Institutional Investors,Political Connections,and the Incidence of Regulatory Enforcement Against Corporate Fraud

We investigate two under-explored factors in mitigating the risk of corporate fraud and regulatory enforcement against fraud, namely institutional investors and political connections. The role of institutional investors in the effective monitoring of a firm’s management is well established in the literature. We further observe that firms that have a large proportion of their shares held by institutional investors have a lower incidence of enforcement actions against corporate fraud. The importance of political connections for enterprises, whether in a developed market such as the United States or an emerging market such as China, has been established by previous studies. However, we find evidence of another positive effect of political connections: they may reduce the incidence of enforcement action against corporate fraud. We also find that political connections play a more significant role in reducing regulatory enforcement incidents against non-state-owned enterprises and firms in weaker legal environments, whereas institutional ownership plays a more important role in reducing regulatory enforcement incidents against state-owned enterprises.     

Do bank loans still convey information to investors? Evidence from the split share structure reform in China

Bank loans can convey information about the borrowing firms that have proper corporate governance systems. Using a sample of bank loan announcements in China, we find that the market reaction is positive after the split share structure reform in 2005, which aligns the interests of large shareholders and minority shareholders, government and public investors, and alleviates their tunneling incentives. We also find that this effect is more pronounced for private firms as the reform mainly enhances corporate governance for private firms. The signaling role of bank loans is less pronounced for firms with less severe information asymmetry after the reform, e.g. higher shareholdings of mutual funds and higher proportion of independent directors. Related party transactions decrease when they obtain bank loans after the reform, which reflects the alleviation of tunneling after the reform.     

The Challenges of Detection and Enforcement of Insider Trading

Taking advantage of the China’s recent anti-corruption campaign, we attempt to examine the effect of public governance on a firm’s incentive to commit fraud. Using enforcement actions data from the Chinese Securities Regulatory Commission (CSRC) from 2004 to 2014, we find that, due to enhanced public governance, firms are less likely to commit fraud in the post-campaign period than in the pre-campaign period. We further show that the effect of public governance is more evident in privately held listed firms, in firms with weak legal environment, and in firms in areas with poor local economies. In addition, we find that older CEOs respond less actively to the public governance caused by anti-corruption regulations. This paper offers clear policy implications for business ethics by indicating that public governance provides external monitoring of corporate decisions.     

Tunneling or Not? The Change of Legal Environment on the Effect of Post-Privatization Performance

Motivated by Hoff and Stiglitz’s (Am Econ Rev 94(3):753–763, 2004) theory, we examine empirically how the creation of “rules of the game” affect the behavior of economic agents in a transition economy. Using a sample of Chinese state-owned enterprises in which controlling ownership was transferred to private acquirers between 1994 and 2006, we find that the post-privatization performance (PPP) of firms depends on institutional factors. Before 2003, we observe severe post-privatization tunneling behaviors by acquirers and worse PPP. However, from 2003, when the State issued regulations against tunneling and strengthened enforcement, the incidence of tunneling behaviors declined, and PPP improved. We find that better implementation of ownership transfer and longer prior experience of private acquirers are key factors that contribute to the improvement.     

Industry globalization and the performance of emerging market firms: Evidence from China

In this study, we explore the extent to which industry globalization affects the performance of firms in China, an emerging market. We focus on the period between 1996 and 2001 and track the globalization levels for six different Chinese industries as well as the performance of 166 public listed firms in these industries. The results validate our major premise: high levels of industry globalization positively impact the performance of Chinese firms. We also find that when their industries globalize, firms with slack resources experience greater performance improvement than other firms without these resources.     

Executive integrity,audit opinion,and fraud in Chinese listed firms

We examine the influence of auditors on mitigating corporate fraud in China, which is known to have weak legal enforcement, weak investor protection along with tight control of the media and labour unions. We find that firms with executives that have lower integrity, indicated by a greater degree of earnings manipulation, are associated with higher propensity of regulatory enforcement actions against corporate fraud in the subsequent year. We show that this effect is moderated by the issuance of a modified audit opinion report by the auditors. This finding implies that auditors can serve as external governance mechanism to discourage executives with lower integrity in committing fraud. Our results have policy implications for further strengthening auditor independence in emerging countries like China.     

Institutional Ownership and Private Equity Placements: Evidence from Chinese Listed Firms

This paper examines the impact of institutional ownership on the performance of private equity placements (PEPs) for listed firms in China. We find that the presence of institutional investors can alleviate the information asymmetries between listed firms and the market. The market reaction to PEP announcements is significantly smaller if there is a higher portion of institutional shareholdings. Long‐term firm operational performance after PEPs is positively correlated with institutional shareholdings. Moreover, we find that the relationship between institutional shareholdings and PEP performance is mainly driven by nonlisted corporate investors and mutual funds. Finally, the relationship between PEP performance and institutional shareholdings is stronger in smaller PEP issuers.     

The Effect of Venture Capital Investment—Evidence from China's Small and Medium‐Sized Enterprises Board

In this paper, we use a matched sample to empirically test the effect of venture capital investment on the companies listed on the Small and Medium‐Sized Enterprises Board in China. We find that Chinese venture capitalists neither add value to their invested firms in the initial public offering (IPO) process nor improve operating performance. Rather, compared with their non‐venture‐backed counterparts, venture‐backed firms are associated with a greater level of IPO underpricing and inferior operating performance both before and after IPO. Our findings in China support neither the certification/monitoring hypothesis nor the grandstanding hypothesis, but partly support the adverse selection hypothesis.     

Foreign direct investment and inequality: Evidence from China's policy change

In this paper, we examine the impact of foreign direct investment (FDI) on local urban inequality in China. Specifically, we consider the FDI policy change as an exogenous shock on the local labour markets. We find that cities that have experienced a bigger policy change in promoting FDI between 1997 and 2002 are significantly more unequal in 2005. This pattern is mainly driven by the positive association between FDI liberalisation and skill premia. The result holds after we control for other policy changes, such as privatisation of state-owned enterprises, infrastructure and trade liberalisation. We then turn to investigate the mechanisms using firm and individual-level information. Our firm-level evidence shows that FDI firms not only hire relatively more high-skilled workers but also provide relatively higher wages to high-skilled workers compared to domestic firms. Moreover, the individual-level analysis shows that FDI has a significantly positive spillover effect on wages received by skilled workers employed by state-owned enterprises, but not wages of unskilled workers.     

Alliances and the innovation performance of corporate and public research spin-off firms

We explore the innovation performance benefits of alliances for spin-off firms, in particular spin-offs either from other firms or from public research organizations. During the early years of the emerging combinatorial chemistry industry, the industry on which our empirical analysis focuses, spin-offs engaged in alliances with large and established partners, partners of similar type and size, and with public research organizations, often for different reasons. We seek to understand to what extent alliances of spin-offs with other firms (either large- or small- and medium-sized firms) affected their innovation performance and also how this performance may have been affected by their corporate or public research background. We find evidence that in general alliances of spin-offs with other firms, in particular alliances with large firms, increased their innovation performance. Corporate spin-offs that formed alliances with other firms outperformed public research spin-offs with such alliances. This suggests that, in terms of their innovation performance, corporate spin-offs that engaged in alliances with other firms seemed to have benefitted from their prior corporate background. Interestingly, it turns out that the negative impact of alliances on the innovation performance of public research spin-offs was largely affected by their alliances with small- and medium-sized firms.     

Foreign Acquisitions and Target Firms' Performance in China

This paper empirically investigates the effects of foreign acquisitions on several performance measures of Chinese target firms. Using a self‐constructed database that includes information on foreign acquisitions in China and the accounting information of Chinese manufacturing firms from 1998 to 2007, we find that foreign acquisitions significantly improve the productivity, sales and fixed asset investment of the target firms. We address the potential endogeneity issue in the OLS estimation using the difference‐in‐differences technique, with two control groups, namely the would‐be targets and the propensity‐score‐matched targets. We also find that the performance‐enhancing effect of foreign acquisitions becomes stronger when larger technology gaps are observed between the acquirers and the targets. An inverted‐U relationship is observed between the post‐acquisition performance of the target firms and the target firm equity that is held by the foreign acquirers. The performance effects are qualitatively different among vertical, horizontal and conglomerate acquisitions.     

Corporate Social Performance, Firm Valuation, and Industrial Difference: Evidence from Hong Kong

This study addresses two issues. First, does corporate social performance matter in Hong Kong. Second, if yes, is it relevant to some industries more than others. To answer these questions, we develop a corporate social performance index (CSP) to measure the quality of corporate social performance of major Hong Kong listed firms. The criteria are based on the OECD Principles of Corporate Governance. Using the 3-year period from 2002 to 2005, we find that firm valuation is positive and significantly associated with CSP. Interestingly, this relation matters less in China related firms and firms with a concentrated ownership structure. The results also show that CSP impacts firm valuation more positively when the firm is in the service sector. We further find that CSP is positively related to the market valuation of the subsequent year.     

Born globals,the choice of globalization strategy,and the market's perception of performance

This paper analyzes which characteristics of born global firms determine their choice for international entry mode. Using a logistic regression analysis, we study 124 newly public firms in the United States that undertake 261 international joint ventures or international acquisitions within the first 6 years of their founding. We find that the market responds positively to announcements of international expansions by born global firms, and that larger, more profitable, and more liquid firms have a higher propensity to engage in joint ventures rather than acquisitions. We also find that the market favors firms that announce joint ventures, rewarding them with significantly positive abnormal returns. Furthermore, while we find that cultural similarity affects mode choice, it does not affect the market's reaction to the announcements.     

Going Public to Grow? Evidence from a Panel of Italian Firms

This paper investigates the consequences of the decision to go public for the growth of Italian firms using US firms as a benchmark for comparison. We find Italian firms conducting IPOs are larger than US firms, but raise fewer funds from the IPO and grow more slowly afterwards. We also compare Italian IPOs across time. Firms going public in the 1990s display features that are more similar to US IPOs. We describe changes to the Italian economy and financial markets that are potentially responsible for the change. We compare firms of different size and with different governance structures, and we find that they behave differently after going public. Our results suggest that going public does not guarantee faster growth or more jobs. As such, public policies that simply increase access to equity markets may not be effective unless they provide incentives for the firms’ decision-makers to use the new capital to grow.      

Mixed ownership and firm performance: Evidence from the Chinese venture capital industry

We examine the impact of mixed ownership on the performance of venture capital (VC) firms in China. We use successful/unsuccessful exits from VC-financed entrepreneurial companies and number of patent applications by VC-financed companies as proxies for VC firms' performance. Consistent with existing research on the inferior performance of SOEs relative to non-SOEs, we find that on average government-controlled VC firms (GVCs) underperform domestic private investors-controlled VC firms (PVCs). More importantly, we find that introducing minority private investors (i.e., mixed ownership) helps improve the performance of GVCs. However, we find no evidence that introducing minority government investors (i.e., mixed ownership) helps improve the performance of PVCs. Our results provide relevant information to the ongoing debate on the role of the government investors and private investors in developing the VC industry in emerging markets.     

Supplier development programs and firm performance: evidence from Chile

This paper evaluates the impact of the Chilean Supplier Development Program, aimed at improving and stabilizing the commercial linkages between small and medium-sized suppliers and their large firm customers, during the period 2003–2008. We use the panel structure of our dataset to control for observables and time-invariant unobservable factors that affect the participation and performance of firms. We find that both small and medium enterprises and large firms benefited from the coordination efforts. The program increased sales, employment, and the sustainability of small and medium-sized suppliers; it also increased the sales of large firms and raised their ability to become exporters. In addition, we find that the timing of the effect is different for suppliers and large firms. While the effect on suppliers appeared 1 year after the firms enrolled in the program, the effect on large firms took 2 years to appear.     

Regulatory Sanctions on Independent Directors and Their Consequences to the Director Labor Market: Evidence from China

We investigate the regulatory sanctions imposed on independent directors for their firms’ financial frauds in China. These regulatory sanctions are prima-facie evidence of significant lapses in business ethics. During the period 2003–2010, 302-person-time independent directors were penalized by the regulator (the China Securities Regulatory Commission—the CSRC), and the two stock exchanges. We find that the independent directors with accounting experiences are more likely to be penalized by the CSRC, though they do not suffer more severe penalties than do the other sanctioned independent directors. We also find that independent directors suffer less severe penalties than do the insider directors. These results are consistent with the hypothesis that the sanctions on independent directors are tied to their assumed ethical and legal responsibilities. Following a regulatory sanction, penalized independent directors experience a significant decline in the number of other board seats held. However, they can gain board seats in better quality firms. We find that interlocked firms that share penalized independent directors with the fraud firm do not suffer from a valuation decline. Overall, our results suggest that regulatory sanctions have not triggered further sanctions on the penalized directors in the labor market but they have, instead, created a disincentive for these directors to serve on the company boards of high-risk firms.     

Fraud,Enforcement Action,and the Role of Corporate Governance: Evidence from China

We examine enforcement action in China’s emerging markets by focusing on (1) the agents that impose this action and (2) the role played by supervisory boards. Using newly available databases, we find that supervisory boards play an active role when Chinese listed companies face enforcement action. Listed firms with larger supervisory boards are more likely to have more severe sanctions imposed upon them by the China Security Regulatory Commission, and listed companies that face more severe enforcement actions have more supervisory board meetings. Our findings are of interest, as supervisory boards in China are generally perceived to be dysfunctional. This study contributes to the existing literature in three ways. First, we shed light on the effects of supervisory boards whose role in a fraud setting has not yet been examined. Second, the study has important policy implications for governance reform. Finally, our analyses provide the most up-to-date picture of fraud and governance issues in China’s ever-growing markets.     

Do firms manipulate earnings after winning public-private partnership bids? Evidence from China

We examine whether firms manipulate their reported earnings after winning investment project bids. China's adoption of the public-private partnership (PPP) provides a unique setting for our analysis. Using the PPP announcements to identify the firms participating in PPP projects, we find that firms conduct both accrual-based and real earnings management after PPP participation. Our findings survive difference-in-differences design with different matching methods. We document that PPP-participating firms have strong incentives to manipulate earnings because of abnormal administrative expenditure and greater short-term performance pressure than non-PPP-participating firms. The auditors respond by charging higher audit fees due to the increased risk. Moreover, government subsidies relieve performance pressure and decrease the likelihood of earnings management among PPP-participating firms. Overall, this study documents the unintended consequences of PPP participation.     

Does family involvement explain why corporate social responsibility affects earnings management?

We investigate how family involvement in the ownership, management, or governance of a business affects its engagement in earnings management both directly and indirectly through its corporate social responsibility (CSR) activities. Using a sample of S&P 500 companies, we find that family firms tend to have higher CSR performance, which can help them to maintain legitimacy and preserve socio-emotional wealth. Family firms also engage in less accrual-based earnings management, although they are indistinguishable from non-family firms in terms of real earnings management. In contrast to previous research, we find that CSR performance is not significantly associated with either accrual-based or real earnings management behavior after we account for the effect of family involvement. Our findings suggest that the association between CSR performance and family involvement is the primary driver of the relation between CSR performance and earnings management documented in previous research.