Protection or expropriation: Politically connected independent directors in China

This paper empirically investigates politically connected independent directors among Chinese listed firms using 7487 firm-year observations from the Shanghai stock exchange during the period of 2003–2012. We distinguish between privately controlled firms and state-controlled firms. We find that the value effect and incentives of appointing independent directors with political ties are shaped by a firm’s ownership structure. More exactly, Chinese listed privately controlled firms with a large fraction of politically connected independent directors tend to outperform their non-connected counterparts, due to the ease of access to external debt financing and more subsidies from the government. However, the appointment of politically connected independent directors also enlarges the magnitude of related-party transactions with the controlling party in listed privately controlled firms. In contrast, having politicians as independent directors does not help to add value to listed state-controlled firms, especially firms controlled by the local government, due to the expropriation of minority investors via more related-party transactions and more severe over-investment problems.     

Politically connected boards,family and business group affiliations,and cost of capital: Evidence from Indonesia

We investigate the effect of politically connected boards (both supervisory boards [SBs] and boards of directors [BODs]) on cost of debt and equity capital of listed companies in Indonesia which has established a two-tier corporate governance system. The results, based on 250 firms, suggest that companies with politically connected SBs experience lower cost of debt and equity capital, whereas politically connected BODs have no association with cost of either debt or equity. Furthermore, we find that family firms and firms belonging to business groups with politically connected SBs enjoy lower cost of debt and equity capital. Our main results are robust to alternative measures and to tests for endogeneity.     

Ethnic board diversity,earnings quality and institutional investors: evidence from Malaysian corporate boards

Motivated by calls to examine the issue of board diversity in emerging economies, this study explores the association between ethnic board diversity and earnings quality; and the moderating effect of institutional investors’ ownership. In a sample of Malaysian firms, we find that boards with higher ethnic diversity are associated with higher earnings quality. Consequently, our findings suggest that institutional investors prefer boards to be ethnically diverse. Consistent with geographical proximity theory, this effect is primarily driven by domestic institutional investors. Finally, we find that political connection attenuates the association between ethnic board diversity and higher earnings quality.     

Restrictions on managerial outside job opportunities and corporate tax policy: Evidence from a natural experiment

We examine the effect of restricting executives’ outside job opportunities on corporate tax avoidance and tax risk, using a natural experiment of the staggered adoption and rejection of the inevitable disclosure doctrine (IDD). Based on a difference-in-differences analysis, we find strong evidence that the IDD decreases effective tax rates. We also find that the IDD reduces tax risk though the evidence is weaker. The effect is generally more pronounced when the risk of dismissal due to poor performance is higher. Additional analyses show that the IDD increases the use of tax haven operations. Finally, a path analysis shows that the increase in tax avoidance contributes about 6% to 7% of the total effect of the IDD on firm value. Overall, the results suggest that career concerns motivate executives to reduce their firms’ tax burden using low risk strategies.     

Ultimate parent board reform and corporate overinvestment: a quasi‐natural experiment study

Using government‐led board reform as a quasi‐natural experiment, we find that board reform at Chinese state controlling shareholders significantly alleviates overinvestment at their listed subsidiaries. The positive role of board reform in reducing overinvestment is stronger when state controlling shareholders have weak incentive to expropriate listed subsidiaries, or they can better monitor the listed subsidiaries through assigned top management. Furthermore, we find that board reform further reduces managerial cost at their listed subsidiaries. Overall, our findings suggest that government‐led board reform enhances internal governance at state controlling shareholders and has a positive effect on investment policy at their listed subsidiaries.     

Tunneling or propping: Evidence from connected transactions in China

Friedman et al. (2003) develop a model in which, in equilibrium, controlling shareholders may choose either tunneling or propping of their listed companies depending on the magnitude of an adverse shock and the magnitude of the private benefits of control. In this paper, we employ connected transaction data from China to test the implications of their model. We hypothesize that, when listed companies are financially healthy (in financial distress), their controlling shareholders are more likely to conduct connected transactions to tunnel (prop up) their listed companies and the market reacts unfavorably (favorably) to the announcement of these transactions. Our empirical findings strongly support our hypotheses. We also find that all of the transaction types in our sample can be used for tunneling or propping depending on different financial situations of the firms. Finally, political connection is negatively associated with the announcement effect. Overall, our analysis supports Friedman et al.'s (2003) model by furnishing clear evidence for propping and tunneling to occur in the same company but at different times.     

Institutional investors and stock returns volatility: Empirical evidence from a natural experiment

In this paper, we provide empirical evidence on the impact of institutional investors on stock market returns dynamics. The Polish pension system reform in 1999 and the associated increase in institutional ownership due to the investment activities of pension funds are used as a unique institutional characteristic. Performing a Markov-switching-GARCH analysis we find empirical evidence that the increase of institutional ownership has temporarily changed the volatility structure of aggregate stock returns. The results are interpretable in favor of a stabilizing effect on index stock returns induced by institutional investors.     

Political connections,auditor choice and corporate accounting transparency: evidence from private sector firms in China

This article investigates the way in which political connections impact auditor choice. Using a political connection index constructed based on the bureaucratic ranks of executive managers and board members in Chinese private sector firms, we find that for firms with weak political connections, the likelihood of hiring high‐quality auditors increases with the degree of political connectedness, while it decreases with political connectedness for firms with strong political connections. This inverse U‐shaped relationship is particularly pronounced for firms with ownership structures that intensify agency problems. Finally, we find that political connections and accounting transparency also have an inverse U‐shaped relationship.     

Regional favoritism and tax avoidance: evidence from China

This paper investigates the effect of officials’ regional favoritism on corporate tax avoidance activity in China. We find that firms located in regions that were formerly administered by the current provincial governors have a higher level of tax avoidance than other firms in the province. Further evidence indicates that regional favoritism affects tax avoidance through two channels: regional politicians’ personal connections with the governor and firms’ political access to the governor. Overall, the findings support China's current official selection and promotion guidelines that restrict hometown favoritism. Our results further imply that favoritism can also extend to officials’ former administrative regions.     

Political connection,market frictions and financial constraints: evidence from China

This paper studies the relationship between market frictions and political connections in determining financial constraints. We develop a novel index to measure the depth of political connections (PC) at the firm level and provide robust empirical evidence that firms in China actively build PC to alleviate the costs of market frictions. Specifically, we find that firms facing severe market frictions are not as financially constrained as expected. This is because these firms also possess strong PC, which alleviate the costs of market frictions. We find that market frictions can significantly affect financial constraints in Chinese firms, but only for those firms with modest levels of PC.     

Short-selling and cost of equity: evidence from China

In this study, we take advantage of the gradual lifting of the short-selling ban in China and find that firms affected by the lifting of the ban experience a lower cost of equity. In addition, the affected firms also incur less earnings management, higher market liquidity and higher investment efficiency. Further evidence shows that firms’ cost of equity increases after their stocks are no longer eligible for short selling. Our inferences are robust to alternative measures of cost of equity, and to using a propensity score-matched sample. Our study contributes to the literature by providing evidence that short sellers play a monitoring role in the Chinese stock markets and sheds light on the benefits of short selling in emerging markets.     

Short-sale constraints and stock price crash risk: Causal evidence from a natural experiment

We examine the relation between short-sale constraints and stock price crash risk. To establish causality, we take advantage of a regulatory change from the Securities and Exchange Commission (SEC)’s Regulation SHO pilot program, which temporarily lifted short-sale constraints for randomly designated stocks. Using Regulation SHO as a natural experiment setting in which to apply a difference-in-differences research design, we find that the lifting of short-sale constraints leads to a significant decrease in stock price crash risk. We further investigate the possible underlying mechanisms through which short-sale constraints affect stock price crash risk. We provide evidence suggesting that lifting of short-sale constraints reduces crash risk by constraining managerial bad news hoarding and improving corporate investment efficiency. The results of our study shed new light on the cause of stock price crash risk as well as the roles that short sellers play in monitoring managerial disclosure strategies and real investment decisions.     

Stakeholder orientation and the value of cash holdings: Evidence from a natural experiment

We investigate whether and, if so, how stakeholder orientation affects the value of cash holdings by disciplining inefficient management and reducing agency costs. In so doing, we exploit the staggered enactment of constituency statutes across different states as an exogenous shock that increases the degree of stakeholder orientation substantially. Specifically, we gauge the monitoring effect of stakeholders by using the market value of cash framework of Faulkender and Wang (2006). We find that on average the marginal value of cash holdings increases significantly, both statistically and economically, after the passage of constituency statutes. The effect of constituency statutes on the value of cash holdings is stronger for firms with relatively weaker stakeholder power, high agency costs, and high information asymmetry. In subsequent tests, we show that investment efficiency in M&As and capital expenditures has improved significantly after the adoption of constituency statutes suggesting that heightened stakeholder monitoring over investments is a potential channel to enhance the value of cash holdings. Overall, our results suggest that stakeholder orientation increases the value of cash holdings by mitigating agency problems.     

Central supervision and earnings management: Quasi-experimental evidence from China

Earnings management is costly to society because it decreases the informativeness of earnings and hence distorts capital market efficiency. Drawing upon a natural experiment generated by the staggered random on-site inspection programme initiated by China's central government between 2013 and 2017, this paper finds that highly intensive central supervision significantly decreases local firms' earnings management behaviours. Moreover, the effect of central supervision is found to be more pronounced in provinces with severe GDP exaggeration, provinces with local governors facing impending promotion, and firms controlled by the government. These findings suggest that on-site inspections by the central government may alleviate local officials' political incentives and ability to pressure local firms to engage in earnings management. However, the estimation results of timing tests indicate that this monitoring effect is short-lived, calling for a more comprehensive strategy to enhance the supervision of local officials and consequently improve the reliability of firms' financial reporting quality. These findings highlight the importance of addressing the agency problem between central and local governments in curbing firms' earnings manipulation to improve the capital market efficiency of economies characterized by strong government intervention.     

Managerial risk appetite and asymmetry cost behavior: evidence from China

Managerial risk preferences have considerable impacts on a firm’s cost management through committed resource adjustment decisions. We investigate whether a firm’s cost behaviour is influenced by managers’ risk appetite and find that cost stickiness increases with managers’ risk-seeking. The positive relationship between risk-seeking and cost stickiness is weaker for firms with higher levels of manager capacity. We further find that the moderating effect of managerial capacity is more pronounced in non-state-owned enterprises, in less competitive industries, and in areas with lower degrees of marketisation. These results suggest that managers’ personal characteristics are key factors that affect sticky cost behaviour.     

Mandatory corporate social responsibility disclosure and dividend payouts: evidence from a quasi‐natural experiment

Employing the enactment of a regulation that mandates a subset of firms to disclose their corporate social responsibility (CSR) activities as a quasi‐natural experiment, we find that mandatory CSR disclosure reduces firms’ dividend payouts significantly. Further analyses indicate that the negative relation is more pronounced for firms with weaker corporate governance mechanisms, where shareholders lack of effective tools to protect themselves against pressures from stakeholders, and a shift of relative power towards stakeholders is more likely to occur. Our paper provides a specific channel through which mandatory CSR disclosure benefits stakeholders at the expense of shareholders.     

Advertising,investor attention,and stock prices: Evidence from a natural experiment

I test whether advertising affects stock prices through an investor attention channel. I use corporate sponsorships of college football bowl games as a natural experiment that provides variation in advertising exposure that is unrelated to firm fundamentals. Sponsoring firms' stocks experience large increases in investor attention, abnormally high turnover, and temporary price pressure that is related to bowl games' TV‐ratings and score differentials. Retail investors are net buyers of sponsors' stocks, whereas institutional investors initially remain neutral and then start selling, ultimately driving a reversal toward fundamental values. These findings shed light on who wins/loses when advertising attracts investor attention.     

Collateral,debt capacity,and corporate investment: Evidence from a natural experiment

This paper examines how a shock to collateral value influences firms’ debt capacities and investments. Using a source of exogenous variation in collateral value provided by the land market collapse in Japan, I find that collateral has a statistically and economically significant impact on corporate investments. I also provide direct evidence on the workings of such a collateral channel. Exploiting a unique dataset of matched bank-firm lending, I show that firms with greater collateral losses are less likely to sustain their banking relationships and tend to obtain a smaller amount of bank credit.     

Fraud commitment in a smaller world: Evidence from a natural experiment

This study examines the effect of proximity on corporate fraud commitment using the introduction of high-speed rail (HSR) as an exogenous shock to travel time. We find that firms commit less corporate fraud after the introduction of an HSR route. A dynamic difference-in-differences (DiD) analysis shows that the effect of HSR introduction on fraud only occurs after the HSR route is launched, supporting the parallel trends assumption and confirming the causal relationship. Further analysis shows that the negative impact of HSR introduction on corporate fraud is more pronounced for firms that have higher information asymmetry or weaker monitoring mechanisms in the pre-HSR period. In addition, we find that HSR introduction increases corporate site visits by external monitors and that visits significantly reduce corporate misbehavior. Overall, our findings suggest that HSR introduction increases proximity and thereby reduces the information acquisition costs for outside monitors. As a result, outside monitors are in a better position to oversee firms, leading to decreased fraud commitment.