Are Multiple Directorships Beneficial in East Asia?

We posit that the benefits and costs of multiple directorships are conditional on firm characteristics. We find firm valuation is positively associated with multiple directorships in (i) firms with high advising needs and (ii) firms with high external financing needs. These beneficial effects of multiple directorships are generally stronger in countries with weak shareholder rights and in firms that are widely held. However, when controlling shareholder hold high voting‐rights to cash‐flow rights, multiple directorships reduce firm valuation, especially in countries with weak shareholder rights and in closely held firms. As multiple directorships increases, cash holdings (capital expenditures) contribute less to shareholder value. The negative association between value of cash (capital expenditure) and busy boards is mitigated in firms with (i) high advising needs, (ii) high external financing needs and (iii) less entrenched ownership structures.     

Investment–cash flow sensitivity and investor protection

We examine the role of country-level legal investor protection (i.e., shareholder and creditor protection) on firm investment–cash flow sensitivity (ICFS). Using underexplored research data on investor protection across 21 countries and working with a conservative empirical design, we extend prior literature on the relation between investor protection and ICFS and provide new evidence on how these country-level attributes interact to explain a firm's ICFS. We find that either the strong legal protection of minority shareholders or the strong legal protection of creditors reduces the sensitivity of investment to internal cash flow. However, in countries with strong levels of both minority shareholder and creditor protection, ICFS increases. Our results remain robust after controlling for several alternative explanations. The results support the argument that overregulation arises when policymakers increase investor protection at levels that lead firms to avoid external sources of finance, hampering firm investment. Our findings suggest that countries face a regulatory trade-off such that increasing investor protection (either shareholder or creditors protection) enhances financial markets efficiency, but excessive regulation can indeed lead to financial markets inefficiencies.     

Trading restrictions and firm dividends: The share lockup expiration experience in China

Chinese firms experienced a substantial reduction in nontradable shares following the Split-Share Structure Reform that began in 2005. The decrease in nontradable shares, or increase in share tradability, is associated with a decline in the firms’ cash dividend payouts. The positive association is attenuated in firms with fewer financial constraints, only weakly affected by firm governance, and not affected by investment opportunities or controlling shareholder type. The results highlight the fact that firms disgorge cash to compensate shareholders for trading restrictions and conclude that dividends persist when firms have easier access to external financing. These findings are robust to alternative definitions of nontradable shares, after controlling for firm fixed effects and omitted changing firm characteristics.     

An international study of shareholder protection in freeze-out M&A transactions

Freeze-out M&A transactions are those initiated by controlling shareholders to acquire minority shareholders' ownership in the firm. We compare international freeze-out mergers in 35 countries in merger premium, choice of payment, and completion probability. We find greater merger premium and probability of cash payment but lower deal completion rates in countries with stronger minority shareholder protection. Using detailed minority shareholder protection indexes, we find some evidence that the ex-post anti-self-dealing law enforcement is more important than the ex-ante anti-self-dealing law regulation in protecting minority shareholder value. Our study provides new evidence of minority shareholder protection in the setting of conflicts of interest between majority and minority shareholders.     

Financial reporting quality and dividend policy: New evidence from an international level

This study examines the link between financial reporting quality and dividend payout across 76 countries. We find that financial reporting quality increases dividend payout after controlling for firm and country specifics. We also investigate different channels that moderate the relation between financial reporting quality and dividend payout. We find that the positive association between high-quality financial reporting and dividend payout is more pronounced when firms have free cash flow problems, face severe information asymmetry, and are located in countries with weaker minority shareholder protection rights. Interestingly, we find evidence that high reporting quality enhances firms' payment of dividend even when these firms already overpaying their shareholders. However, the relation becomes weaker when firms overpass the optimal level of dividend payout. The findings remain consistent after several robustness checks, thus highlighting the effectiveness of more transparent disclosure of financial information in reducing information asymmetry related to firms' internal agency costs and their relationships with external parties.     

Does the market understand the ex ante risk of expropriation by controlling shareholders?

We examine how the market values operating assets in the presence of time-varying ex ante risk that these assets may be tunneled away. We analyze pairs of Chinese publicly listed firms and their non-listed parents and examine the market valuation of current assets (cash balances, trade receivables, receivables due from the controlling shareholders, inventories) and fixed assets on the publicly listed firm's balance sheet. Our results show that in periods when the risk of tunneling from the publicly listed firm to its controlling shareholder increases, operating assets that are easy to tunnel (cash and receivables due from the controlling shareholder) are valued at larger discounts, while operating assets that are not easy to tunnel (trade receivables, inventories, fixed assets) are not valued at such discounts.     

Capital gains taxation and shareholder wealth in takeovers

Before December 1999, the capital gains of shareholders who sold their shares into Australian takeovers have been taxable irrespective of payment method. Subsequently, shareholders can elect to rollover capital gains in equity takeovers. We examine the effect of this change on the association between target shareholder capital gains and bidder and target firm shareholder wealth. The results indicate that prior to the regulatory change, cash consideration results in higher target shareholder returns for non‐taxation reasons. After the introduction of capital gains tax rollover relief, we find that target and acquiring firm shareholders earn lower returns when cash consideration is offered to shareholders with greater capital gains.     

Nonnegotiable shares, controlling shareholders, and dividend payments in China

China has some unique institutional features. For example, the shares of listed firms are segmented into negotiable and nonnegotiable ones. The controlling shareholders, usually connected to the government, hold nonnegotiable shares. We examine how these institutional features affected cash dividend payments in China during the period 1994-2006. We find that dividend payments are positively associated with the proportion of nonnegotiable shares in a firm and the proportion of nonnegotiable shares held by the controlling shareholder; moreover, the 2001 China Securities Regulatory Commission stipulation requiring cash dividend payments does not benefit negotiable shareholders. However, we also find that dividend payments are downside flexible, and controlling shareholders cannot force firms to pay or to pay more dividends when firms' earnings decline significantly. The conventional factors, especially profitability or the capability to pay, still play an important role in determining the dividend policy. The propensity to pay and the payout ratio in China are not high compared to those of other countries.     

Reputation as a governance mechanism? Evidence from payout policy of insider‐controlled firms in Taiwan

This paper examines the effect of entrenched insiders’ reputational concerns on corporate payout policy in Taiwan, a market in which typical public firms are controlled by a single dominant shareholder who is subject to weak takeover threats and has incentives and abilities to extract private benefits by oppressing minority equity holders. The reputation‐building hypothesis predicts that firms with higher expropriation risk by a controlling shareholder make more payouts to credibly commit not to expropriate minority shareholders, thereby establishing reputation in the capital market for risk diversification and low‐cost external financing. I show that corporate payout intensity is significantly and positively correlated with measures related to the moral hazard of dominant owners. The reputation effect manifests in firms that most value it; the interaction analyses indicate that younger, smaller, or growth firms with higher controlling shareholder expropriation risk pay more cash dividends. Moreover, firms are less likely to omit dividends and more likely to resume dividends when their controlling shareholders are more entrenched. Finally, I show that the value of cash dividends is higher for firms with higher controlling shareholder expropriation risk and that expected dividend increases in these firms are value enhancing.     

Private firms' financial constraints and share pledging by controlling shareholders of publicly listed firms: Evidence from China

Private firms face significant financial constraints that limit their investment and growth. Recognizing the fact that many private firms belong to business groups that contain at least one publicly listed firm, we hypothesize that private firms can partially relieve their financial constraints through the cash proceeds from share pledging of publicly listed firms by the common controlling shareholder. Using data from publicly listed Chinese firms, we find results consistent with this hypothesis, especially for private firms facing greater financial constraints. However, such share pledging also creates a negative spillover on shareholder value of publicly listed firms under common ownership.     

Corporate codes of ethics and cash holdings: International evidence

In the presence of agency costs, managers retain cash for their own benefit at the expense of shareholder wealth. Extending prior literature on the role of corporate governance in mitigating the effects of agency conflicts on corporate cash holdings, we study a governance mechanism that has largely been overlooked, namely, corporate codes of ethics. We find a negative association between code of ethics quality and cash holdings, which suggests that managers hold less cash when the firm has a strong code of ethics in place. The effect is greater when agency costs are elevated due to weaker country-level investor protections. We also find that payouts and the marginal value of cash holdings to investors are increasing in code quality. Overall, our results are consistent with codes of ethics helping to limit opportunistic behaviour from managers when determining the firm's level of cash holdings.     

Determinants of the Method of Payment in Asset Sell‐Off Transactions

Using a sample of asset sell‐off transactions from January 1990 to April 2010, we find that the method of payment used in asset sell‐off transactions is associated with several characteristics cited in the acquisitions research that reflect cash constraints of the bidder. Specifically, bidders facing more stringent cash constraints are more likely to use equity when purchasing assets, while sellers subjected to cash constraints prefer cash when selling assets. Second, we find that the variation in method of payment among asset sell‐off transactions also is partially explained by variables representing asymmetric information. Third, we apply our model to an expanded sample that includes non‐U.S. sellers of assets and find that an equity payment is more likely when sellers are based in countries that have relatively high country risk (more government restrictions), weak shareholder rights, and a weak legal system. Thus, it appears that bidders prefer that sellers share in the risk of the transaction under these conditions.     

Corporate focus versus diversification: the role of growth opportunities and cashflow

We examine the valuation impact of corporate diversification strategies through an analysis of a set of international joint ventures which contain both focus-decreasing and focus-increasing investments. Consistent with previous findings reported for US firms, we find that focus-increasing joint ventures create value for shareholders. However, we do not find that corporate diversification uniformly reduces shareholder value, either at the announcement of the project or in the long-run. Diversifying joint ventures negatively impact shareholder wealth only when the investing firms have poor growth opportunities and a weak cashflow position. After controlling for the q and cashflow effects, we find no significant difference in the market reaction to focus-increasing and -decreasing joint ventures. Such a result implies that the impact of diversification on shareholder wealth is not absolute, but rather is conditional upon the financial resources and growth opportunities available to the firm.     

Agency Problems at Dual-Class Companies

Using a sample of U.S. dual-class companies, we examine how divergence between insider voting and cash flow rights affects managerial extraction of private benefits of control. We find that as this divergence widens, corporate cash holdings are worth less to outside shareholders, CEOs receive higher compensation, managers make shareholder value-destroying acquisitions more often, and capital expenditures contribute less to shareholder value. These findings support the agency hypothesis that managers with greater excess control rights over cash flow rights are more prone to pursue private benefits at shareholders' expense, and help explain why firm value is decreasing in insider excess control rights.     

Does tunneling explain the sensitivity of executive compensation to other member firms’ performance?

This study examines how executive compensation is set when a firm is a business group member. Using Korea's unique setting of family-controlled business groups, we find that a member firm's executive cash compensation is positively linked to the stock performance of other member firms as well as its own. Further analyses reveal that this positive link is consistent with the hypothesis that corporate managers are rewarded for their decision to benefit the controlling family at the expense of the firm they manage. Specifically, we find that the sensitivity of executive pay to other member firms’ performance exists only in respect to firms in which the cash flow rights of the controlling family exceed those of the subject firm. We also find that this sensitivity is strengthened if the controlling family's control–ownership disparity in the subject firm is above the sample median.     

Do analyst recommendations reflect shareholder rights?

We examine whether sell-side analyst recommendations reflect shareholder rights. Our rationale is that analysts should be influenced by external governance only if market participants do not efficiently price its value. We find that stronger shareholder rights are associated with more favorable recommendations. Further analysis reveals that analysts favor firms with strong shareholder rights only when strong rights appear to be warranted, but do not penalize firms for having strong rights when not needed. These findings occupy middle ground in the debate on the pricing efficiency of shareholder rights. Moreover, we find that firm value is positively associated with the strength of shareholder rights regardless of the expected external governance structure. The latter result is consistent with a “one-size-fits-all” interpretation, and implies that firms across the board could increase share value by reducing their number of anti-takeover provisions.     

How creditor rights affect the value of cash: A cross-country study

We examine how legal protection of creditors affects the value of cash across countries. We find that the marginal value of cash is considerably higher in countries with weak creditor rights. Creditor rights are at least as relevant as shareholder rights, which other studies have found to be an important factor affecting various corporate policies. In addition, we find that marginal investment is more valuable for firms in countries with weak creditor rights. This combines the findings of previous studies that weak creditor protection makes firms financially constrained and that cash is more valuable for financially constrained firms. Subsample analysis suggests that financial constraints generated by weak creditor rights create underinvestment among cash starved firms but alleviate agency conflicts among cash rich firms. Further analysis reveals that good country governance complements laws protecting creditors in cash valuation.     

Costs of voting and firm performance: Evidence from RegTech adoption in Chinese listed firms

Employing the 2014 mandatory adoption of online shareholder voting in China, we show that the reduction of voting costs through online voting is positively related to participation in shareholder meetings and future firm performance. Our mechanism analysis suggests that the improved firm performance is mainly driven by the enhanced governance role played by informed investors and institutional investors. Further analysis shows that online shareholder voting makes the firms more attractive to mutual fund managers who are far away from the firms. Moreover, we find that the improved firm performance is concentrated in firms with low controlling shareholder ownership, and that online shareholder voting is associated with an increased likelihood of vetoing proposals and lower tunneling.     

Large Shareholder Entrenchment and Performance: Empirical Evidence from Canada

Abstract:  Recent empirical evidence indicates that the largest publicly traded companies throughout the world have concentrated ownership. This is the case in Canada where voting rights are often concentrated in the hands of large shareholders, mostly wealthy families. Such concentrated ownership structures can generate specific agency problems, such as large shareholders expropriating wealth from minority shareholders. These costs are aggravated when large shareholders don't bear the full costs of their decisions because of the presence of mechanisms (dual class voting shares, pyramids) which lead to voting rights being greater than the cash flow rights (separation). We assess the impact of separation on various performance metrics while controlling for situations when the large shareholder has (1) the opportunity to expropriate (high free cash flows in the firm) and (2) the incentive to expropriate (low cash flow rights). We also control for when the large shareholder has the power to expropriate (high voting rights, outright control and insider management) and for the presence of family ownership. The results support our hypotheses and indicate that firm performance is lower when large shareholders have both the incentives and the opportunity to expropriate minority shareholders.     

Incentive effects of executive compensation and the valuation of firm assets

This paper examines how executive compensation influences the market value of the firm's assets. After controlling for endogeneity, we find that boards have set the incentive to incur risk (vega) to maximize shareholder value, but that incentives to increase returns (delta) do not maximize shareholder value. We also find that current levels of cash compensation do not maximize shareholder value. Finally, we consider the moneyness of stock options. We find that the level of at- and out-of-the money options maximize shareholder value, but the level of in-the money options do not maximize shareholder value.