The Inefficiency of Hostile Takeovers as a Disciplinary Mechanism: A Theoretical Analysis

Varvara Vadimovna Nazarova - SPbShEiM, St. Petersburg.
 E-mail: nvarvara@list.ru
 Anzhelika Vladislavovna Kolkina - HSE - St. Petersburg.
 Email: lika.kolkina@yandex.ru
 Researchers come to controversial conclusions regarding the impact of corporate diversification on the company›s value and performance. The diversification strategy itself has been subject to strong criticism in the past 20–30 years. There is an opinion, however, that in emerging markets diversification has a positive impact on companies› value and effectiveness. Despite the existing advantages of diversified companies, planning and budgeting various business areas not related to each other is a considerably difficult task that results in the agency problem between managers and stakeholders. This leads to corporate governance problems in companies that use the diversification strategy. Studying corporate governance in emerging countries is especially important, as they need to adjust their corporate governance standards to developed markets. The theory of corporate governance is now developing rapidly, especially in Russia, where researchers did not often turn to this subject. In the last decade, this issue has most often become a subject of research in China and India. The issue of corporate governance in Russia is relevant today due to the fact that it is a mechanism of managing a company which makes it possible to balance the interests of managers and stakeholders. Moreover, companies are interested in attracting foreign investors, who pay significant attention to the level of current corporate governance. However, unlike in developed countries, corporate governance in developing capital markets is only being introduced. Today a lot of Russian companies are engaged in the optimisation of corporate governance largely to build a good reputation and do not pay enough attention to corporate governance principles, which a company should follow. Thus, today the low level of corporate governance is a problem in Russian companies, as the companies› owners do not understand its significance. Moreover, the Russian business environment is rather specific and requires a certain approach in order to form an optimal corporate governance system. As far as research in this field is concerned, a positive impact of corporate governance on companies› effectiveness lacks empirical proof. A number of studies have not found a statistically significant positive correlation between the level of corporate governance in Russian companies and their effectiveness. With regard to the stated issue, the purpose of this paper is to discover to what extent corporate governance has an impact on the effectiveness of Russian diversified companies. Such companies are a subject of particular interest, as not only developed and emerging economies have different features of corporate governance, but within one country there are also companies whose development strategy and industry have a significant impact on the optimal corporate governance structure. The study suggests the following hypothesis: the corporate governance system has a positive impact on the effectiveness of Russian diversified companies.The study has been conducted on a sample of Russian diversified companies with an original corporate governance index created for this purpose, which had never been done previously.The study has a practical importance, because Russian diversified companies can use the corporate governance index devised during the study to assess their corporate governance level. Such procedure will make it possible to uncover the existing flaws and improve the corporate governance system in Russian companies. In their turn, the suggested methods and the resulting models of the correlation between market capitalisation, on the one hand, and fundamental factors and various factors of corporate governance, on the other, can be used in strategic planning and managing the value of diversified companies. In the paper, we also determine the impact of corporate governance on companies› performance, which enables us to suggest recommendations on enhancing the governance system in Russian companies.

PurposeMotivated by managers’ intentions to pursue private interests by engaging in earnings management, this paper aims to investigate whether voting with hands (shareholders cast votes on shareholder proposals) by shareholders acts as an external disciplining mechanism over earnings management relative to corporate governance. Also, as corporate governance can scrutinize managers’ behavior, this study also examines whether there is a substitutive relation between shareholder proposals and corporate governance mechanism.Design/methodology/approachFirst, this paper uses ordinary least squares (OLS) regressions of discrepancy accruals on the percentage of “For” votes for shareholder proposals to test the incremental effect of shareholder proposals on earnings management. Second, firms receiving shareholder proposals are matched with those not receiving proposals by propensity scores, and the levels of earnings management and corporate governance between these two groups are compared by univariate analysis and OLS regressions. In addition, six portfolios are created based on whether firms receive shareholder proposals, as well as on the levels of corporate governance, to assess whether external control from shareholder proposals can substitute internal control for corporate governance in disciplining earnings management. Regressions of earnings management on corporate governance (shareholder proposals) are conducted in the sub-samples formed on shareholder proposals (corporate governance) to further explore the above substitution effects.FindingsBased on a sample of 2,041 firm-year observations from 2001 to 2010, this paper finds that the “For” votes received from the shareholder proposals have a significant negative relationship with the practice of earnings management, even when corporate governance is controlled. The negative relationship between shareholder proposal and magnitude of earnings management is also found to be stronger when firms have weak corporate governance. The overall evidence suggests that the external control from “voting-with-hand” shareholders has a significant impact on earnings management. In addition, shareholder proposals can substitute the monitoring mechanism for corporate governance in constraining managers’ myopic behavior.Originality/valueThis paper contributes to the extant literature by using the percentage of “For” votes for shareholder proposals as a proxy for shareholder pressure and concerns. This study contributes to the earnings management literature by showing the disciplinary effect of outside shareholders on managers’ reporting behavior. Also, it contributes to the corporate governance research by presenting that shareholder proposals can substitute for the internal control of corporate governance in decreasing earnings management. This paper should be of interest to investors and standard setters.

Purpose As one of China’s informal institutions, red culture serves a soft constraint function in economic and social development. However, the question of its impact on corporate governance remains unresolved. This study aims to examine the association between Chinese red culture and corporate governance level. Design/methodology/approach Hypotheses were tested using multiple linear regression models based on hand-collected data on red culture and a sample of Chinese listed companies from 2009 to 2020. Findings Red culture, as a carrier of specific cultural values, significantly promotes corporate governance level. In addition, red culture promotes the level of corporate governance through two channels by improving the quality of internal control and shaping a culture of corporate collaboration. Moreover, in companies with strong market power and for Chief Executive Officers (CEOs) with military experience, the positive impact of red culture on corporate governance is more significant. Originality/value This study examines the impact of red culture on the level of corporate governance in enterprises using a unique red culture dataset collected manually. It not only contributes to the existing body of research on informal institutions and corporate governance, but it also provides empirical evidence of the impact of red culture on corporate governance level. Furthermore, the findings are socially oriented, which facilitates the effective integration of corporate and social governance by underscoring the soft constraint function of red culture.

The impact of artificial intelligence (AI) on the economy and industry has gradually extended from the macroeconomic to the microeconomic level. Artificial intelligence technology has brought great innovation and impact to the company’s operation and management and has a strong role in promoting the level of corporate governance. Based on an in-depth analysis of the theoretical mechanism of artificial intelligence affecting corporate governance, and based on the balanced panel data of Chinese A-share listed companies from 2011 to 2020, this paper empirically analyzes the mechanism and intermediary effect of artificial intelligence affecting corporate governance. The study found that AI applications can significantly improve corporate governance levels, and a higher level of artificial intelligence application can produce a higher level of corporate governance. From the perspective of the impact path, artificial intelligence technology can significantly improve the degree of information symmetry required for corporate governance, thereby providing favorable technical conditions and decision support for improving the level of corporate governance. Artificial intelligence technology has a positive and effective impact on corporate governance through the information symmetry effect.

The quality level of corporate governance can be defined as the degree of compliance with set corporate governance standards defined at the international and national institutional levels. Guided by previous theoretical and empirical findings, Bosnia and Herzegovina has characteristics of a closed corporate governance system in both entities and, for this reason, the models that measure corporate governance in countries with typical closed corporate governance systems are selected as the basis for developing a model for measuring the level of corporate governance. Measuring the quality of corporate governance provides a clear picture of the internal strengths and weaknesses of the corporate governance system in corporations in Bosnia and Herzegovina. The quality of corporate governance is one of the non-financial indicators of business operations and shows the degree of compliance with international standards of corporate governance. A significant number of studies show that corporations that achieve higher standards and better practices of corporate governance also have better financial results and thereby higher value in the capital market. This means that corporations with a higher level of corporate governance also have a better financial result of business operations, easier access to financial capital and higher value in the capital market. The subject of the study is to determine the relationship between the quality of corporate governance and profitability of business operations of corporations, and considering that this is historical data, the study will determine whether corporations that had good corporate governance also had greater business profitability and vice versa. The mean objective of the study is to determine the relationship between the quality of corporate governance and business profitability indicators and the direction of this relationship.

The Stock Exchange of Sao Paulo (BOVESPA) has different Levels and also the New Market of corporate governance in order to provide a trading environment that would stimulate investors interest and valuation of companies. This study aims to identify the degree of readability of Administrative Reports (ARs) of BOVESPA listed companies that changed their level of corporate governance between the years of 2004 to 2007. It was used the Legilibilidade test of Flesch-Kinkaid in the year of change in level of corporate governance and in the years prior to that change. BOVESPA informed a group of 174 companies which made changes in levels during the study period, after it has adopted criteria for selection, as shown in the selection of samples, 26 enterprises remaining, objects of this study. Thus, it was concluded that the change in the level of corporate governance does not represent a higher degree of readability of ARs calculated based on the Flesch index. Keywords: Readability. Corporate Governance. Administrative Report.

This study aims to investigate the relationship between institutional ownership and the level of corporate governance in the Kingdom of Bahrain. A multi-regression analysis model was used to investigate the relationship between corporate governance and institutional ownership. Additionally, certain firm characteristics were controlled to study the influence of institutional investment on governance. The results indicated that there is a significant negative relationship between institutional ownership and the level of corporate governance. The researchers assumed that governance of firms may take a number of forms that would decrease the need for improving other corporate governance mechanisms as a result. This study offers recommendations to various stakeholders, whereby companies should hire external auditors that are from the Big4, because they would encourage and contribute to increasing the level of corporate governance. Furthermore, workshops and training courses should be conducted in order to increase the awareness of the corporate governance code in Bahrain.

This study aims to investigate the relationship between institutional ownership and the level of corporate governance in the Kingdom of Bahrain. A multi-regression analysis model was used to investigate the relationship between corporate governance and institutional ownership. Additionally, certain firm characteristics were controlled to study the influence of institutional investment on governance. The results indicated that there is a significant negative relationship between institutional ownership and the level of corporate governance. The researchers assumed that governance of firms may take a number of forms that would decrease the need for improving other corporate governance mechanisms as a result. This study offers recommendations to various stakeholders, whereby companies should hire external auditors that are from the Big4, because they would encourage and contribute to increasing the level of corporate governance. Furthermore, workshops and training courses should be conducted in order to increase the awareness of the corporate governance code in Bahrain.

It is widely assumed that hostile takeovers are a prerequisite for an efficient system of corporate governance. This assumption is false. Since the new millennium, Japan has transformed itself from being on the brink of one of the largest economic meltdowns in modern economic history to currently being in the midst of its longest period of postwar economic expansion (2002-2007). This astounding recovery was achieved without a single successful hostile takeover of a major Japanese company. True to its postwar tradition, corporate Japan has successfully restructured through government intervention, bank-driven reallocation of capital, and orchestrated and friendly mergers — the antitheses of the American corporate governance model, which is premised on hostile takeovers. The conspicuous absence of hostile takeovers in Japan’s recent recovery is particularly remarkable considering that, during the recent recovery, market conditions for hostile takeovers were close to optimal. Almost all of Japan’s “idiosyncratic barriers” to hostile takeovers (i.e., stable shareholdings, a cultural aversion to hostile takeovers, and inefficient takeover laws) were ostensibly dismantled, and the bust-up values of a substantial percentage of Japan’s listed companies were considerably more than their cumulative stock price. To many experts, Japan appeared to be a utopia for hostile takeovers. Yet despite the pro-hostile takeover environment, there has never been a successful hostile takeover bid during Japan’s period of economic recovery. Japan’s unique system of corporate governance — lifetime employment and the influence of the government and banks — has fostered orchestrated and friendly (but not hostile) M&A as a significant force for restructuring. This is important because it provides evidence of “the efficiency of friendliness” in the era of globalization. Other countries can once again look to Japan’s unique system of corporate governance as a viable alternative to the American corporate governance model based on hostile takeovers.

The paper considers corporate governance practices in Russia. Market and information infrastructure, legal environment, regulatory environment are investigated. The level of corporate governance in Russia remains low. The vast majority of Russian companies still lack transparent operational and ownership structures, and suffer from weak internal control procedures. The redistribution of ownership stakes, the introduction of strategic shareholders — often in conjunction with significant investments — and the desire to attract outside capital are major driving forces in the improvement in governance standards in Russia.

Purpose This study aims to examine the listing of firms at the highest corporate governance level of the Brazilian stock exchange (B3) as a means of legitimation and its relationship with risk and return on investment. Design/methodology/approach This paper analyzes 205 companies from 2010 to 2019, in which firms listed at the Novo Mercado level were compared with groups composed of other firms traded on B3. Findings The main results demonstrate that a listing at the supposedly higher level of corporate governance in Brazil does not indicate lower risk, a higher return or even a better risk-return ratio. Research limitations/implications The findings are restricted to this sample, representing the association identified between the analyzed phenomena and not a cause-effect relationship. Practical implications The highest level of corporate governance in Brazil brings together firms that present a higher risk (at least systematic) and lower returns (at least financial) because they seek to legitimize themselves in the market as firms committed to better management practices. Social implications These findings are useful to investors, the stock exchange, regulatory agents and the companies themselves to reflect on the purpose and usefulness of different levels of corporate governance in Brazil. Originality/value This study differs from the others that relate corporate governance to risk or return because it does not deal individually with corporate governance practices, but rather the phenomenon that is listed in a special governance level, created by the stock exchange, serving as a kind of seal legitimation.

Voluntary certification and disclosure of internal controls over Australian financial reporting, audit fees and value relevance

This paper explores corporate risk disclosure (CRD) in the Gulf Cooperative Council (GCC) countries and its relation to different firm’s characteristics, level of corporate governance and country of origin. Employing content analysis we searched the 2008 annual reports of 424 GCC publicly listed firms for 45 types of CRD. Using univariate and multivariate analyses, we report a positive relation between CRD and the firm’s size, leverage, and number of years using IFRS. We also find that financial and non-Islamic financial institutions disclose more risks than other firms in the sample. Using the BASIC score, which is a corporate governance index developed by the National Investor (TNI) in collaboration with HAWKAMAH (The Institute of Corporate Governance in the UAE), we find a positive relation between the firm’s level of corporate governance and CRD. Interestingly, we document an increase in the level of CRD with more corporate communication and disclosure. Compared to prior literature (e.g. Dobler et al, 2011), our paper is unique because it is the first to explore the relation between CRD and IFRS, the difference in CRD between Islamic and conventional financial institutions, and most importantly, the impact of corporate governance and corporate communication on CRD.

When an outside investor exercises control differently than the manager of the firm that is when the corporate governance problem arises. The problem of conflicts between the stakeholders magnifies with dispersed ownership, it also creates collective action problem among investors. Some studies have identified five alternative mechanisms which can mitigate this problem: (1) Control in hands of one investor or few of them or giving partial ownership. (2) Concentration of ownership by hostile takeovers and proxy voting contests. (3) Control by the board of directors. (4) Executive compensation contracts are given to investors to align managerial interests. (5) If the decisions have harmed or blocked the corporate decision that goes against the investors a fiduciary duty is assigned to the CEO. Shari’ah governance encourages honesty, integrity, transparency, accountability and responsibility among stakeholders in an organisation. Shari’ah board plays a very significant role in controlling and monitoring business transactions for the purpose of Shari’ah compliance. It follows ex-ante and ex-post criteria. AAOIFI and IFSB has set up guidelines for a sound corporate governance. In many ways Shari’ah governance can help the governance problems being faced by the corporations but there are some pros and cons as well regarding their implementation. Though the core Islamic laws cannot be followed in all the conventional countries but the principles or rules mentioned for a sound Shari’ah governance can be used so as to protect the economy from all kinds of frauds or losses. This paper will portray the benefits of Shari’ah governance. It will also be dealing with the corporate governance problems faced by the organisations and how these problems can be overcome by implementing Shari’ah Corporate Governance.KeywordsShariah governanceCorporate governanceCorporate governance problemStakeholders

The article investigates the correlation between adherence to different levels of Bovespa corporate governance and earnings management. We take the hypothesis that firms with higher standard of corporate governance have lower earnings management. After a review of the literature on conceptual aspects of accruals, discretionary and non-discretionary accruals, earnings management and its relationship to the levels of Bovespa corporate governance, a research is promoted by applying the model developed by Kang and Silvaramkrishnan (1995) to identify discretionary accruals at different levels of corporate governance. The survey is characterized as descriptive and documentary, with a quantitative approach. We analyzed the companies listed on Bovespa in different governance levels: Level 1, Level 2 and Novo Mercado, in the period between 2000 and 2007. Unlike the results reported in international studies, mercaresearch has not allowed us to infer that a higher level of governance necessarily mean a lower degree of earnings management. It is also concluded that the behavior of firms in earnings management is similar between the different levels of governance of the Bovespa, especially those found in two groups of positive profitability described in this study. This suggests that the level of governance does not interfere in such behavior of managers.