Board composition,grey directors and corporate failure in the UK

This study examines the effect of board composition on the likelihood of corporate failure in the UK. We consider both independent and non-independent (grey) non-executive directors (NEDs) to enhance our understanding of the impact of NEDs' personal or economic ties with the firm and its management on firm performance. We find that firms with a larger proportion of grey directors on their boards are less likely to fail. Furthermore, the probability of corporate failure is lower both when firms have a higher proportion of grey directors relative to executive directors and when they have a higher proportion of grey directors relative to independent directors. Conversely, there is a positive relationship between the likelihood of corporate failure and the proportion of independent directors on corporate boards. The findings discussed in this study support the collaborative board model and the view that corporate governance reform efforts may have over emphasised the monitoring function of independent directors and underestimated the benefits of NEDs' affiliations with the firm and its management.     

Corporate fraud culture: Re‐examining the corporate governance and performance relation

We analyse the corporate governance and performance relation, when conditioning on corporate fraud, for fraud firms during 2000 – 2007. Fraud firms are identified as either self‐ reported fraud events, or subject to regulatory investigation. We use the inverse Mills ratio procedure to account for firms' (unobservable) fraud culture in the dynamic system GMM model of the performance‐ governance relation. We find that corporate governance is an endogenously determined characteristic that has no causal impact on firm performance when conditioning on fraud. Fraud is a significant regulatory event but its overall economic impact at the firm level is highly variable.     

Multinationality and capital structure dynamics: A corporate governance explanation

This paper examines the impact of corporate governance on capital structure dynamics. Using ordinary least squares regressions on 17,496 firm-year observations for 2,294 US multinational companies (MNCs) over the period 1990–2018, we find that MNCs with strong corporate governance use more debt than those with weak governance. Furthermore, strong corporate governance is associated with a faster speed of adjustment to capital structure. This relationship is more pronounced for MNCs than domestic companies, particularly for overlevered firms. We also use the two-part zero-inflated fractional regression model, instrumental variable, and structural equation model estimations to deal with any endogeneity concerns associated with the explanatory variables. Overall, our findings, which withstand a battery of robustness checks, suggest that improvements in corporate governance reduce the costs of monitoring for bondholders, resulting in increased debt financing.     

Corporate governance and the dynamics of capital structure: New evidence

The effects of corporate governance on optimal capital structure choices have been well documented, though without offering empirical evidence about the impact of corporate governance quality on the adjustment speed toward an optimal capital structure. This study simultaneously considers two effects of debt originating from agency theory—the takeover defense and the disciplinary effects of debt—on the speed of adjustment to the optimal capital structure. Corporate governance has a distinct effect on the speed of capital structure adjustment: weak governance firms that are underlevered tend to adjust slowly to the optimal capital structure, because the costs of the disciplinary role of debt outweigh the benefits of using debt as a takeover defense tool. Although overlevered weak governance firms also adjust slowly, they do so because they are reluctant to decrease their leverage toward the target level to deter potential raiders, especially if they face a serious takeover threat. Therefore, this study finds that both overlevered and underlevered firms with weak governance adjust slowly toward their target debt levels, though with different motivations.     

Corporate governance in banking: The role of the board of directors

We use a sample of large international commercial banks to test hypotheses on the dual role of boards of directors. We use a suitable econometric model (two step system estimator) to solve the well-known endogeneity problem in corporate governance literature, and demonstrate the empirical and theoretical superiority of system estimator over OLS and within estimators. We find an inverted U-shaped relation between bank performance and board size, and between the proportion of non-executive directors and performance. Our results show that bank board composition and size are related to directors’ ability to monitor and advise management, and that larger and not excessively independent boards might prove more efficient in monitoring and advising functions, and create more value. All of these relations hold after we control for the measure of performance, the weight of the banking industry in each country, bank ownership, and regulatory and institutional differences.     

Initial public offer pricing,corporate governance and contextual relevance: Australian evidence

This study examines the relationship between initial public offer (IPO) corporate governance, IPO pricing and possible contextual relevance. A comprehensive inventory of IPO governance attributes is modelled. A positive association is reported between the inventory and IPO initial returns. This relationship is attenuated for IPOs where a diminished price relevance of governance structure is posited: smaller scale firms and/or those with alternative monitoring agents in place. Relevance appears modified and even supplanted by particular corporate priorities or the presence of other monitoring mechanisms. These contexts inform the motivation of key players regarding whether and how to act in response to the governance signal.     

Accounting conservatism and voluntary corporate governance mechanisms by Australian firms

This study examines the relationship between voluntary adoption of selected corporate governance mechanisms and accounting conservatism for a sample of firms listed on the Australian Securities Exchange (ASX) over the 11‐year period prior to the promulgation of the ASX Corporate Governance Council Good Governance Principles and Best Practice Recommendations in 2003. Using four accounting and market‐based accounting conservatism measures, our results provide evidence of both conditional and unconditional conservatism in accounting reporting for Australian firms. We find that voluntary audit committee formation, increasing board independence and decreasing board size are positively associated with unconditional accounting conservatism and negatively related to the degree of conditional conservatism. Our results support the contention that firms voluntarily adopting perceived best practice corporate governance mechanisms employ unconditional accounting conservatism as a complimentary agency control device and are consistent with the observed negative association between the unconditional and conditional forms of accounting conservatism practice.     

Corporate governance and the probability of default

We employ Merton's probability of default as a continuous ex‐ante measure of the likelihood of firm failure and dynamic panel generalised method of moments to better characterise the relationship between corporate governance and the chance of default. In doing so, we overcome limitations of discrete proxies widely used in previous studies and more completely account for endogeneity issues permeating this area of research. While initial testing designed to facilitate comparison with previous studies suggests a significant relationship between the probability of default and executive pay, board structure and ownership structure, once endogeneity concerns are accounted for, no such relationship remains.     

Corporate governance and firm performance

How is corporate governance measured? What is the relationship between corporate governance and performance? This paper sheds light on these questions while taking into account the endogeneity of the relationships among corporate governance, corporate performance, corporate capital structure, and corporate ownership structure. We make three additional contributions to the literature:First, we find that better governance as measured by the Gompers, Ishii, and Metrick [Gompers, P.A., Ishii, J.L., and Metrick, A., 2003, Corporate governance and equity prices, Quarterly Journal of Economics 118(1), 107–155.] and Bebchuk, Cohen and Ferrell [Bebchuk, L., Cohen, A., and Ferrell, A., 2004, What matters in corporate governance?, Working paper, Harvard Law School] indices, stock ownership of board members, and CEO-Chair separation is significantly positively correlated with better contemporaneous and subsequent operating performance.Second, contrary to claims in GIM and BCF, none of the governance measures are correlated with future stock market performance. In several instances inferences regarding the (stock market) performance and governance relationship do depend on whether or not one takes into account the endogenous nature of the relationship between governance and (stock market) performance.Third, given poor firm performance, the probability of disciplinary management turnover is positively correlated with stock ownership of board members, and board independence. However, better governed firms as measured by the GIM and BCF indices are less likely to experience disciplinary management turnover in spite of their poor performance.     

Accounting conservatism and corporate governance

We predict that firms with stronger corporate governance will exhibit a higher degree of accounting conservatism. Governance level is assessed using a composite measure that incorporates several internal and external characteristics. Consistent with our prediction, strong governance firms show significantly higher levels of conditional accounting conservatism. Our tests take into account the endogenous nature of corporate governance, and the results are robust to the use of several measures of conservatism (market-based and nonmarket-based). Our evidence is consistent with the direction of causality flowing from governance to conservatism, and not vice versa, indicating that governance and conservatism are not substitutes. Finally, we study the impact of earnings discretion on the sensitivity of earnings to bad news across governance structures. We find that, on average, strong-governance firms appear to use discretionary accruals to inform investors about bad news in a timelier manner.

Operating performance changes associated with corporate mergers and the role of corporate governance

We find that corporate governance characteristics of acquiring firms (board ownership, board size, and block-holder control) have an economically and statistically significant impact on operating performance changes following mergers. We also show that dispersion of intra-board ownership stakes is an important but heretofore overlooked factor when judging the influence of ownership on the outcomes of corporate choices. Finally, we present evidence that suggests the market sometimes under- or overreacts to merger news when initially revaluing merger partners but corrects any miscalculation following the consummation of the merger.     

Endogeneity in Accounting and Finance Research: Natural Experiments as a State‐of‐the‐Art Solution

This paper provides a discussion of endogeneity as it relates to finance and accounting research. We discuss the textbook solutions: two‐stage least squares, instrumental variables, differenced generalized method of moments (GMM) and system GMM and provide a unifying framework showing how they are related. We consider the limitations of these techniques and then detail a state‐of‐the‐art solution, utilizing a natural experiment as a way of mitigating endogeneity and building stronger theory.     

Corporate social performance,ownership structure,and corporate governance in France

Empirical evidence of the influence of shareholders and governance practices on corporate social responsibility (CSR) policies is mixed, and most studies have been conducted in the United States. This study of the French market and its unique characteristics reveals the forms of shareholding and CSR implementations, thereby shedding new light on the influence of shareholders on corporate social performance (CSP). Specifically, with a sample of French listed companies, the authors investigate how ownership concentration, ownership type, and governance practices relate to CSP. The geography of capital is relevant, but little evidence arises of the importance of shareholders’ identity. That is, neither family nor institutional shareholders influence CSP, and large shareholders seem to place less emphasis on CSR, suggesting that they are reluctant to invest in it. Finally, the results related to good governance practices are mixed, but board independence provides a foundation for good CSR.     

Growth,governance and corporate payout policy

We show that when growth opportunities decreased following the end of the Cold War, defence firms responded by increasing total payout. This change in policy was largely driven by increased stock buybacks as opposed to changes in cash dividends and primarily by firms that faced stronger external governance. On the other hand, firms with weaker internal governance that were more severely affected by the reduced growth chose to alter the mix of payout at the expense of repurchases. Overall, our findings (i) demonstrate a causal link where exogenous shocks to growth cause payout policy changes, (ii) support the role of internal governance in payout policy design where entrenched managers pre‐commit to higher dividends and (iii) emphasize the monitoring role of external governance in mitigating agency costs of free cash flow.     

Empty voting and the efficiency of corporate governance

We model corporate voting outcomes when an informed trader, such as a hedge fund, can establish separate positions in a firm's shares and votes (empty voting). The positions are separated by borrowing shares on the record date, hedging economic exposure, or trading between record and voting dates. We find that the trader's presence can improve efficiency overall despite the fact that it sometimes ends up selling to a net short position and then voting to decrease firm value. An efficiency improvement is likely if other shareholders’ votes are not highly correlated with the correct decision or if it is relatively expensive to separate votes from shares on the record date. On the other hand, empty voting will tend to decrease efficiency if it is relatively inexpensive to separate votes from shares and other shareholders are likely to vote the right way.     

Does corporate governance transparency affect the accuracy of analyst forecasts?

Using country‐level proxies for corporate governance transparency, this paper investigates how differences in transparency across 21 countries affect the average forecast accuracy of analysts for the country's firms. The association between financial transparency and analyst forecast accuracy has been well documented in previous published literature; however, the association between governance transparency and analyst forecast accuracy remains unexplored. Using the two distinct country‐level factors isolated by Bushman et al. (2004 ), governance transparency and financial transparency, we investigate whether corporate governance information impacts on the accuracy of earnings forecasts over and above financial information. We document that governance transparency is positively associated with analyst forecast accuracy after controlling for financial transparency and other variables. Furthermore, our results suggest that governance‐related disclosure plays a bigger role in improving the information environment when financial disclosures are less transparent. Our empirical evidence also suggests that the significance of governance transparency on analyst forecast accuracy is higher when legal enforcement is weak.     

On the uses of corporate governance provisions

We document a large and broad-based increase in the use of corporate governance provisions in the late 1980s. As a result, most large publicly traded firms have complex governance structures. This violates an assumption implicit in many empirical studies that provision use is mutually independent. While overall provision use is not systematically related to industry grouping, the uses of some types of provisions are correlated. Most notably, supermajority vote requirements, classified boards, and shareholder meeting requirements tend to be used in concert. Firms reincorporating to Delaware tend to eliminate cumulative voting, and coverages by certain types of state antitakeover laws are correlated. We also find that firms with poison pills tend to have relatively high institutional ownership, low managerial ownership, and a high proportion of independent directors.     

Small firms and the value of improvements in corporate governance mechanisms

Since 2002, many firms have been required to alter their board of directors and committees to increase management monitoring. Kinney and McDaniel (1989) and Chhaochharia and Grinstein (2007) provide empirical evidence suggesting that investments in corporate governance may differ based on firm size, and that under-investing in monitoring may be more pronounced in smaller firms. To further test whether the benefits of recent changes in companies' governance mechanisms accrue to smaller firms that have underinvested in governance, we examine the stock market reaction to changes in board structure over the twenty-four months following the passage of the Sarbanes–Oxley Act. We construct a new composite measure of board structure and regress buy-and-hold abnormal returns on changes that occur in the Board Structure Index, finding that improvements in corporate governance quality result in economically significant abnormal returns accruing only to the smaller firms with weak initial board structures.     

A study of the relationship between corporate governance structures and the extent of voluntary disclosure

The primary objective of this study is to test a theoretical framework relating four major corporate governance attributes with the extent of voluntary disclosure provided by listed firms in Hong Kong. These corporate governance attributes are the proportion of independent directors to total number of directors on the board, the existence of a voluntary audit committee, the existence of dominant personalities (CEO/Chairman duality), and the percentage of family members on the board. Using a weighted relative disclosure index for measuring voluntary disclosure, the results indicate that the existence of an audit committee is significantly and positively related to the extent of voluntary disclosure, while the percentage of family members on the board is negatively related to the extent of voluntary disclosure. The study provides empirical evidence to policy makers and regulators in East Asia for implementing the two new board governance requirements on audit committee and family control.     

Mutual monitoring and corporate governance

Mutual monitoring in a well-structured authority system can mitigate the agency problem. I empirically examine whether the number two executive in a firm, if given authority, incentive, and channels for communication and influence, is able to monitor and constrain the potentially self-interested CEO. I find strong evidence that: (1) measures of the presence and extent of mutual monitoring from the No. 2 executive are positively related to future firm value (Tobin’s Q); (2) the beneficial effect is more pronounced for firms with stronger incentives for the No. 2 to monitor and with higher information asymmetry between the boards and the CEOs; and (3) mutual monitoring is a substitute for other governance mechanisms. The results suggest that mutual monitoring provides important checks and balances on CEO power.