Active Role In Corporate Governance Research Articles

Monitoring or Colluding? Institutional Investors' Heterogeneity and Environmental Information Disclosure Behavior.

High-quality environmental information disclosure is not only an effective way for the firm to fulfill its environmental responsibility and promote green development, but also an important governance mechanism to reduce the degree of information asymmetry between the firm's management and shareholders and alleviate the agency conflict. As an important shareholder of a firm, there are two different hypotheses about the influence of institutional investors on firm decision-making and behavior: monitor and collusion. Institutional investors are not homogeneous, and there are significant differences in the impact of different types of institutional investors on firm decision-making and behavior. We divide institutional investors into the stable institutional investors and the unstable institutional investors, using the data of listed firms in China's A-share heavy pollution industry between 2008 and 2020, and this study explores the effect of institutional investors' heterogeneity on environmental information disclosure behavior from the perspective of environmental information disclosure quality. Empirical evidence shows that institutional investors as a whole have a positively significant impact on environmental information disclosure quality. Further analysis shows that the stable institutional investors have positive impact on environmental information disclosure quality compared with the unstable institutional investors. After a series of robustness tests, the conclusion is still valid. The results of this paper show that institutional investors, especially the stable institutional investors, can effectively reduce the degree of information asymmetry, alleviate the agency conflict of the firm, play an active role in corporate governance, strengthen the main responsibility of firm ecological environment protection, and promote the green development of firm. The conclusion of this paper has important reference significance for the regulators to formulate policies to improve environmental information disclosure quality and promote green development according to the heterogeneity of institutional investors.

How does Buddhism affect corporate cash holdings?

PurposeThis study explores whether and how Buddhism impacts corporate cash holdings. Buddhist culture affects investors' perception of how cash is deployed and then influences corporate cash holdings. This study first examines the impact of Buddhism on corporate cash holdings and then investigates whether formal governance mechanisms such as legal institutions and institutional ownership influence the relationship between Buddhism and corporate cash holdings.Design/methodology/approachThe authors conduct empirical tests with data on Chinese listed companies between 2006 and 2019. Buddhism is measured with the natural logarithm of the number of Buddhist temples within a radius of a certain distance around a firm's headquarters. The authors adopt the OLS method to regress and take the 2SLS method, Heckman selection model and FEVD approach to address the endogeneity issue.FindingsThe results show a positive relationship between Buddhism and corporate cash holdings. This positive relation is more prominent for firms located in regions with weak legal institutions and for firms with low institutional ownership. Further analysis shows that Buddhism works through the channel of alleviating agency problems and finally improves the value of cash to investors.Research limitations/implicationsThe authors’ findings have important implications. First, this study provides inspiration for incorporating the ethical values of traditional cultures, such as Buddhism, into the corporate governance system. Second, the findings imply that informal institutions can influence corporate financial decisions beyond the effect of formal institutions, suggesting that informal systems should be emphasized when dealing with business affairs in countries where legal institutions are relatively weak. Third, the results suggest the significance of encouraging research on religious culture to explore its active role in corporate governance.Originality/valueThis study illustrates the positive value of religious culture in advancing corporate governance by relating Buddhism to corporate cash holdings based on the explanation of investors' perception. It makes a marginal contribution to the literature that investigates the determinants of cash policies and explores the firm-level consequences of religious culture, adding to the research area of culture and corporate finance.

The Impact of Religious Atmosphere on Corporate Governance: An Empirical Study Based on the Number of Temples around Listed Companies

Religious belief can affect individual’s behavior. It usually induces managers to be more risk averse, thereby mitigating the agency problem and positively influencing governance. This paper conducts an empirical study to analysis the effect of religious atmosphere on corporate governance. It could be figured out that strong religious atmosphere plays an active role in corporate governance. The stronger the influence of religious tradition on listed companies, the less likely the managers are to violate the rules. Through precepts and deeds, these religious traditions are passed on from generation to generation and have become a significant factor affecting human economic behavior.

Private Meetings Between Firm Managers and Outside Investors: The European Paradigm

Institutional ownership of listed companies has grown significantly, leading to an increase in ownership concentration in the European Union. Under the current context of re-concentrated ownership, institutional shareholders are expected, also in Europe, to play a more active role in corporate governance and to exert influence on the company’s strategies. Within such a corporate governance landscape institutional investor engagement is becoming a distinctive feature of corporate governance of European listed companies. In particular, board-shareholder dialogue is a key engagement tool and is essential in order to enable institutional investors to fulfil their stewardship functions. Board-shareholder dialogue is also core to listed companies’ communication strategies, since the growing demand for engagement by institutional investors has rendered traditional investor relations insufficient. Nevertheless, private meetings between directors and institutional investors raise concerns with respect to the financial markets law framework in the EU. In particular, the EU market abuse regime and the related principle of equal treatment for shareholders seem to hinder dialogue between directors and key shareholders. Against this background this Article shows that legal constraints deriving from EU financial markets law do not hamper institutional investor engagement. Furthermore, based on recommendations from corporate governance and stewardship codes as well as good practice standards drafted by corporate governance experts and institutions, it outlines an innovative practical framework that reduces the risk of violating disclosure rules and fosters board-shareholder engagement. In doing so, the Article provides theoretical and practical insights that can help to make institutional investor engagement more effective also in non-European countries.

The effect of sovereign wealth funds on corporations: Evidence of cash policies in Singapore

This paper studies the monitoring role of sovereign wealth funds (SWFs). By using unique dataset from one of the largest SWF: Temasek holdings, we find that SWF’s presence has a positive effect on cash holdings of portfolio companies. The effect is more pronounced for well-governed firms, indicating that Temasek increases corporate cash holdings through its active role in corporate governance. We further find supportive evidence that Temasek ownership affects cash holdings by hoarding excess cash and reducing capital expenditure, especially within firms with good governance. Temasek’s discerning effect on cash policies highlights the effective monitoring role of sovereign wealth funds.

Should companies care who their lender is? Evidence from loan covenants

Non-bank lenders are an increasingly important part of the syndicated loan market, particularly for riskier borrowers who require intensive monitoring. Interestingly, when non-bank lenders arrange loans, they impose fewer and looser covenants. Although the prior literature shows that banks play an active role in corporate governance following covenant violations, non-banks are not likely to intervene in borrowers’ decision making in similar circumstances. We also investigate possible explanations for the weak enforcement of loan covenants by non-banks and find that non-bank lenders do not appear to improve their monitoring abilities by learning from previous default experiences on loan portfolios as banks do.

Insights into the Effectiveness of Internal Audit: A Multi-Method and Multi-Perspective Study

This doctoral dissertation includes five related working papers that provide valuable contributions to the understanding of internal audit (IA) and its effectiveness. Paper 1 is a literature review that uses the perspective of new institutional theory as a framework and acknowledges that IA effectiveness is largely still viewed as a “black box” that is under-explored in academic research. Paper 2 is an explorative work that studies the variables that are theoretically associated with the IA function’s active role in corporate governance. This paper was published in the Journal of Applied Accounting Research (JAAR 2012). Paper 3 is a conceptual essay that discusses the status of IA as a profession and questions why the IA profession has not generally been seen as playing a significant role in the financial crisis, either as part of the problem or as part of the solution. This paper was published in the Managerial Auditing Journal (MAJ 2012). Paper 4 is an empirical survey that clarifies the discriminatory power of characteristics suggested by practitioners and academic research that may indicate IA effectiveness. Paper 5 is a qualitative research paper that breaks new ground in applying role theory (Kahn et al. 1964) in combination with the theory of relational coordination (Gittell 2006) to the research context of IA effectiveness. This dissertation builds on an exhaustive literature review, provides a mix of different methods and perspectives and offers innovative and complementary insights that open the door for further research.

What is the Optimal Balance in the Relative Roles of Management, Directors, and Investors in the Governance of Public Coroporations?

American economic success depends on establishing an effective system of corporate governance. Collaboration between the three traditional actors in corporate governance — boards of directors, management, and shareholders — is fundamental to identifying the corporate governance policies and practices that will be most conducive to producing economic growth while reducing attendant financial and legal risk. This white paper provides an overview of the evolution of US corporate governance, the current balance of responsibilities among directors and shareholders and the principal issues in corporate governance today. The trends analyzed include the effects of increased influence of institutional investors resulting from concentration of ownership in institutional investment and savings vehicles, changes in voting rules and practices, and more assertive shareholder activism; shifting conceptions about the purpose of the corporation and the duty to maximize corporate value; decreased public trust of business leaders following the corporate scandals and the financial crisis; Federal regulations intended to enhance the influence of shareholders and increase board and management accountability, continuing efforts to address executive compensation; and the growth in importance of proxy advisory firms in the shareholder voting process. Continuing issues examined include whether: federal mandates undermine the benefits of a historically state-driven corporate law system; further changes to board processes and composition are desirable; shareholders should assume a more active role in corporate governance; proxy advisory firms replace, rather than augment, the shareholder voice, and whether the proxy advisory industry should be subject to greater regulation and oversight; changes in voting mechanics can improve the effectiveness of corporate governance; short-termism is a cause for concern, and if so, its causes and remedies; and new challenges are presented by vote decoupling, high-speed trading, and hyper portfolio diversification.

Game Analysis of Institutional Investors Participating in Corporate Governance

By building a game model between the institutional investors and the management, an analysis has been conducted to uncover the influential factors that are crucial to the role switching of institutional investors when confronting tunneling behaviors of the management: supervision cost, shareholding ratio, invisible income, fines and patience. In cases of lower supervision cost, higher shareholding ratios, less invisible income, larger amount of fines, more patience and pursuing long-term gains, institutional investors will tend to play an active role in corporate governance. They will act as an active supervisor to restrain the tunneling behavior of the management.

Factors associated with the internal audit function's role in corporate governance

PurposeThe purpose of this paper is to investigate several variables that are theoretically associated with the internal audit function (IAF) having an active role in corporate governance.Design/methodology/approachThe paper uses responses from 782 US Chief Audit Executives (CAEs) in the CBOK (2006) database for the investigation. The paper makes the assumption that an IAF has only one CAE, thus the dataset represents 782 US IAFs.FindingsIt is found that an IAF having an active role in corporate governance is significantly and positively associated with the use of a risk‐based audit plan, existence of a quality assurance and improvement program, and audit committee input to the audit plan. Control variables such as stock exchange listing, firm size, the existence of an internal control framework, and a CAE with an internal auditing qualification also are positively associated with the IAF having an active role in corporate governance.Research limitations/implicationsA limitation of this study is that CAE perceptions may deviate from actual practice. Also, the sample is limited to the US CAEs who are also IIA members, thus it may not reflect the views of non‐members and the CAEs from other countries.Practical implicationsThe results have implications for CAEs who wish to increase the chance for their IAFs to play an active role in corporate governance. The IIA may benefit from these results in its supporting role for the internal auditing profession.Originality/valueThe study is complementary to the literature on the existence and size of the IAF and reveals several avenues for further research.

Shareholder Activism in the Obama Era

The financial crisis of 2008 and the ascendancy of the Democratic Party in Washington have created an environment in which proponents of expanded shareholder corporate governance rights are making considerable progress. Even before the crisis hit, of course, there had been a number of efforts to extend the shareholder franchise, principally so as to empower institutional investors. The crisis, however, has given them new momentum. The logic behind the shareholder empowerment project is that institutional investors will behave quite differently than dispersed individual investors. Because they own large blocks, and have an incentive to develop specialized expertise in making and monitoring investments, institutional investors could play a far more active role in corporate governance than dispersed individual investors traditionally have done. Institutional investors holding large blocks thus have more power to hold management accountable for actions that do not promote shareholder welfare. Their greater access to firm information, coupled with their concentrated voting power, might enable them to more actively monitor the firm’s performance and to make changes in the board’s composition when performance lagged. In fact, however, institutional investor activism is rare and limited primarily to union and state or local public employee pensions. As a result, institutional investor activism has not - and cannot - prove a panacea for the pathologies of corporate governance. Activist investors pursue agendas not shared by and often in conflict with those of passive investors. Activism by investors undermines the role of the board of directors as a central decision-making body, thereby making corporate governance less effective. Finally, relying on activist institutional investors will not solve the principal-agent problem inherent in corporate governance but rather will merely shift the locus of that problem.

Does institutional ownership affect the cost of bank borrowing?

Institutional ownership is negatively related, both statistically and economically, to loan spreads. This relationship is stronger for firms with higher degrees of information asymmetry. Institutional investors play an active role in corporate governance by reducing the risk levels of their portfolio companies through effectively monitoring management. Further, at high levels of concentration, institutional ownership has the tendency to increase the cost of loans due to the agency cost of debt. Nonetheless, companies with institutional investors pay significantly lower borrowing costs than companies without institutional shareholders.

What Do Corporations Owe Citizens?

Institutional investors occupy an important location in the corporate governance system in countries with high shareholding, such as the US. As these are also countries where pensions are heavily invested in equities, the pension and corporate governance systems intersect, though they are usually analyzed separately. Institutional investors could play a more active role in corporate governance, but many if not most have not done so. Public pension funds are more proactive on corporate governance transparency issues than are the privately held funds, in part because the latter have some conflict of interest between those who own the parent firm and those who invest in the funds. Overall, institutional investors in the US have fewer powers over the managers than do the UK counterparts. Debates over SEC Rule 14a-8 which would give more power to IIs reflects the views and influence of competing lobbies on each side of the battleground among shareholders, managers, and employees over the cash flow of the firm, a battleground in which pension funds are increasingly important players.

Does Institutional Ownership Affect the Cost of Bank Borrowing?

Institutional ownership is negatively related, both statistically and economically, to the cost of loans. This relationship is stronger for firms with higher degrees of information asymmetry. Institutional investors play an active role in corporate governance by reducing the risk levels of their portfolio companies through effectively monitoring management. Institutional ownership has the tendency to increase the cost of loans due to the agency cost of debt. Overall, we find a significant and robust U-shaped relationship between institutional ownership and the cost of loans. Nevertheless, companies with institutional investors still pay significantly lower borrowing costs than companies without institutional shareholders.

Shareholder Activism and Institutional Investors

Recent years have seen a number of efforts to extend the shareholder franchise, principally so as to empower institutional investors. The logic of these proposals is that institutional investors will behave quite differently than dispersed individual investors. Because they own large blocks, and have an incentive to develop specialized expertise in making and monitoring investments, institutional investors could play a far more active role in corporate governance than dispersed individual investors traditionally have done. Institutional investors holding large blocks thus have more power to hold management accountable for actions that do not promote shareholder welfare. Their greater access to firm information, coupled with their concentrated voting power, might enable them to more actively monitor the firm's performance and to make changes in the board's composition when performance lagged. In fact, however, institutional investor activism is rare and limited primarily to union and state or local public employee pensions. As a result, institutional investor activism has not - and cannot - prove a panacea for the pathologies of corporate governance. Activist investors pursue agendas not shared by and often in conflict with those of passive investors. Activism by investors undermines the role of the board of directors as a central decision-making body, thereby making corporate governance less effective. Finally, relying on activist institutional investors will not solve the principal-agent problem inherent in corporate governance but rather will merely shift the locus of that problem.

Personal Finance and Corporate Governance: The Missing Link: Product Regulation and Policy Conflicts

In the UK today the pursuit of one policy objective—to increase the level of private savings and financial provision by devising simpler, cheaper and often tax privileged retail financial products—obscures and makes it yet more difficult to achieve another stated current policy objective—a more active role in corporate governance by institutional investors. This article sets out the evidence for this claim by examining the structures, regulation and design of some common forms of retail financial product and shows how these together constitute the terms upon which investment capital is both formed and then entrusted to institutional investors. It argues that those terms inevitably affect the level of corporate governance activity that such capital can give rise to.

Ownership Concentration, Debt Financing and the Investment Opportunity Set as Determinants of Accounting Discretion: Empirical Evidence From Spain

ABSTRACTUsing a sample of 783 observations, belonging to 109 firms quoted in the Spanish capital market over the period 1991–1999, our research analyses the discretion and restrictions of accounting policy in a Continental European country, where firms present important differences in ownership structure and corporate governance compared to that of Anglo Saxon countries.This article shows that the absolute value of discretionary accruals declines with ownership concentration, this result being consistent with large shareholders playing an active role in corporate governance. In our financial system, where firms and banks enter into long term relationships, debt financing generates incentives for the exercise of accounting discretion, as also occurs in market oriented financial systems. The third variable analysed refers to the investment opportunity set. This variable exhibits a positive relation, that is, the more growth opportunities firms have the more accounting discretion managers exercise. The results reported in this study are also important because they are obtained from the estimation of a dynamic panel data model, which allows us to control for the reversion of accruals.

Monitoring by Transient Investors? Institutions and Corporate Control

Do institutions monitor management? This paper argues that even if institutions do not actively monitor, monitoring results via the takeover market. Using 139 hostile attempts from 1985-1994, I show that higher levels of institutional ownership, primarily by mutual funds, increases bid probability. The level rather than the concentration of institutional ownership is the important factor. Also, successful acquisitions are more likely when institutions sell their shares. Further, institutions are not predicting likely targets; in fact, they are net sellers prior to the announcement. Even if institutions do not take an active role in corporate governance, institutional ownership results in increased monitoring, albeit through the market for corporate control.

The motivation and impact of pension fund activism

Pension funds have pursued an active role in corporate governance, although some question their effectiveness and motivations. We examine the impact and motivation of pension fund activism by studying the shareholder proposals of the largest, most active funds from 1987 through 1993. We find significant heterogeneity across funds in activism objectives, tactics, and impact on target firms, consistent with differing investment strategies. We find the funds are more successful at monitoring and promoting change in target firms than previously recognized. We also find no evidence to support motivations other than fund value maximization.

Corporate Governance and Commercial Banking: A Comparative Examination of Germany, Japan, and the United States

The current paradigm of corporate governance theory suggests that the Japanese main bank system and the German universal bank system encourage socially optimal corporate decisionmaking. Unlike their Japanese and German counterparts, American banks are barred from taking an active role in corporate governance, both by laws restricting share ownership, and by legal rules which hold banks liable for exerting managerial control over borrowers. The debate among commentators has focused on whether the German and Japanese systems should be viewed as alternatives to the American model. In this article, Professors Macey and Miller challenge the current paradigm by demonstrating that powerful banks may prevent equity claimants from undertaking socially optimal risks, thereby hindering the development of robust capital markets. They conclude that the most effective model is one which large-block shareholders pose a credible threat to incumbent management and banks maximize their comparative advantage in controlling moral hazard.