Predicting corporate governance in emerging markets

This paper investigates what predicts corporate governance in emerging markets. Specifically, we examine what predicts governance changes and the level of governance itself. To conduct this study, we utilize a unique dataset from AllianceBernstein that consists of monthly firm-level corporate governance ratings for 24 emerging market countries for almost seven years. Since the AllianceBernstein ratings are time-series data, they allow us to determine the direction of change in a firm’s corporate governance, and the timing of these changes. Using these data, we find two main results. First, as firms grow they are more likely to improve their governance. Second, the level of political risk where the firm resides is negatively and significantly related to the level of firm governance but positively and significantly related to changes in firm governance. Hence, firm governance is better in countries with lower political risk but firms are more likely to improve their governance in countries with higher political risk.     

Evaluating corporate credit risks in emerging markets

Corporate leverage among emerging market firms went up considerably after the 2007–09 Global Financial Crisis (GFC). We investigate how the increased emerging market corporate leverage in the post-GFC period (2010–15) impacted the underlying credit risk, compared to the pre-GFC (2002–2006) and GFC (2007–09) periods. Using firm-level credit risk, financial, and balance sheet data for 350 firms in 23 emerging markets, we find that leverage growth leads to a significant increase in corporate credit default swap (CDS) spreads only in the post-GFC period, and the incremental effect is mainly evident among risky firms (firms with high leverage and idiosyncratic volatility). In contrast, emerging market CDS spreads during the GFC period are mainly driven by global market risk factors. The post-GFC corporate debt vulnerability is mitigated for high growth prospect firms and firms domiciled in countries with high net capital inflows and superior governance. While corporate leverage growth impacts aggregate corporate credit risk, there is no evidence that it increases sovereign credit risk. Our paper contributes to the recent literature on potential sources of default risk in emerging markets.     

Corporate governance, investor protection, and performance in emerging markets

We use recent data on firm-level corporate governance (CG) rankings across 14 emerging markets and find that there is wide variation in firm-level governance in our sample and that the average firm-level governance is lower in countries with weaker legal systems. We explore the determinants of firm-level governance and find that governance is correlated with the extent of the asymmetric information and contracting imperfections that firms face. We also find that better corporate governance is highly correlated with better operating performance and market valuation. Finally, we provide evidence that firm-level corporate governance provisions matter more in countries with weak legal environments.     

How useful are commercial corporate governance ratings? Evidence from emerging markets

A central issue in evaluating the effects of firm-level corporate governance (FLCG) is how to measure it. We focus here on emerging markets (EMs). One common approach to measuring FLCG uses country-specific (CSIs), tailored to each country's laws and institutions. Several studies report that CSIs can predict firm outcomes in a panel data framework with two-way (firm and time) fixed effects (TWFE). An alternate approach uses commercial CG ratings (CCGRs) that apply the same or similar elements across many countries. We assess the three best available CCGRs covering EMs (Asset4, Thomson Reuters, and MSCI), and find that they do not predict firm outcomes with TWFE in EMs. We also provide evidence that the likely cause for CCGRs' lack of performance is their poor construction rather than the inability of FLCG measures to predict outcomes. CSI-based studies suggest that disclosure (beyond country-mandated minimums) is the FLCG aspect that most consistently predicts firm outcomes in EMs. Yet, these CCGRs have no or minimal measures of disclosure. Other important limitations of the CCGRs include the use of elements that are U.S.-centric; reflect firm outcomes rather than CG; are implausible measures of good FLCG, or are vaguely or subjectively defined. We also attempt, but fail, to use element-level information from CCGRs to construct sound measures of FLCG.     

Postprivatization corporate governance: The role of ownership structure and investor protection

We investigate the role of ownership structure and investor protection in postprivatization corporate governance. Using a sample of 209 privatized firms from 39 countries over the period 1980 to 2001, we find that the government relinquishes control over time to the benefit of local institutions, individuals, and foreign investors, and that private ownership tends to concentrate over time. Firm size, growth, and industry affiliation, privatization method, as well as the level of institutional development and investor protection, explain the cross-firm differences in ownership concentration. The positive effect of ownership concentration on firm performance matters more in countries with weak investor protection.     

The market reaction to corporate governance regulation

This paper investigates the market reaction to recent legislative and regulatory actions pertaining to corporate governance. The managerial power view of governance suggests that executive pay, the existing process of proxy access, and various governance provisions [e.g., staggered boards and Chief Executive Officer (CEO)-chairman duality] are associated with managerial rent extraction. This perspective predicts that broad government actions that reduce executive pay, increase proxy access, and ban such governance provisions are value-enhancing. In contrast, another view of governance suggests that observed governance choices are the result of value-maximizing contracts between shareholders and management. This perspective predicts that broad government actions that regulate such governance choices are value destroying. Consistent with the latter view, we find that the abnormal returns to recent events relating to corporate governance regulations are, on average, decreasing in CEO pay, decreasing in the number of large blockholders, decreasing in the ease by which small institutional investors can access the proxy process, and decreasing in the presence of a staggered board.     

Regulation: The market for corporate control and corporate governance

This study examines the effects of regulation and a contested market for corporate control on the internal mechanisms of corporate governance. The study focus is on two sectors, manufacturing and banking, due to their differences in the governance environment. In the United Kingdom for the sample period used in this study, manufacturing was characterized by a contested market for corporate control with little or no regulatory interference. In banking on the other hand, takeovers, hostile or otherwise, were absent and ownership changes and board appointments were supervised by the regulator—the Bank of England. The findings of the panel data estimates show that, unlike in the manufacturing sector, disciplinary top management turnover in banks was not related to share price performance. Outside directors were significantly less effective in disciplining top management in banks than in manufacturing firms.     

The rise of corporate governance in corporate control research

This article has two related tasks. First, we review the articles published in this Special Issue on Corporate Control, Mergers, and Acquisitions. These articles provide new evidence on several aspects of corporate control and governance including the value and performance effects of various ownership groups, the impact of internal governance structures, the effects of regulatory changes on specific industries and evidence on bidding strategies in takeovers. This analysis leads us to our second task – to examine the evolution of corporate control research, broadly defined. Our analysis shows a movement in research from mergers and acquisitions to a broader analysis of corporate governance, especially internal governance features. We suggest that there is a trend toward an increase in the relative importance of internal governance compared to discipline from the market from corporate control. This trend reflects an important change over the past several decades in the means through which the market disciplines corporate behavior.     

The impact of corporate governance on corporate performance: Evidence from Japan

Employing a unique data set provided by Governance Metrics International, which rates firms using six different corporate governance dimensions, we analyze whether Japanese firms with many governance provisions have a better corporate performance than firms with few governance provisions. Employing an overall index, we find that well-governed firms significantly outperform poorly governed firms by up to 15% a year. Using indices for various governance categories, we find that not all categories affect corporate performance. Governance provisions that deal with financial disclosure, shareholder rights, and remuneration do affect stock price performance. The impact of provisions that deal with board accountability, market for control, and corporate behavior is limited.     

Asset pricing with investor sentiment: On the use of investor group behavior to forecast ASEAN markets

A study of investor behavior, using four investor groups (local, foreign, institutional, and dealer's accounts) on the Stock Exchange of Thailand (SET). The daily net purchases of each group are used as leading indicators for sentiment. The sentiments are examined with relation to each other and market returns. Eight proven macroeconomic factors with known cross-sectional relationships and known to forecast with returns are examined as a benchmark for the newly proposed sentiment factor model. Retesting the factors allows for an apples to apples comparison with the proposed sentiment factors. Using a VAR framework this research finds that dealers predominantly sell to institutional accounts, creating a negative correlation between the two groups, in addition to strong institutional herding which is all indicative of potential agency problems on the exchange. Also find that local individual accounts practice negative feedback trading and the other groups practice positive feedback trading. Of the four groups, the only group that influences the SET is the local individual group of investors. The foreign investor is found to be the least significant group on market returns, provide market liquidity to locals, and be the least responsive to daily market changes-following the prudent man rule. Lastly, propose a simple model, using investor behavior to accurately predict the market's direction for the following day 76 percent of the time with market timing ability (66 percent in Malaysia). This can be useful for buying and shorting the market.     

Diversification,corporate governance and firm value in small markets: evidence from New Zealand

We find that diversified firms in New Zealand are associated with a value discount of 19–42 per cent relative to single‐segment (undiversified) firms. Although several competing explanations have been offered in the literature, we find that the strength of corporate governance explains between 15–21 per cent of this discount. Specifically, board size, busyness of directors, CEO ownership and whether or not compensation of directors includes equity‐based components collectively explain a large part of the reported discount. Our results from companies trading in New Zealand complement recent findings in the US by not only confirming the existence of a diversification discount but also emphasizing the role of poor governance in destroying shareholder wealth by pursuing a value‐destroying corporate strategy. All our results hold after controlling for potential endogeneity in the decision to diversify and the choice of corporate governance structure by employing two‐way fixed‐effects and dynamic‐panel generalized method of moments regression techniques.     

What matters and for which firms for corporate governance in emerging markets? Evidence from Brazil (and other BRIK countries)

A central issue in corporate governance research is the extent to which “good” governance practices are universal (one size mostly fits all) or instead depend on country and firm characteristics. We report evidence that supports the second view. We first conduct a case study of Brazil, in which we survey Brazilian firms' governance practices at year-end 2004, construct a corporate governance index, and show that the index, as well as subindices for ownership structure, board procedure, and minority shareholder rights, predicts higher lagged Tobin's q. In contrast to other studies, greater board independence predicts lower Tobin's q. Firm characteristics also matter: governance predicts market value for nonmanufacturing (but not manufacturing) firms, small (but not large) firms, and high-growth (but not low-growth) firms. We then extend prior studies of India, Korea, and Russia, and compare those countries to Brazil, to assess which aspects of governance matter in which countries, and for which types of firms. Our “multi-country” results suggest that country characteristics strongly influence both which aspects of governance predict firm market value, and at which firms that association is found. They support a flexible approach to governance, with ample room for firm choice.     

Does compliance with corporate governance increase profitability? Evidence from an emerging economy: Pakistan

Corporate governance reforms have evolved over time, but few studies have addressed firm compliance with corporate governance standards in the context of an emerging market like Pakistan. We build a Corporate Governance Compliance Index for public firms in Pakistan for 2008–2018. Our index consists of six subindices based on the key parameters of governance outlined by the Code of Corporate Governance of Pakistan. Our analysis shows that increased compliance predicts higher firm performance but entails greater compliance costs. Board Structure and Functions & Responsibilities of Audit Committee drive the compliance-performance relationship, which is affected by levels of managerial ownership and ownership concentration.     

永恒的主题:银行业公司治理建设

银行公司治理建设是一个长期实践和动态的过程,好的治理机制应该具备健全稳定的治理架构,对治理主体清晰职责边界的确定,以及内部相互监督与制约机制、激励考核和问责机制,还应包括透明度建设和社会责任与形象的提升。     

Partial acquisitions in emerging markets: A test of the strategic market entry and corporate control hypotheses

In this paper, we examine the motivations of acquirers undertaking partial acquisitions in emerging markets by testing two competing hypotheses: the market for corporate control hypothesis and the market entry hypothesis. We find that targets of cross-border acquisitions outperform targets of domestic acquisitions in the pre-acquisition period. While cross-border acquisitions have no significant impact on target firms' operating performance, targets of domestic acquisitions experience significant improvements in operating performance and substantial changes in ownership structure after the acquisition. The evidence suggests that domestic partial acquisitions in emerging markets serve as a market for corporate control, while cross-border partial acquisitions are motivated by the strategic market entry rationale.     

The transmission of emerging market shocks to global equity markets

The paper analyzes whether, and to what extent, emerging market economies (EMEs) have systemic importance for global financial markets, above and beyond their influence during crises episodes. Using a novel database of exogenous economic and political shocks for 14 systematically relevant EMEs, we find that EME shocks not only have a statistically but also economically significant impact on global equity markets. The economic significance of EME shocks is in particular underlined by their remarkably persistent effects over time. Importantly, EMEs are found to influence global equity markets about just as much in “good” times as in “bad” times, though they tend to be stronger during crises or periods of financial turbulence. Finally, we detect a large degree of heterogeneity in the transmission of EME shocks to individual countries' equity markets, stressing the different degrees of financial exposure, which is relatively higher for European equity markets.     

The role of shareholder proposals in corporate governance

This paper examines the corporate governance role of shareholder-initiated proxy proposals. We find that target firms tend to underperform and have generally poor governance structures, with little indication of systematic agenda-seeking by the proposal sponsors. Governance quality also affects the voting outcomes and the announcement period stock price effects, with the latter strongest for first-time submissions and during stock market peaks. Proposal implementation is largely a function of voting success but is affected by managerial entrenchment and rent-seeking. The results imply that shareholder proposals are a useful device of external control, countering arguments that they should be restricted rather than facilitated under the SEC's current regulatory agenda.     

Market discipline or rent extraction: Impacts of share trading by foreign institutional investors in different corporate governance and investor protection environments

Minority investors' reliance on market discipline can vary with different country-level investor protection and firm-level corporate governance environments, which affect both discipline and rent extraction incentives of foreign institutional investors (FIIs). Using data from 47 economies between 2009 and 2017, we find that firm value increases with FIIs aggressive trading but decreases with FIIs discreet trading. The positive and negative impacts of FIIs trading are strengthened when investor protection is stronger, but weakened when corporate governance is stronger. Our analysis enhances understanding of trade-offs of FIIs trading between discipline and rent extraction in different corporate governance and investor protection environments.