Corporate diversification,ownership structure,and firm value: The Singapore evidence

We provide international evidence on the level and value of corporate diversification using a sample of 145 Singapore firms. We find that the level of diversification is positively related to firm size and negatively related to the equity ownership of outside blockholders. However, we find no evidence that insider ownership has a significant impact on the level of diversification. We find significant value loss from diversification only for those firms with low managerial ownership, suggesting that value-reducing diversification stems from agency problems. Outside block ownership does not have a significant impact on the value of diversification. Thus, while outside blockholders may act as a deterrent on the level of diversification, there is no evidence that they can effectively reduce the agency problems for those firms with low managerial ownership.     

Managerial ownership dynamics and firm value

From 1988 to 2003, the average change in managerial ownership is significantly negative every year for American firms. We find that managers are more likely to significantly decrease their ownership when their firms are performing well and more likely to increase their ownership when their firms become financially constrained. When controlling for past stock returns, we find that large increases in managerial ownership increase Tobin's q. This result is driven by increases in shares held by officers, while increases in shares held by directors appear unrelated to changes in firm value. There is no evidence that large decreases in ownership have an adverse impact on firm value. We rely on the dynamics of the managerial ownership/firm value relation to mitigate concerns in the literature about the endogeneity of managerial ownership.     

Cash holding and control-oriented finance

We critically reassess the notion that high liquid asset holding by firms faced with weak investor protection is evidence of managerial rent extraction. We show that firms facing agency problems may establish tight controls over management through concentrated ownership. Using data on Belgian listed firms between 1991 and 2006, we find a strong positive association between ownership concentration and cash holding. This indicates a precautionary motive on the part of the controlling shareholders who highly value control. We also find that firm market valuation is positively affected by the amount of cash held by firms. On the other hand, managerial ownership has no impact. These results are consistent with the hypothesis that firms' owners are pursuing a rational strategy to mitigate agency costs in the face of weak investor protections.     

Impact of managerial ownership on investment and liquidity constraints: Evidence from Chinese listed companies

We examine the impact of managerial ownership on investment and financial constraints in the context of China. Using the system generalized method of moments estimation of an investment Euler equation, we find that investment decisions are related to managerial ownership in two ways. First, managerial ownership exerts a positive direct effect on corporate investment decisions by aligning management’s incentives with the interests of shareholders. Second, managerial ownership helps to reduce the degree of financial constraints faced by firms, suggesting that managerial ownership acts as a form of credible guarantee to lenders, signaling the quality of investment projects to the capital markets. Our findings suggest that recent policies enacted by the Chinese government, aimed at reforming ownership structure and encouraging managerial ownership in listed firms, help reduce agency costs and asymmetric information; thereby facilitating firms’ investment efficiency. Our findings will be of interest to scholars, practitioners, and policy makers interested in the financial impacts of management-compensation contracts.     

Ownership concentration and executive compensation in closely held firms: Evidence from Hong Kong

Controlling shareholders, who often manage the firms they control, can expropriate minority shareholders in many ways, which are usually referred to as “tunneling”. One of these ways is for owners–managers to set the level of their own compensation. We test the relationship between ownership concentration and executive compensation, using panel data for a sample of 412 Hong Kong firms during 1995–1998. We find a positive relationship between managerial ownership and cash emoluments for levels of ownership of up to 35% in small and in family controlled firms, and for up to 10% in large firms. Our tests show that the observed relationships do not result from compensation serving as a proxy for managerial effort. We interpret these findings as suggesting that in the presence of information asymmetry between entrenched managers and outside investors the former may use their ownership rights to extract higher salaries for themselves. There is also weaker evidence that top executives with larger shareholdings may be using dividends as a way of supplementing their cash salaries.     

The performance effect of managerial ownership: Evidence from China

By examining a sample of non-listed Chinese firms, we provide the first evidence from China for the effect of managerial ownership on firm performance. In matching-sample comparisons, we find that firms of significant managerial ownership outperform firms whose managers do not own equity shares. Our further results indicate the relation between firm performance and managerial ownership is nonlinear, and the inflection point at which the relation turns negative occurs at ownership above 50%. Compared with previous studies, our results are less likely to suffer from an endogeneity problem due to the non-list nature of our sample and the unique institutional environment in China.     

The Influence of Long-Term Performance Plans on Earnings Management and Firm Performance

Boards of directors often implement long-term performance plans (LTPP) to focus management's attention on enhancing long-term shareholder value instead of concentrating their efforts on short-term earnings. This study provides estimation results suggesting that firms that compensate managers with LTPP are associated with lower levels of managed earnings than firms that have only short-term bonus plans. In addition, we find evidence that suggests that firms with long-term performance plans have significantly higher annual returns than firms that have only short-term bonus plans. We also find that firms with long-term performance plans are typically larger firms with smaller managerial ownership and larger institutional ownership than firms without long-term performance plans.     

Managers of Financially Distressed Firms: Villains or Scapegoats?

In this article, we provide evidence concerning the extent to which managers are to blame when their firms become bankrupt. We study a sample of firms that file for Chapter 11 and determine the actions taken by the firms' managers during the three-year period before the filing. We compare the sample with a control sample of firms that performed better. We suggest that the comparison provides evidence on the way managers act as their firms sink into financial trouble and whether financial distress is the result of incompetence or excessively self-serving managerial decisions or due to factors outside of management's control. We find that managers of the Chapter 11 firms and the control firms make very similar decisions and that, on average, neither set of managers is perceived to be taking value-reducing actions. These results do not change when we control for managerial turnover or managerial ownership. We also find that when managers are replaced in firms that eventually file for Chapter 11 protection, the market does not respond positively, regardless of whether the new managers are from inside or outside the firm. Our findings suggest that when managers are blamed for financial distress, they are serving as scapegoats.     

Ownership structure and real earnings management: Evidence from China

Although ownership structure is fundamental to corporate accounting behaviors, the current literature provides scarce evidence about the governance effect of ownership structure on real earnings management (REM). We seek to address this issue by using a sample of Chinese listed firms which are likely to engage in earnings management during 2003–2014. We find that Chinese firms with more influential largest shareholders are more prone to REM; and that firms with state control and managerial ownership are less likely to engage in REM. We further find that there exists a joint and sequential relationship between REM and accrual-based earnings management in China. Our findings are robust to different variable measurements, samples and regression models. Our study contributes to the research on the relationship between ownership structure and earnings management and contributes to the understanding of REM in emerging economies. Our findings have significant implications for shareholders, analysts and regulators, and are important and relevant given that MSCI decides to include China mainland stocks in its indexes starting 2018.     

Managerial Discretion and Corporate Governance in Publicly Traded Firms: Evidence From the Property–Liability Insurance Industry

We study the incremental impact of corporate governance in mitigating managerial discretion, controlling for incentive alignment of managerial ownership. We extend the managerial discretion hypothesis to predict that for firms with the same set of governance tools, those that utilize governance tools more stringently to control agency costs will command greater contracting cost advantages, leading them to specialize in business with greater managerial discretion. Using 72 publicly traded insurers from 1994 to 2006, we find evidence supporting our hypothesis. Our findings complement the finance literature that focuses on the role of financing policies in mitigating agency costs of managerial discretion.     

Earnings persistence, accruals and managerial share ownership

We investigate the relationship between earnings persistence and a broad measure of total accruals (TACC). We propose and find that in Australia, TACC is less persistent than cash flows. We further propose that the persistence of accrual components is positively associated with the reliability of those components. However, we find that the least reliable accrual component has the greatest persistence and suggest possible reasons for this. We then investigate the relationship between earnings persistence and managerial share ownership, but find no evidence of a consistent, strong relationship. Rather, for the non-current operating accruals we find evidence consistent with incentive alignment for large firms with high operating cash flows, whereas for small firms we find evidence consistent with efficient contracting.     

Agency Problems,Equity Ownership,and Corporate Diversification

We provide evidence on the agency cost explanation for corporate diversification. We find that the level of diversification is negatively related to managerial equity ownership and to the equity ownership of outside blockholders. In addition, we report that decreases in diversification are associated with external corporate control threats, financial distress, and management turnover. These findings suggest that agency problems are responsible for firms maintaining value-reducing diversification strategies and that the recent trend toward increased corporate focus is attributable to market disciplinary forces.     

Corporate governance and dynamics capital structure: evidence from Vietnam

This paper examines the relationship between corporate governance and speed of adjustment (SOA) of capital structure for listed firms in Vietnam from 2000 to 2016. We first examine the literature on the influence of crucial corporate governance mechanisms, including gender diversity and managerial ownership, on SOA. Empirically, we then find that board size, board independence, gender diversity, and managerial ownership significantly increase SOA, but CEO duality significantly decreases it. We discuss some policy implications for firms and Vietnamese authorities.     

MANAGERIAL OWNERSHIP,TAKEOVER DEFENSES,AND DEBT FINANCING

We examine the effect of agency conflicts on debt financing and show that managerial ownership and its interaction with takeover defenses affect these decisions. We find that (1) the relation between leverage and takeover defenses becomes insignificant when we control for the interaction of these defenses with managerial ownership, and (2) firms with large managerial ownership operate at high debt levels unless they have a large number of takeover defenses. Therefore, a two‐dimensional aspect of governance that includes the interaction between managerial ownership and takeover defenses is useful in understanding the effect of agency conflicts on firms' debt financing decisions.     

Managerial ownership and firm performance: A re-examination using productivity measurement

The role of productivity in firm performance is of fundamental importance to the US economy. Consistent with the corporate finance approach, this paper uses the ownership stake of a firm's managers as an argument in estimating the firm's production function. Accordingly, this paper brings together the corporate finance and productivity literature. Using a large sample of randomly selected manufacturing firms that does not suffer from any survivorship or large firm size biases, we find that managerial ownership changes are positively related to changes in productivity. We also find a higher sensitivity of changes in managerial ownership to changes in productivity for firms who experience greater than the median change in managerial ownership. These results are robust to including lagged estimates of production inputs, year dummies and separate dummies for each firm to control for unobservable firm characteristics. In addition, we find that the stock market rewards firms with increases in firm value when these firms increase their level of productivity.     

The Underpricing of Insurance IPOs

The previous literature documents that insurance initial public offerings (IPOs) are less underpriced than those of noninsurance firms. This difference is usually attributed to lower information asymmetry for regulated firms. However, we find that once one controls for the file price adjustment insurance IPOs, both stock and mutual, are no less underpriced than other noninsurance offerings suggesting the book-building process resolves any such information asymmetries. We also find that mutual IPOs appear more underpriced than stock insurance IPOs, but this difference is related to the differences in pre-issue managerial ownership.     

Corporate Governance and Asset Sales: The Effect of Internal and External Control Mechanisms

We investigate firms that sell assets to determine whether corporate governance mechanisms are effective at controlling agency problems. Our evidence shows that these firms have lower managerial ownership and are more likely to make unrelated acquisitions, suggesting weak internal controls. Analysis of insider trading activity shows that, on average, net buying increases before the asset sale and shareholders benefit more when this occurs. Results suggest that how managers reach a given level of ownership provides more information about incentive alignment than just the level of ownership. Our results also highlight the dynamic nature of corporate restructuring as firms acquire and then sell assets.     

Institutional ownership and the informativeness of disclosure tone

Disclosure tone is an important qualitative characteristic of managerial disclosures. There is mixed evidence on the role of tone in disclosure strategy. While some studies highlight the informativeness of disclosure tone, other studies provide evidence consistent with an information obfuscation role. We conjecture that the mixed evidence may be because prior studies have not explicitly modeled the role of oversight over managerial disclosure. Using an exogenous shock to institutional ownership, an important source of managerial oversight, we find that abnormal disclosure tone is informative of a firm's future earnings and cash flows when institutional ownership is high. This positive association between institutional ownership and informativeness of abnormal tone is stronger when there is an increase in quasi-indexer institutional ownership and the contemporaneous performance is negative. Collectively, the results highlight a more complex role for disclosure tone. Abnormal disclosure tone could be reflective of managerial sentiment and convey forward-looking information to investors in the presence of greater oversight over managerial actions.     

Managerial Ownership and Accounting Disclosures: An Empirical Study

This study examines empirically the effect of managerial ownership on firms' disclosures. Agency theory predicts that investors' information requirements increase with the agency costs of the firm. Managerial ownership mitigates agency costs and therefore should reduce investors' information needs. This study tests the hypothesis that firms with lower levels of managerial ownership provide more extensive disclosures by examining analysts' ratings of firms' disclosures. In contrast to the proxies used in prior studies that test this relationship, such as the earnings-return correlation and management earnings forecasts, these ratings provide a more direct measure of firms' overall disclosure practices.I find that the relationship between managerial holdings and disclosures depends on the type of disclosure. Consistent with the hypothesis of this study, firms with lower levels of managerial ownership are more likely to receive higher ratings for the disclosures provided in their annual and quarterly reports, even after controlling for size, performance, volatility of returns, the frequency of securities offerings and proprietary costs. The more informal and flexible aspects of disclosures, however, as measured by the investor relations rating, are not influenced by the level of managerial ownership. These results are consistent with prior research that predicts that firms lower their costs of capital by signaling a commitment to maintain a more open disclosure policy. Because annual and quarterly reports are less flexible, and therefore less likely to change, they may represent a more credible commitment to provide more informative disclosures.     

How Entrenchment, Incentives and Governance Influence REIT Capital Structure

Although recent literature has confirmed the importance of viewing a firm??s capital structure choices of leverage and debt maturity as jointly determined, to date there has been little analysis of the importance of traditional governance variables on a firm??s capital structure decisions using a simultaneous equations approach. We examine the influence of managerial incentives, traditional managerial monitoring mechanisms and managerial entrenchment on the capital structure of Real Estate Investment Trusts (REITs). Using panel data, we estimate a system of simultaneous equations for leverage and maturity and find that firms with entrenched CEOs use less leverage and shorter maturity debt. This is consistent with the expectation that managers acting in their own self interest will choose lower leverage to reduce liquidity risk and use short maturity debt to preserve their ability to enhance their compensation and reputations by empire building. We also find evidence that traditional alignment mechanisms such as equity and option ownership have an offsetting effect; and that firms where the founder serves as CEO choose higher leverage and longer maturity debt. The results also provide evidence that leverage and maturity are substitutes, firms with high profitability and growth opportunities use less leverage and firms with liquid assets use more leverage and longer maturity debt.