Do Corporate Governance Motives Drive Hedge Fund and Private Equity Fund Activities?

We document empirical evidence that both hedge fund (HF) and private equity fund (PE) investments are driven by corporate governance improvements, but address different types of agency conflicts. Whereas HFs focus on firms without a controlling shareholder, in particular family shareholders, PEs invest in firms with low managerial ownership. Both appear to address free cash flow problems differently. Aiming at increasing dividends, HFs tend to use commitment devices that can be implemented over a short horizon. PEs are inclined to longer‐term strategies: they target firms that are particularly well suited for leverage increases because of low expected financial distress costs.     

Should Independent Directors Have Term Limits? The Role of Experience in Corporate Governance

We examine the role of independent directors with extended tenure in board‐level governance, monitoring decisions, and advising outcomes. These directors exhibit a higher level of commitment as they attend more board meetings and take more committee memberships. Firms with a higher proportion of these directors have lower chief executive officer (CEO) pay, higher CEO turnover‐performance sensitivity, and a smaller likelihood of intentionally misreporting earnings. These firms also restrict the expansion of resources under the CEO's control as they are less likely to make acquisitions, while the acquisitions they do make are of higher quality. Efforts to impose term limits on directors may, therefore, be misguided.     

Does Corporate Governance Matter in the Contractual Form of Fund Management Companies in China?

ABSTRACT

Operating under a regulatory environment with weak enforcement of investor protection, the contractual form of fund management companies (FMCs) in China’s emerging fund industry presents some complex governance issues in addition to the conventional agency problems of modern public corporations. Using 288 firm-year observations covering more than 98 percent of FMCs in China, this article presents the first systematic study on whether the quality of corporate governance mechanisms affects the performance of the contractual form of FMCs. Our results suggest that FMCs with good corporate governance do matter in generating favorable performance for fund investors in China.     

Does Financial Restructuring Change the Relationship Between Corporate Governance and the Static and Dynamic Efficiency of Bank Mergers in Taiwan?

Taiwan's Financial Restructuring Fund Statute was enacted in 2001. This study is unique in simultaneously considering Taiwan's corporate governance, bank mergers, and the financial restructuring scheme. Unlike other literature that investigates only the characteristics of corporate governance that affect the concurrent static efficiency of bank mergers, we further use the dynamic slacks-based measure to examine the persistent and intertemporal effects on the dynamic efficiency of bank mergers. The results of this study show that major shareholders of acquiring banks have greater controlling power to decide whether to merge during the financial restructuring period. A bank merger using the financial restructuring scheme has less static and dynamic efficiency in the short run but gradually increased static and dynamic efficiency in the long run. Such an observation is consistent with the hypothesis that controlling shareholders pursue long-term efficiency in a bank merger.     

Do Corporate Governance Analysts Matter? Evidence from the Expansion of Governance Analyst Coverage

T his paper examines the economic consequences of the initiation of governance analyst coverage. Governance analysts process, enhance, and disseminate governance‐related information to capital market participants via, for example, governance reports and ratings. Using an exogenous shock in the United Kingdom, I find that an increase in governance analyst coverage results in increased governance quality, improved liquidity, increased financial analyst following, and improved investor breadth. These findings are consistent with governance analysts creating value for firms via monitoring, information dissemination/production, and investor recognition.     

How does the Funding Status of Defined Benefit Pension Plans Affect Investment Decisions of Firms in the United States?

We investigate whether the flexibility in making contributions towards defined benefit pension plans sponsored by firms in the United States allows managers to save cash and increase investments. Firms invest more at higher levels of pension deficit, defined as pension benefit obligations less pension assets, and scaled by total assets. At the median level (90^th percentile) of pension deficit, investments increase by 6.7 cents (9.4 cents) for every dollar increase in cash. As the pension deficit increases, firms deviate more from the predicted level of investment. These findings suggest that the incremental investments are more likely to represent overinvestment by managers. Our results are robust to alternative model specifications and endogeneity concerns that may arise if investments are jointly determined with the funding policy of pension plans and the firm's target cash level. We repeat our main analysis for the United Kingdom and also find for that country that, at a fixed cash level, total investment increases as pension deficit increases.     

What's in a Name? An Experimental Examination of Investment Behavior

A fundamental unresolved issue is whether information asymmetries underlie investors predisposition to invest close to home (i.e., domestically or locally). We conduct experiments in the United States and Canada to investigate agents portfolio allocation decisions, controlling for the availability of information. Providing participants with information about a firms home base, without disclosing its specific identity, is not sufficient to change investment behavior. Rather, participants need to know a firms name and home base. Additional evidence indicates that participants have a greater perceived familiarity with local and domestic securities and, in turn, invest more in such securities.The authors thank Ann Gillette, Josef Zechner (the editor), and two anonymous referees for helpful comments and acknowledge the financial support of the Federal Reserve Bank of Atlanta, Georgia Tech, and Social Sciences and Humanities Research Council of Canada. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System.     

Budget-Emphasis in Performance Evaluation and Managers’ Job Related Tension: the Moderating Effect of Information Completeness

Research examining a budget-emphasis style of performance evaluation has led to insights about those situations where it is likely to increase a manager’s job related tension. However, less is known about how the management accountant can use the budget process to ameliorate this effect. This paper focuses on the part of the budget process where subordinate managers have to explain budget variances to their superiors and, in particular, the information subordinates have available to explain those variances. The paper argues that the completeness of this information affects subordinate managers’ ability to understand budget variances and explain them to their superiors which, in turn, affects subordinates’ level of job related tension, especially where superiors use a budget-emphasis style of performance evaluation. A cross-sectional study, using interview and questionnaire techniques, empirically tests, and finds support for, this hypothesis.     

Do US Corporate Governance Standards Effectively Discourage Risk in the Emerging Markets?

This study provides an examination of the effect of various corporate governance factors on the management of the risks inherent in business and the potential divergent impact of these factors on US firms and firms in emerging countries. In particular, the study scrutinises corporate governance and corporate risk‐taking behaviour across different political and socioeconomic environments. In a cross‐sectional time‐series setting, two‐step generalised least squares regression outcomes reveal that the impact of corporate governance on corporate risk taking demonstrates similar implications for US and emerging markets firms in several ways. Nonetheless, the findings also indicate that although some of the US governance standards are effective in the emerging markets, further strengthening of governance standards may be required. Specific governance aspects of the emerging markets, such as board and committee composition, are still lacking when compared to those of the US. Regardless of these differences, the outcomes reveal that those US governance standards adopted by the firms in the emerging markets strengthen governance structures and discourage corporate risk‐taking behaviour.     

The Role of People’s Expectation in the Recent US Housing Boom and Bust

This paper investigates how an important driver of the recent housing boom and bust, people’s expectation, influences housing asset returns. Specifically, it extends the volatility feedback model to study the relationship between housing volatility and asset returns during 19632007. The analysis considers two alternative breakpoints, 1984Q1 and 1999Q1, in order to distinguish the permanent structural break from temporary Markov-switching volatility. The novelty of this study lies in its insightful investigations into the recent U.S. housing boom and bust in the post-1999 period in four dimensions. First, the significantly negative volatility feedback effect in the housing market suggests a positive relationship between housing volatility and expected asset returns, and highly supports the important role of people’s expectations in the recent housing boom and bust. Second, the high-volatility regimes of the housing market delivered by this study indicate a strong association between housing cycles and business cycles, as well as a remarkable uncertainty in the U.S. housing market after the recession 2001. Third, the violated fundamental which refers to the broken negative relationship between housing volatility and realized asset returns during 2001–2004 implies the possible presence of a housing bubble during this period. Finally, volatility feedback anticipates the recent bubble-like housing market dynamics because high volatility during 2002–2003 implies low realized returns in the early housing-boom stage (2002–2003), as well as high expected returns in the second stage of the housing boom (2004–2005).     

Corporate Governance Reform,Board Structure,and Its Determinants in the Banking Industry—Evidence from Taiwan

This study employs the data of twenty-seven banks listed on the Taiwan Stock Exchange from 2000–11 to examine the determinants of board structure, e.g., board size and the independent directors ratio. The evidence shows that bank size, the degree of revenue diversification, and the CEO’s shareholding are positively associated with the independent directors ratio. A higher outside block shareholding is correlated with a larger board size and a higher independent directors ratio. As the creditors’ stake decreases, a larger board and greater board independence are required to maintain internal corporate governance. Finally, banks with M&A activity tend to downsize their board sizes and reduce board independence in the subsequent period.     

Out of Site,Out of Mind? The Role of the Government-Appointed Corporate Monitor

We study the role of a relatively new type of external firm monitor, an on-site government-appointed Corporate Monitor, and assess whether such appointments reduce firms' propensity to violate laws. Using a sample of deferred and nonprosecution agreements, we first document the determinants of Monitor appointment. We find firms that voluntarily disclose wrongdoing and have more independent directors are less likely to have Corporate Monitors, whereas those with more severe infractions, mandated board changes, and increased cooperation requirements are more likely to have Monitors. We find such appointments are associated with an 18%–25% reduction in violations while the Monitor is on site, however, the effect does not persist after the Monitorship ends. Using a semisupervised machine learning method to measure changes in firms' ethics and compliance norms, we find that the reduction in violations is associated with changes in ethics and compliance that also do not persist. Finally, we document that firms under Monitorship experience a persistent reduction in innovation, highlighting a previously unexplored cost of these interventions. Overall, our results suggest that, although Corporate Monitors on site are associated with fewer violations, firms revert to previous levels of violations following Monitors' departure.     

Governance and bank characteristics in the credit and sovereign debt crises – the impact of CEO power

The global financial sector recently suffered from two interrelated crises: the credit crisis and the sovereign debt crisis. A common question is whether the recent experience with the credit crisis has helped in dealing with the sovereign debt crisis. We study more specifically whether banks with powerful CEOs perform better or worse than other banks, and if there is any difference in this relationship between the two crises. Using unique hand-collected data for 378 large global banks, we find that CEO power has a significant positive relation to bank profitability and asset quality, but also to insolvency risk, during the sovereign debt crisis. Thus, strong CEOs do not appear to be detrimental to bank performance. Our results also support the idea that deposit insurance may have contributed to the credit crisis.     

Do Investors Perceive the Link Between Equity Method Earnings and Future Earnings? The Role of Supplemental Disclosures

Equity method investments are commonly a material component of a firm's corporate structure, yet these investments are presented to financial statement users through opaque financial reporting. This study demonstrates that the link between equity method earnings and future earnings is stronger than the link between consolidated earnings and future earnings, consistent with the synergistic and diversification benefits of equity method investments. Next, this study demonstrates a limitation in the opaque reporting of equity method investments by revealing that the market fails to fully incorporate into prices the link between equity method earnings and future earnings. Further, this study contributes to the active debate among practitioners and regulators about the usefulness of supplemental disclosure requirements related to equity method investments. Results indicate that supplemental equity method investment disclosures aid the market in impounding the persistence of equity method earnings into share price.     

Investment bank monitoring and bonding of security analysts’ research

We assess investment banks’ influence over the agreement between their analysts’ research behavior and their clients’ interests, in the post-reform era. Competing banks discipline their analysts with worse career outcomes for producing biased reports, issuing shirking reports, and for involvement in the earnings guidance game, showing meaningful monitoring of their analysts. Highly reputable banks provide more monitoring discipline of their analysts and bonding of their moral hazard than other banks. The findings agree with the banks taking responsibility for aligning analysts’ behavior with clients’ interests.     

Are Some Mutual Fund Managers Better Than Others? Cross-Sectional Patterns in Behavior and Performance

We examine whether mutual fund performance is related to characteristics of fund managers that may indicate ability, knowledge, or effort. In particular, we study the relationship between performance and the manager's age, the average composite SAT score at the manager's undergraduate institution, and whether the manager has an MBA. Although the raw data suggest striking return differences between managers with different characteristics, most of these can be explained by behavioral differences between managers and by selection biases. After adjusting for these, some performance differences remain. In particular, managers who attended higher-SAT undergraduate institutions have systematically higher risk-adjusted excess returns.     

The Impact of Austerity in the Framework of Corporate Rescue and the Rights of Workers in the EU: A Road to Recovery?

The financial crisis and the sovereign debt crisis have been attributed to a number of causes. Whether these are economic, social, cultural or legal, they are all by and large also political. The aim of this article is not to delve into the myriad of heated political arguments that continue to dominate the scene but to assess the impact of the financial crisis on the employment protection rights and the corporate rescue regimes in Greece, Portugal, France and the UK. In light of the crisis, the rights of the workforce have been severely compromised to afford financially troubled companies a greater opportunity to recover. In order to minimise the catastrophic impact of financial turmoil on their economy and society, all four jurisdictions introduced reforms to their labour codes and corporate rescue mechanisms, often in the name of austerity. This article will offer a snapshot of the changes and their effects and an assessment whether or not the reforms of pre‐insolvency regimes have operated as an effective embankment for the protection of social and economic welfare. The purpose of this piece is to shed a light on the changes that have occurred and that have affected employment rights in the domestic legal systems of individual member states, as influenced to some extent by the EU in its expectations of improvements to increase labour market flexibility, and whether corporate rescue mechanisms in individual member states are able to provide some counterbalance to the erosion of employment rights generally. Copyright © 2017 INSOL International and John Wiley & Sons, Ltd.