

Understanding the Determinants of RiskMetrics/ISS Ratings of the Quality of UK Companies' Corporate Governance Practice

We examine the determinants of RiskMetrics/ISS Ratings of the quality of UK companies' corporate governance practice and investigate whether corporate governance mechanisms and firm specific characteristics affect these ratings. We also investigate the association between firms' financial distress and these ratings. Using data for nonfinancial Financial Times Stock Exchange (FTSE) 250 firms over the 2003 to 2009 period, we find that board independence, managerial ownership, institutional ownership, firm size, and profitability are associated with firms' corporate governance ratings. In addition, we find that more independent directors on the board, more institutional ownership, and larger size lead to a high level of board‐related ratings. Finally, we find no association between corporate governance ratings and financial distress. Copyright © 2012 ASAC. Published by John Wiley & Sons, Ltd.     

Corporate governance and returns to emerging economy firm acquisitions in tax havens: An empirical test on Indian firms

Cross‐border acquisitions (CBAs) by emerging economy firms are known to yield positive stockholder returns. A nontrivial fraction of CBAs by emerging economy firms are in tax havens. We argue because of weak corporate governance in emerging economies and the secrecy afforded by tax havens, emerging economy firm CBAs in tax havens yield lower stockholder returns than their CBAs in nontax havens. We also argue the negative effect of tax haven destinations is greater for firms with greater business group ownership and for firms with greater foreign insider ownership. Furthermore, we argue the negative effect of tax haven destinations is mitigated for firms whose stock is actively traded in the market. Empirical tests in a sample of nearly 800 CBAs by Indian firms from 2002 to 2011 support our hypotheses. Our study contributes to a better understanding of stockholder returns to CBAs by emerging economy firms and the influence of corporate governance on these returns.     

How does CSR disclosure affect dividend payments in emerging markets?

This article examines the nexus between corporate social responsibility disclosures (CSRD) and dividend payout decisions in the context of emerging markets. Using hand-collected sample of listed firms from India, China, Indonesia, Pakistan, Malaysia, Korea, Turkey, and Russia over the period 2010–2018, our results show that CSR disclosures exert a negative impact on corporate dividend payments. Further, this effect is more prevalent for firms having higher institutional ownership. However, the results remain unaffected by the differences in legal origin i.e. civil law or common law, of the sample countries. Further, our main results are supported by a number of sensitivity tests, including reduced sample size, alternative dividend payment measures, and estimation techniques.     

Late Disclosure of Insider Trades: Who Does It and Why?

We attempt to understand the personal incentives that motivate corporate insiders to engage in unethical behavior such as delayed trade disclosure. Delayed disclosure affects corporate transparency and other shareholders in the firm potentially suffer investment losses because they are unaware of insiders’ activities. Using archival data from the 300 largest Australian firms between 2007 and 2011, the results show that risk factors such as insider age and tenure and wealth effects in the form of insider shareholdings affect the likelihood of delayed reporting. Governance positions such as committee membership mitigate this behavior. Our study highlights the importance of considering individual insider’s wealth and risk factors. The self-monitoring role of governance positions is also indicative of the effectiveness of internal corporate governance in the prevention of illegal insider behavior.     

Multiple directorships in emerging countries: Fiduciary duties at stake?

This study investigates the effect of multiple directorships on firm performance, using a database of non‐financial firms listed on the Pakistan stock exchange. Prior literature provides inconsistent evidence on the relationship between multiple directorships and firm performance in an emerging country context, which may be the result of overlooking both the large differences in institutional environments among emerging countries and the dynamic endogenous relationships between board variables and firm performance. We aim to contribute to this academic debate by focusing on directorship appointments to multiple boards in a weak institutional context. Corporate governance practices, such as boards with outside directors exercising their fiduciary duties, are crucial for effective governance in weak institutional environments. However, serving in multiple directorships is expected to compromise the execution of director duties. Using a dynamic system Generalized Method of Moments model, our findings show, indeed, a negative effect of multiple directorships on firm performance in a weak institutional environment. Building on the premise that corporate governance is conditional in nature, we also tested the moderating influence of firm size on this relationship, but we did not find supporting evidence in a dynamic model setting. Our results have important practical implications for policy makers as well as firms.     

Earnings persistence,fundamentals, and anticipation of breaking earnings strings

Using a sample of firms with consecutive earnings growth for more than 20 quarters (earnings strings), I assess the relationship between earnings persistence and the extent to which investors are able to anticipate breaks of earnings strings. I find that firm‐specific earnings persistence exhibits a concave trend during earnings strings. Stock returns are significantly and positively associated with earnings persistence. Upon breaks of earnings strings, investors’ reactions are more negative for firms with higher earnings persistence—especially those with smaller institutional holdings and analyst coverage, and those with insider selling activities—before the break. Additional analyses show that variations in firms’ economic performance (fundamentals) explain the varying earnings persistence during earnings strings. Copyright © 2015 ASAC. Published by John Wiley & Sons, Ltd.     

The financial determinants of corporate cash holdings: Evidence from some emerging markets

This paper investigates corporate cash holdings in developing countries. In particular, we look into the effect of capital structure and dividend policy on cash holdings in Brazil, Russia, India, and China and compare our results with a control sample from the US and the UK. Our sample contains 1992 firms across these countries for the period 2002–2008. We employ Instrumental Variables analysis to control for the endogeneity of the financial policies (cash holdings, capital structure, and dividend policy). Our results show some evidence that capital structure and dividend policy affect cash holdings. There are similarities between developed and developing countries on the factors determining corporate cash holdings. The results of our cross-country model provide evidence that capital structure, dividend policy, and firm size are important factors in determining cash holdings. Finally, we show that firms operating in countries with low shareholder protection hold more cash.     

What if your owners also own other firms in your industry? The relationship between institutional common ownership,marketing, and firm performance

The growth in institutional holdings of public firms has led to increased interest in the concept of common ownership, in which the same investor owns stakes in multiple firms within the same industry. Economic theory suggests that common ownership could affect firm performance, but little empirical research has examined the nature of this effect or how a firm’s extant marketing potentially relates to this effect. This paper addresses this gap by proposing a relationship between common ownership and firm performance that is moderated by the firm’s extant marketing capabilities and its relative marketing strategic emphasis. Our empirical approach employs data from over 43 million institutional holdings to develop a measure of common ownership and accounts for empirical issues like endogeneity and unobserved heterogeneity. The results document a positive relationship between common ownership and firm performance and provide some evidence that this effect is stronger for firms with lower marketing capabilities and a relative strategic emphasis towards R&D spending. These results suggest that public policymakers should consider the firms’ extant strategic marketing when assessing regulations on common ownership.     

Does the Quality of Corporate Governance Affect Firm Valuation and Risk? Evidence from a Corporate Governance Scorecard in Hong Kong*

Using Hong Kong firm data, we construct an index of corporate governance during 2002–2005, which scores the corporate governance practices of listed companies from the public shareholders' perspective based on the Organization for Economic Corporation and Development Principles of Corporate Governance. The findings show that family firms and firms with concentrated ownership structures are associated with bad corporate governance. The evidence also shows that these firms improve their corporate governance practices slower than their peers. Overall, the quality of corporate governance is very significant in explaining future company stock returns and risk. Good corporate governance is associated with both higher stock returns and with lower risk. Improvements in corporate governance are associated with significantly higher stock returns and lower company risk.     

Corporate governance in publicly traded small firms: A study of Canadian venture exchange companies

Most evidence regarding the determinants and effects of corporate governance practices is based on large firms. Herein, we explore these issues in the context of small publicly traded Canadian companies. We exploit the fact that such firms were not subject to corporate governance guidelines prior to 2005 and thus analyze the determinants of voluntary governance practice choices, as well as the effects of those practices on firm performance. Using a unique data set, we construct a corporate governance index for each firm. We measure performance by two variables: quality of accounting earnings and financial performance. The results indicate that corporate governance does matter for smaller traded Canadian firms. We find that both accounting and financial performance are positively related to corporate governance; however, their underlying mechanisms may differ somewhat. Given this result, it would be natural to expect all firms to choose higher levels of governance. However, our results also suggest small firms face resource constraints that limit their choices. We conclude that good governance is an important driver of small firm performance that cannot be neglected by the owners and managers of these firms.     

The Masculinisation of Ethical Leadership Dis/embodiment

Using a worldwide sample, we examine whether corporate social responsibility (CSR) performance has an impact on the value of cash holdings. We find that investors assign a higher value to cash held by firms that have a high CSR rating. This result is consistent with the idea that CSR policies are a means for managers to act in the shareholders’ interests by mitigating conflicts with stakeholders. Finally, we reveal that CSR performance has a positive impact on the value of cash holdings only for firms which operate in countries where shareholders are well protected from expropriation by managers and in countries where the institutional quality is high.     

Alignment or entrenchment? Corporate governance and cash holdings in growing firms

This study contends that the association between corporate cash holdings and corporate governance is subject to the investment environments that firms face. For example, firms with an abundance of investment opportunities have a strong incentive to hold cash in order to maintain their competitive positions. Shareholders accept high levels of cash holdings in such growing firms if corporate governance can protect their interests. This study examines the effects of corporate governance on cash holdings for a sample of high-tech firms. The results show that CEO ownership, the directorship of venture capitalists (VCs), and independent directors play critical roles in corporate cash policy. In addition, the boards are more effective when the firms' CEOs are also their founders or when VCs hold a large stake of company shares. The effects of corporate governance are more significant in younger firms while the effects of firm-specific economic variables are more significant in older firms in the sample.     

Cross‐Border Mergers and Differences in Corporate Governance

We examine whether corporate governance differences affect firm valuation in cross‐border mergers. We find that takeover premiums are decreasing in the quality of the foreign acquirer's home country governance for deals completed with stock, suggesting that the acquirers compensate target shareholders for the resulting exposure to inferior corporate governance regimes. Correspondingly, we find that the acquiring firm stockholders' abnormal returns at the merger announcement are increasing in the quality of corporate governance for stock offers. Finally, we find that foreign acquirers from countries with better corporate governance are more likely to make stock offers.