Foreign Direct Investment,Institutional Voids,and the Internationalization of Mining Companies into Africa

The paper investigates the factors influencing the internationalization of mining firms into Africa and the strategies employed. We find that the three most important factors identified by mining houses as influencing their decisions to invest are all related to institutional voids particular to developing countries—security of tenure, political stability and poor infrastructure. South African firms have shown themselves to be adept to doing business in volatile political and institutional environments because of their experience within their home base with relatively weaker institutions. They have therefore developed advantages over multinational enterprises from industrialized countries to doing business in these new frontiers.     

Political patronage and analysts’ forecast precision

We test whether the channel by which the government plays the role of political patron to selected firms influences analysts’ forecast precision in Malaysia. Correcting for analysts’ self-selection bias, we find a negative relation between analysts’ forecast errors and the social dimension of political patronage, as proxied by government-controlled institutional ownership. The reverse is found for the economic dimension of political patronage, as proxied by the percentage shareholding of government-linked corporations. We find no evidence that the personal dimension of political patronage influences analysts’ forecast precision.     

Foreign Institutional Ownership and the Global Convergence of Financial Reporting Practices

This paper investigates whether foreign institutional investors affect the global convergence of financial reporting practices. Using several measures of reporting convergence, we show that U.S. institutional ownership is positively associated with subsequent changes in emerging market firms’ accounting comparability to their U.S. industry peers. We identify this association using an instrumental variable approach that exploits exogenous variation in U.S. institutional investment generated by the JGTRRA Act of 2003. Further, we provide evidence of a specific mechanism—the switch to a Big Four audit firm—through which U.S. institutional investors affect reporting convergence. Finally, we show that, for emerging market firms, an increase in comparability to U.S. firms is associated with an improvement in the properties of foreign analysts’ forecasts.     

Debate: Economic policy and prospects; Accounting for inflation

Citizenship, a somewhat elusive concept, is explored in the context of social, economic and political entitlement. At the socio‐political level, it is argued that bodies intermediate to the state and individual—civil and civic formations—are necessary for citizenship to flourish in an atmosphere where experiments in living can take place. We currently lack a clear philosophy directed to creating an acceptable balance between individual self‐help, the enabling state which pilots the needs of citizens into agreed channels and intermediate social life forms. Such a philosophy needs to be developed alongside an institutional restructuring of the state. In this, a reformed constitutional and administrative law has a crucial role to play.     

Auditor Choice in Politically Connected Firms

We extend recent research on the links between political connections and financial reporting by examining the role of auditor choice. Our evidence that public firms with political connections are more likely to appoint a Big 4 auditor supports the intuition that insiders in these firms are eager to improve accounting transparency to convince outside investors that they refrain from exploiting their connections to divert corporate resources. In evidence consistent with another prediction, we find that this link is stronger for connected firms with ownership structures conducive to insiders seizing private benefits at the expense of minority investors. We also find that the relation between political connections and auditor choice is stronger for firms operating in countries with relatively poor institutional infrastructure, implying that tough external monitoring by Big 4 auditors becomes more valuable for preventing diversion in these situations. Finally, we report that connected firms with Big 4 auditors exhibit less earnings management and enjoy greater transparency, higher valuations, and cheaper equity financing.     

The color of shareholders' money: Institutional shareholders' political values and corporate environmental disclosure

In this study, we investigate whether and to what extent institutional shareholders' political values influence their investees' environmental disclosure and performance. Using employees' political donation data, we construct institutional investors' political ideology score, which higher (lower) value represents a more Republican- (Democratic)-leaning culture. We find that firms led by institutional shareholders with a more Republican-oriented political ideology are less likely to issue environmental reports. Such a negative effect is more pronounced for firms with institutional shareholders with long-term horizons, with high corporate Republican ideology scores, and without an environmental committee. We further find that institutional shareholders' Republican-oriented political values are negatively associated with their investee firms' environmental performance and green innovations. Overall, our results indicate that institutional shareholders' internal political polarization significantly influences corporate environmental disclosure policies.     

Non-Linearity Between Life Insurance and Economic Development: A Revisited Approach

This paper investigates the non-linear link between economic development and activities of the life insurance market. We ask whether the relevance of institutional environments on the development of the life insurance market is different across countries. Applying a novel threshold model with the instrumental variable approach, we find overwhelming evidence in support of an income threshold. Moreover, legal and political circumstances have an overwhelming positive effect on life insurance in low-income countries, but the effect is marginal in high-income countries. Our findings clearly demonstrate that the role of institutions on activities in the life insurance market diminishes with the evolvement of economic development.     

Cross-country differences in the effect of political connections on stock price informativeness

Using an international sample of firms from 28 countries, we document that there exists a negative relationship between political connections and the informativeness of stock price, as measured by idiosyncratic volatility (IV). This finding is robust to alternative regression specifications, sub-samples analyses, and concerns related to endogeneity. A more detailed analysis shows that out of the different types of possible connections, the connectedness of the owners is the primary driver of this result. Further, the negative association is only significant for firms in countries characterized by low institutional quality (corrupted countries, countries with low access to external equity markets, and countries with low media penetration). There is no evidence of any relation between political connections and stock price informativeness for firms in countries characterized by high institutional quality. Overall, our results show that although political connections exacerbate rent-seeking that weaken the firms’ information environment on average, the negative information consequences are compensated by the countries’ institutional quality.     

Institutional development,financial deepening and economic growth: Evidence from China

There have been profound changes in both political and economic institutions in China over the last 20 years. Moreover, the pace of transition has led to variation across the country in the level of development. In this paper, we use panel data for the Chinese provinces to study the role of legal institutions, financial deepening and political pluralism on growth rates. The most important institutional developments for a transition economy are the emergence and legalization of the market economy, the establishment of secure property rights, the growth of a private sector, the development of financial sector institutions and markets, and the liberalization of political institutions. We develop measures of these phenomena, which are used as explanatory variables in regression models to explain provincial GDP growth rates. Our evidence suggests that the development of financial markets, legal environment, awareness of property rights and political pluralism are associated with stronger growth.     

Political connections and the cost of equity capital

Motivated by recent research on the costs and benefits of political connection, we examine the cost of equity capital of politically connected firms. Using propensity score matching models, we find that politically connected firms enjoy a lower cost of equity capital than their non-connected peers. We find further that political connections are more valuable for firms with stronger ties to political power. In additional analyses, we find that the effect of political connection on firms' equity financing costs is influenced by the prevailing country-level institutional and political environment, and by firm characteristics. Taken together, our findings provide strong evidence that investors require a lower cost of capital for politically connected firms, which suggests that politically connected firms are generally considered less risky than non-connected firms.     

Active Institutional Shareholders and Costs of Monitoring: Evidence from Executive Compensation

Although evidence suggests that institutional investors play a role in monitoring management, not all institutions are equally willing or able to serve this function. We present a stylized model that examines the effects of institutional monitoring on executive compensation. The model predicts that institutions' influence on managers' pay-for-performance sensitivity and level of compensation is enhanced when institutions have lower implied costs of monitoring, but that these effects are attenuated when the firm-specific cost of monitoring is high. Our empirical results are broadly consistent with these implications, suggesting that independent investment advisors and investment company managers have advantages in monitoring firms' management.     

Renewable Governance: Good for the Environment?

We conjecture that board renewal mechanisms—those substantive enough to renew the thinking of the board—are required before investors can address the mismatch between their preferences regarding environmental sustainability and what insiders at firms are actually doing. We identify the adoption of majority voting for directors and the introduction of a female director as two corporate governance mechanisms potentially strong enough to renew a board's thinking on sustainability. Using a sample of 3,293 firms from 41 countries, along with quasi-exogenous shocks to board renewal mechanisms in Canada and France, we find that both board renewal mechanisms are associated with significantly higher future environmental performance. Further tests provide suggestive evidence that board renewal is more strongly associated with environmental performance in settings with better institutions and more motivated institutional investors. These results suggest the importance of board renewal for alignment of firm policies with investor preferences around the world.     

Institutional cross-ownership and stock price crash risk

Using manually collected data of Chinese listed firms during the period 2007–2018, we provide strong and robust evidence that institutional cross-ownership is negatively associated with firm-specific stock price crash risk. Building on China’s institutional settings, we document that the negative relation is more pronounced for firms located in provinces with higher political uncertainty, or state-owned enterprises. This paper also conducts several mechanisms analyses and has confirmed three potential influencing mechanisms, such as information advantage, governance improvement and anticompetitive incentives, in explaining the effect of institutional cross-ownership on stock price crash risk. Overall, this paper develops a new perspective to investigate the ways to alleviate stock price crash risk in emerging markets.     

The Main Determinants of the Use of the Cost Accounting System in Portuguese Local Government

Abstract: This paper explores the main determinants of the use of the cost accounting system (CAS) in Portuguese local government (PLG). Regression analysis is used to study the fit of a model of accounting changes in PLG, focused on cost accounting systems oriented to activities and outputs. Based on survey data gathered from PLG, we have found that the use of information in decision‐making and external reporting is still a mirage. We obtain evidence about the influence of the internal organizational context (especially the lack of support and difficulties in the CAS implementation) in the use for internal purposes, while the institutional environment (like external pressures to implement the CAS) appears to be more deterministic of the external use. Results strengthen the function of external reporting to legitimate the organization's activities to external stakeholders. On the other hand, some control variables (like political competition, usefulness and experience) also evidence some explanatory power in the model. Some mixed results were found that appeal to further research in the future. Our empirical results contribute to understand the importance of interconnecting the contingency and institutional approaches to gain a clear picture of cost accounting changes in the public sector.     

Market Segmentation and Cross‐predictability of Returns

We present evidence supporting the hypothesis that due to investor specialization and market segmentation, value‐relevant information diffuses gradually in financial markets. Using the stock market as our setting, we find that (i) stocks that are in economically related supplier and customer industries cross‐predict each other's returns, (ii) the magnitude of return cross‐predictability declines with the number of informed investors in the market as proxied by the level of analyst coverage and institutional ownership, and (iii) changes in the stock holdings of institutional investors mirror the model trading behavior of informed investors.     

Effects of international institutional factors on earnings quality of banks

We examine the relation between legal, extra-legal and political institutional factors and earnings quality of banks across countries. We predict that earnings quality is higher in countries with legal, extra-legal and political systems that reduce the consumption of private control benefits by insiders and afford outside investors greater protection. Using a sample of banks from 35 countries during the pre-crisis period from 1993 to 2006, we find that all five measures of earnings quality studied are higher in countries with stronger legal, extra-legal and political institutional structures. We also find that banks in countries with stronger institutions are less likely to report losses, have lower loan loss provisions, and higher balance sheet strength during the 2007–2009 crisis period. Our findings highlight the implications of country level institutional factors for financial reporting quality and are relevant to bank regulators who are considering additional regulations on bank financial reporting.     

Firms’ debt choice in Africa: Are institutional infrastructure and non-traditional determinants important?

We use a World Bank survey data on the financing of incremental production to examine firms’ debt choice decision in eleven African countries, where capital markets are evolving and/or fraught with inadequate institutional infrastructure. Such a landscape suggests that hitherto overlooked nontraditional factors and institutions may be important determinants of debt choice. Interestingly, we find that some nontraditional factors and institutional infrastructure are robust debt choice determinants. Education level of managers, national incidence of corruption and ethnicity of owners are important for non-bank debt choice in Africa, with non-bank debt markets populated largely by the less formal trade credit and lease markets. Both effective legal and political infrastructures foster firms’ preference for non-bank debt while macro-instability discourages preference for non-bank debt; thus, flagging institutional infrastructures as vital for effective non-bank debt markets. Furthermore, we find evidence which confirms that capital markets in Africa are insufficiently spanned by the necessary debt markets; this should motivate relevant authorities to hasten development of public debt markets to supplement the currently limiting non-bank debt markets of trade credits and leases.     

Privatization,political risk and stock market development in emerging economies

This paper investigates whether privatization in emerging economies has a significant indirect effect on local stock market development through the resolution of political risk. We argue that a sustained privatization program represents a major political test that gradually resolves uncertainty over political commitment to a market-oriented policy as well as to regulatory and private property rights. We present evidence suggesting that progress in privatization is indeed correlated with improvements in perceived political risk. Our analysis further shows that changes in political risk in general tend to have a strong effect on local stock market development and excess returns in emerging economies. We conclude that the resolution of political risk resulting from successful privatization has been an important source for the rapid growth of stock markets in emerging economies.     

Subsidiary financing choices: The roles of institutional distances from home countries

We examine how the institutional distance between home and host countries is associated with the characteristics of foreign subsidiary debt, including leverage, debt maturity choices, and cash holdings. We utilize the multidimensionality of institutional distances to examine ten different distance dimensions. We use a sample of 3139 foreign subsidiaries operating in France and being headquartered in 44 different countries. We find that while subsidiaries' financing choices are partially explained by standard determinants, they are also significantly associated with different forms of institutional distance. Regarding the heterogeneity of institutional distances, results show the dominance of financial and cultural distances for leverage levels; knowledge and political distances for debt maturities; and a dominance of demographic, geographic, and political distances for cash holdings levels.     

Effects of the institutional environment on public-private partnership (P3) projects: Evidence from Canada

The purpose of this paper is to understand the effects of the institutional environment on project outcomes in order to contribute to the accumulating accounting literature on P3s. Based on an empirical study of Alberta’s institutional environment, using Edmonton’s Anthony Henday Highway P3 projects, we analyze how the: a) political environment enables or disenables P3 outcomes; b) policy/business environment impacts project development and implementation; and c) organizational capacity affects P3 outcomes and vice versa.Adopting a neo-institutionalism perspective and a case study approach, we investigate the effects of the institutional environment on P3 project outcomes. This research is based on 35 semi-structured interviews of public sector executive managers, political actors, senior industry executives, project consultants/advisors, labour union, media specialists, community advocates and public policy analysts in the P3 industry who participated in Alberta’s P3 projects from 2004 to 2016.We find that the institutional environment has significant influence on project performance, and program permanence/continuity. Our study suggests that P3 enabling environments present: 1) relevant P3 policy measures and committed political support by field actors; 2) a path-dependent response to project outcomes; and 3) institutional environment elements that are mutually re-enforcing with synergistic effects.In effect, we document that a strong political leadership support for P3s, a favourable policy environment, and effective organizational capacity are pre-requisite factors for the successful implementation of P3s. Given the unsettled debate about various methodological approaches to value for money (VfM) determination for assessing P3s, we are unsure whether our findings are partly influenced by inconsistent accounting standards for P3s across jurisdictions.Our study highlights critical P3 enabling attributes that would be beneficial to accounting researchers interested in institutional environment studies and co-operative arrangements, accountants, public sector policy managers, regulators, and private sector partners saddled with the task of developing and implementing P3 projects in various institutional and/or contextual settings.