Consequences For Corporate Governance Research Articles

The Impact of Heterogeneous Market Sentiments on Corporate Risk-Taking and Governance

This research focuses on how market sentiment affects corporate governance in the Chinese market. The sample covers the years from 2014 to 2023. Market sentiment is estimated using a cross-sectional absolute deviation (CSAD) model, and earnings quality is used as an indicator of the consequences of corporate governance. Both mutual fund shareholding and the number of firm visits by mutual fund analysts are verified as effective corporate governance instruments that work well in a regular market but become ineffective when the market sentiment is high. The reason for this is that managers’ expectations change, and they may believe that disclosing good news during high-sentiment market periods significantly increases the share prices and helps them meet their performance requirements. In a high-sentiment market, an incentive contract encourages managers to take on projects with inappropriate risk or even manipulate earnings. One potential solution is to adopt venture capital firms’ high-water mark and clawback clauses to prevent managers from focusing on short-term goals rather than seeking long-term business sustainability.

Government awards to CEOs

AbstractThis paper investigates the value and corporate governance consequences of government awards for a sample of French CEOs appointed to the national Order of the Legion of Honor (Légion d'honneur). Short‐term market reactions surrounding award announcements are significantly positive, whereas the valuation of firms with awarded CEOs is greater than that of (matched) firms with nonawarded CEOs. We explore the channels through which government awards create value and find evidence that they provide awarded CEOs and their firms with increased political access. We also observe that government awards are associated with better corporate governance in that awarded CEOs are more likely to be fired for poor performance. The negative effects that have been documented for media awards and are associated with CEOs’ superstar status do not seem to apply to state awards.

Corporate governance matters: How do reduced state-owned shares lower firms’ market power in a developing country?

Corporate governance refers to certain approaches by which a company's stakeholders can receive a return on investment, one of which is to solve the agency problems that can arise from the separation of ownership and control. However, the basis for effective corporate governance is that the country has a mature modern corporate institution. The question of whether corporate governance can be effectively applied in firms in developing countries remains unclear. This study explores the influence of corporate governance in developing countries in the early stage of establishing a modern corporate institution. We use incremental job loss cost and agency cost reduction to represent the two consequences of corporate governance. Our estimates confirm a negative relationship between reduced state-owned shares and state-owned enterprises' (SOEs) market power and reveal the mediating effect of corporate governance on this negative relationship. Reduced state-owned shares can influence corporate governance and reduce agency costs. We also provide novel findings indicating that what really makes SOEs' market power decrease is the cost of job loss; however, we determine that the decline of market power is not necessarily a negative consequence as reduced state-owned shares can significantly promote the performance of SOEs by reducing market power. Our conclusions remain robust following a series of endogeneity tests. The study sheds new light on corporate governance by examining the relationship between corporate governance, SOE reform and employee welfare costs for the first time.

Board reforms and the choice of debt: international evidence

PurposeThe authors examine how the major board reforms recently implemented by countries around the world affect firms' choice of debt.Design/methodology/approachUsing a quasi-experimental setting of major board reforms around the world that aim to improve board-related governance practices in various areas, this study investigates the impact of effective board monitoring on corporate debt choice. The authors employ difference-in-differences-type quasi-natural experiment method and path analysis for hypotheses testing.FindingsThe authors find that the implementation of board reforms is positively associated with firms' preference for public debt financing over bank debt. However, this effect tends to weaken after the fourth year following the implementation of board reforms. In additional analyses, the authors find that “rule-based” reforms have a more pronounced effect on firms' choice of debt than do “comply-or-explain” reforms. Both (1) strengthened firm-level internal governance practices that address concerns about the agency cost of debt and (2) reduced information asymmetries play important roles in facilitating firms' debt choice, but the evidence suggests that the former is the economic mechanism through which country-level reforms affect corporate debt choice.Research limitations/implicationsThe study extends the literature examining the heterogeneity of corporate debt choices in a global setting and the literature on the consequences of corporate governance reforms.Practical implicationsThe findings demonstrate the effectiveness of the corporate board reforms implemented in countries around the world, addressing concerns from critics about their potential harm or ineffectiveness.Originality/valueThe results indicate that country-level board reforms reduce the extent to which shareholder–creditor conflicts harm shareholders.

Mandatory employee board representation: Good news for family firms?

We assess the corporate performance and corporate governance consequences of mandatory employee board representation through a natural experiment: the passage of the 2015 Rebsamen law in France, which requires 1 or 2 board seats to be allocated to employee representatives. We hypothesize that such formal institutional arrangements to give workers a voice in corporate governance are irrelevant for family firms, which have been shown to commit to implicit contracts with their employees. We find evidence that affected family firms’ share prices reacted negatively to the passage of the law. Moreover, standard OLS regressions of operating performance suggest that family control neutralizes the positive effect associated with employee directors. A more sophisticated difference-in-differences approach shows that affected family firms experienced a significant subsequent decrease in their return on assets. Our investigations of board composition also suggest that family firms rely on avoidance strategies to offset the influence of employee representatives. Overall, this paper casts doubt on the efficiency of minority worker representation in the boardrooms of family-owned companies and thus cautions against a “one-size-fits-all” approach to corporate governance practices.

The corporate governance consequences of small shareholdings: Evidence from sovereign wealth fund cross‐border investments

AbstractResearch Question/IssueExisting research on sovereign wealth funds (SWFs) has largely explored how they affect target firm value, overlooking the role they play in corporate governance. This paper examines the impact of SWFs' cross‐border equity acquisitions on targets' corporate governance and the role the institutional environment of SWF countries plays in shaping this impact.Research Findings/InsightsWe use a difference‐in‐differences approach and find that, on average, SWF investments are negatively related to target firms' corporate governance. This impact holds for small SWF cross‐border equity investments only and is stronger for firms that are weakly governed and for those located in jurisdictions with weak shareholder protection. The negative relation is more pronounced when SWFs' home countries have lower‐quality investor protection, corruption control, governmental effectiveness, and law enforcement than their host countries. We find further that SWF investments are positively associated with target firms' earnings management and negatively associated with investment efficiency. Finally, target firm value is found to decrease after SWF investments.Theoretical/Academic ImplicationsThe evidence that SWFs' small equity investments are detrimental to target firms' corporate governance is broadly consistent with the view that SWFs are passive investors. Managers can exploit this passivity, as evidenced by higher earnings management, reduced investment efficiency, and lower firm value.Practitioner/Policy ImplicationsThis study has important policy implications for investors, SWF managers, and policymakers. The passive role of SWFs in corporate governance should prompt minority shareholders to look for alternative monitoring mechanisms. Moreover, SWF managers may realize the need to target firms with strong corporate governance at the outset to compensate for the post‐acquisition decline. Host country policymakers may need to condition SWF investments on commitments to improve the corporate governance of investee firms, which would be akin to the performance requirements imposed on inward foreign direct investment (FDI). This is particularly relevant for SWFs from countries with weak institutions that are targeting countries with strong institutions.

Triggering changes in corporate governance: before and after external whistleblowing

PurposeThe purpose of this paper is to investigate whether a change of corporate governance occurs after financial crimes in Canada revealed through external whistleblowing.Design/methodology/approachBased on the methodology of Smaili and Arroyo (2019), the authors implement a qualitative research framework to examine 11 alleged Canadian corporate financial statement fraud cases publicly exposed during the 1995–2012 period.FindingsThe analysis suggests that firms had a weak traditional corporate governance mechanism before the external whistleblowing occurred. In almost every case, the chief executive officer (CEO) was also the chair of the board of directors. Although the reports by Dey and Saucier recommend that independent directors make up at least 75% of Canadian boards, we note that the percentage of independent directors was under 70% in six cases. Moreover, only two firms had a whistleblowing policy in place, and seven firms had a major shareholder. Regarding the consequences for corporate governance after whistleblowing, the analysis shows that the companies that survived the whistleblowing had enhanced their internal corporate governance by the third year after the whistleblowing. In fact, at all the surviving companies, the CEO was no longer the chair, and the percentage of independent directors had increased to 80%. However, for those survival companies that did not have a whistleblowing policy before the event, the situation did not change quickly, and they only implemented a policy after the enforcement of the new regulation in the year 2003.Originality/valueThis paper adds new insights to the research on financial crime by investigating the relation between corporate governance and whistleblowing.

THE IMPACT OF CORPORATE GOVERNANCE ON FINANCIAL PERFORMANCE OF LEBANESE BANKS

The aim of this research is to study the impact of corporate governance disclosure on the financial performance of Lebanese banks. The impacts of corporate governance consequences on financial performance are the problem being faced by many firms. This research applies a quantitative methodology to the data from 29 banks’ annual reports for the year 2018. This data was analyzed using regression analysis means. This empirical study intends to find substantial evidence which would help acquire new knowledge and better understanding of how virtuous corporate governance practices and disclosures may help improve banks’ performance. In particular, validation of our research hypotheses may help with assessing the importance of corporate governance disclosure for the financial performance of Lebanese banks. The research proves there is a direct relationship between diversity on board and financial performance, as well as, between frequency of Board meetings and financial performance. 

Determinants, mechanisms and consequences of corporate governance reporting: a research framework

Corporate governance disclosures form a key part of a company’s non-financial reporting. Several studies consider the determinants of corporate governance reporting, including external factors such as country-specific legislation and scandals, and internal factors such as financial performance, size and culture. Others consider the consequences of corporate governance reporting, using simple proxies for corporate governance mechanisms such as board composition characteristics to analyse the impact on financial reporting quality and company valuation. Yet the determinants and consequences of corporate governance reporting may be interlinked, and many quantitative studies fail to consider these links and their multiple effects adequately. Poor financial performance, for example, can be both a determinant and a consequence of the underlying governance mechanisms that corporate governance reporting aims to capture. The framework provided in this paper considers both the determinants and consequences of corporate governance and likely links between them, and also considers internal corporate governance mechanisms and the measures that are used as their proxies. In combining these three aspects of corporate governance and showing potential links, the framework offers insights into future research opportunities. The framework can be adapted to any country or organisational setting and also offers the opportunity to consider theories other than agency theory when studying corporate governance disclosures.

The Agency Problems of Institutional Investors: Presentation Slides

The presentation slides in this document provide an overview of our study The Agency Problems of Institutional Investors, which was published in the Journal of Economic Perspectives in its summer 2007 issue. The slides build on our presentations at the 2017 ALEA annual meeting. Our study focuses on how the rise of institutional investors has transformed the governance landscape. The study analyzes the agency problems that the investment managers of institutional investors have vis-a-vis their own investors. We develop an analytical framework for examining these agency problems and apply it to study several key types of investment managers. We analyze how the investment managers of mutual funds - both index funds and actively managed funds - have incentives to under-spend on stewardship and to side excessively with managers of corporations. We show that these incentives are especially acute for managers of index funds, and that the rise of such funds has system-wide adverse consequences for corporate governance. Activist hedge funds have substantially better incentives than managers of index funds or active mutual funds, but their activities do not provide a complete solution for the agency problems of institutional investors. Our analysis provides a framework for future work on institutional investors and their agency problems, and generates insights on a wide range of policy questions. We discuss implications for disclosure by institutional investors; regulation of their fees; stewardship codes; the rise of index investing; proxy advisors; hedge funds; wolf pack activism; and the allocation of power between corporate managers and shareholders. Our study is part of a larger project on the incentives of investment managers that also includes Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy and The Specter of the Giant Three.

Bail-inable securities and financial contracting: can contracts discipline bankers?

The post-crisis stream of reforms, especially the new recovery and resolution framework, has been often welcomed for its aim to increase market discipline in the banking sector, allocating the losses to shareholders and creditors of failing banks and not anymore on the general public though state bail-out. Nonetheless, the concrete mechanisms according to which such turnaround shall happen and the corporate governance consequences of financial reforms have been severely understudied. The paper tackles the trade-off between market discipline and financial stability in the post-crisis EU regulatory environment through the lenses of financial contracting. Building on the debt as a mechanism to contingently allocate control, the paper approaches the regulatory framework as a set of restrictions to contractual freedom, exploring the room for investors to discipline risk-taking of banks through specific contractual arrangements. Traditional contractual devices are scrutinized against the qualitative requirements for regulatory capital and bail-inable securities and turned out to be largely unavailable because of regulatory constraints, so that the ability of investors to limit risk-taking appetite of managers is limited. Therefore, the attention moves to the peculiar case of contingent convertible instruments (Cocos), discussing some design features that might allow investors to successfully reduce risk-taking incentives both before and after the distress of the bank, enhancing market discipline after all.

Determinants and consequences of financial distress: review of the empirical literature

AbstractWe synthesise the empirical literature on the determinants and consequences of financial distress, critique the findings and offer suggestions for future research. We categorise these indicators into (i) firm‐level fundamental determinants, (ii) macroeconomic determinants and (iii) firm‐level corporate governance determinants. We categorise the consequences into (i) financial reporting and auditing consequences, (ii) firm‐level operational consequences, (iii) capital market consequences and (iv) corporate governance consequences. We suggest that future research can make a more meaningful contribution, by developing more comprehensive models of predicting financial distress which will entail a departure from the current partial analysis to a more holistic complex analysis.

Are Passive Index Funds Active Owners? Corporate Governance Consequences of Passive Investing

The exponential rise of mutual funds designed to track stock indices has been one of the drivers behind the re-concentration of ownership of listed companies in the U.S.. Due to the high concentration of the passive index funds industry, the three leading passive fund managers (BlackRock, Vanguard and State Street) make up an increasingly important component of the shareholder base of listed companies. In spite of this however, it remains questionable whether they are actually interested in playing an active role in the corporate governance of investee companies. In fact, although passive investors are, by definition, focused on the long term and, as such, should naturally be incentivized to monitor investee companies in order to improve their performance, passive fund managers generally adhere to a low-cost approach to voting and engagement in order to keep their fees low. Against this background, this Article will provide an in-depth analysis of available evidence concerning the corporate governance role of passive investing and, taking the current EU institutional investor-driven corporate governance strategy as a reference, will demonstrate the shortcomings of the regulatory approaches to institutional shareholder engagement focused mainly on short-termism. This article will therefore argue that, in order to promote more effective passive investor engagement, lawmakers, regulators and corporate governance professionals should tackle cost-related issues more effectively. Moreover, pursuing this line of thought, it will outline a analytical framework of potential regulatory strategies aimed at reducing engagement-related costs in order to encourage passive index fund managers and, more generally, non-activist institutional investors to play a more effective oversight role over investee companies.

The Norwegian Gender Balance Law. A Reform That Failed?

The Norwegian Gender Balance Law (GBL) was proposed in June 14th 2003, made into a law on December 9th 2005, and implemented from January 1st 2006 with a two-year grace period. The law mandates at least 40% board representation for both gender in PLC companies. The government gave two main promises, one that gender equality would increase with the law, the other that companies' financial performance would improve. I review research literature and add descriptive long-term developments on these dimensions. This essay concludes that the promises were not fulfilled, and that the corporate governance consequences that did follow are mostly negative. Companies attain the 40% female director target, but besides this, the law does not bring more female managers or CEOs, and the gender segregated labour market remains segregated. Today, the law applies to about 500 women, half of the number at its maximum. An unintended consequence of the legislation is the mass exodus of companies from the PLC register. I find it difficult to compare results from research on financial performance. Researchers perform before-and-after study, a natural experiment, but the reform has a long gestation period and attrition of companies from the PLC register. I conclude that the law should be repealed. In a wider context the experiment casts doubt as to the usefulness of legislation to promote gender equality in the boardroom and in society at large.

Corporate Governance Consequences of Accounting Scandals: Evidence from Top Management, CFO and Auditor Turnover

This paper examines the consequences of accounting scandals to top management, top financial officers and outside auditors. We examine a sample of 518 U.S. public companies that announced earnings-decreasing restatements during the 1997–2002 period and an industry-size matched sample of control firms. Using logistic regressions that control for other determinants of management turnover, we find strong evidence of greater turnover of chief executive officers (CEOs), top management and chief financial officers (CFOs) of restating firms compared to the control sample. On average, over the three-year period surrounding the year of restatement announcement, CEOs and CFOs face, respectively, a 14% and 10% greater probability of being replaced in restating firms than in control firms, after controlling for other factors. These represent increases of about 42% and 23%, respectively, compared to the usual turnover probabilities for CEOs and CFOs. The magnitudes of these effects are even larger for restatements that are more serious, have worse effects on stock prices, result in negative restated earnings, are initiated by outside parties, are accompanied by Accounting and Auditing Enforcement Releases (AAERs), or trigger securities class action lawsuits. We find little systematic evidence that auditor turnover is higher in restating firms. Our paper provides evidence of effective functioning of internal governance mechanisms following accounting scandals.

The Agency Problems of Institutional Investors

We analyze how the rise of institutional investors has transformed the governance landscape. While corporate ownership is now concentrated in the hands of institutional investors that can exercise stewardship of those corporations that would be impossible for dispersed shareholders, the investment managers of these institutional investors have agency problems vis-a-vis their own investors. We develop an analytical framework for examining these agency problems and apply it to study several key types of investment managers. We analyze how the investment managers of mutual funds - both index funds and actively managed funds - have incentives to under-spend on stewardship and to side excessively with managers of corporations. We show that these incentives are especially acute for managers of index funds, and that the rise of such funds has system-wide adverse consequences for corporate governance. Activist hedge funds have substantially better incentives than managers of index funds or active mutual funds, but their activities do not provide a complete solution for the agency problems of institutional investors. Our analysis provides a framework for future work on institutional investors and their agency problems, and generates insights on a wide range of policy questions. We discuss implications for disclosure by institutional investors; regulation of their fees; stewardship codes; the rise of index investing; proxy advisors; hedge funds; wolf pack activism; and the allocation of power between corporate managers and shareholders. This paper is part of a larger project on the incentives of investment managers that also includes Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy and The Specter of the Giant Three. Presentation slides for this paper are available on SSRN here.

Employee representation and board size in the Nordic countries

Several European countries have mandatory employee representation on company boards, but the consequences for corporate governance are debated. We use employee representation rules in the otherwise quite similar Nordic countries (Denmark, Finland, Norway, and Sweden) to elicit information on shareholder preferences for employee representation and board size. We find that shareholders tend to choose board structures that minimize the proportion of employee representatives. In Denmark and Norway employee representation depends on board size, and shareholders choose board sizes that minimize the number of employee representatives. However, many companies have more employee representatives than is mandatory. In Sweden, where the law mandates a fixed number of employee representatives (two or three depending on firm size), shareholders choose to have larger boards. In Finland, where employee representation is not mandatory, <1 % of companies choose to have it. Whatever, the merits of employee representation, shareholders appear to be mildly averse to it.

The Intrinsic Value of Decision Rights

Philosophers, psychologists, and economists have long argued that certain decision rights carry not only instrumental value but may also be valuable for their own sake. The ideas of autonomy, freedom, and liberty derive their intuitive appeal—at least partly—from an assumed positive intrinsic value of decision rights. Providing clean evidence for the existence of this intrinsic value and measuring its size, however, is intricate. Here, we develop a method capable of achieving these goals. The data reveal that the large majority of our subjects intrinsically value decision rights beyond their instrumental benefit. The intrinsic valuation of decision rights has potentially important consequences for corporate governance, human resource management, and optimal job design: it may explain why managers value power, why employees appreciate jobs with task discretion, why individuals sort into self-employment, and why the reallocation of decision rights is often very difficult and cumbersome. Our method and results may also prove useful in developing an empirical revealed preference foundation for concepts such as freedom of choice and individual autonomy.

Culture and Law in Corporate Governance

Understanding the role of culture in corporate governance has become a subject of growing importance. Today, no institutional analysis of corporate governance systems would be complete without considering the cultural environment in which such systems are embedded. This paper provides an overview of different accounts on how culture interacts with the law - especially corporate law - to shape corporate governance and on how this may help explain diversity and persistence in corporate governance. Basic concepts in cultural analysis are first presented, together with prevalent theories of cultural dimensions and of social networks as social capital. Relying on this analytical framework, this paper reviews current research on culture’s consequences for corporate governance on issues such as legal transplants, the objectives of the corporation (corporate social responsibility), relations with investors and other stakeholders by way of disclosure and dividend distribution, executive compensation, and the operation, composition, and network structure of the board of directors.

The impact of innovation and technology on microfinance sustainable governance

Technical or social innovation, concerning also the creation and commercialization of new products, strategies and management, has a deep actual - and especially trendy - impact on microfinance institutions (MFIs), contributing to reshape their business model, with an impact on their overall risk profile. Innovation is mostly an opportunity even for MF risk mitigation, considering its pervasive impact on risk factors. This original analysis is addressing, in a multidisciplinary and innovative comprehensive way, apparently weakly related topics such as MF governance, and IT issues, within recessionary cycles. This hardly investigated frontier faces key trendy issues, which are likely to deeply reengineer the relationship among different stakeholders, as it has already happened, on a different and more sophisticated scale, with traditional banking. To the extent that technology (with access to Internet, social networks, cashless electronic payments, etc.) reshapes the equilibriums among different stakeholders, it is likely to have important – albeit under-investigated - corporate governance consequences, softening the conflicts of interest among stakeholders and reinforcing the business model, making it more resilient during recessions, with positive externalities on both sustainability and outreach.