Corporate Governance Measures Research Articles

Earnings Transparency and Corporate Cash Holdings

This paper examines the impact of earnings transparency on corporate cash holdings. Motivated by Barth et al. (2013), who show that firms with less earnings transparency tend to have higher cost of equity, this paper shows that the cross-section differences in earnings transparency cause variations in firm cash holdings because firms with less earnings transparency have more incentives to hold cash in order to avoid costly external financing. Using data of US firms from 1980 to 2013, it is found that earnings transparency is significantly negatively associated with cash reserves. This impact remains significant when corporate governance measures and accounting-based earnings quality measures are accounted for. And this impact is more pronounced in firms with more growth opportunities, more RD expenses and more financial constraints. It is further found that firm with lower earnings transparency have a higher value of cash holdings, suggesting that cash held by firms with lower earnings transparency are expected to be used to invest, which is also a verification that firms with less earnings transparency hold more cash for precautionary motivation.

Does corporate governance beget firm performance in Fortune Global 500 companies?

PurposeThis paper aims to determine the impact of corporate governance practices on the financial outcomes of Fortune Global 500 Companies, thus covering impact of geographical differences (USA and non-USA) as well.Design/methodology/approachThe study is a quantitative research based on a positivist paradigm using deductive reasoning and secondary data collection. Data collection has been done from secondary sources (annual reports, Edgar submissions and financial statistics from renowned financial databases such as yahoo.finance, Bloomberg, Ycharts statistics and Morningstar. Data were collected for 8 years (2005-2012).FindingsThe study found a strong positive relationship between corporate governance and firm performance. Smaller board sizes are found to generate better firm performance in Fortune Global 500 Companies. Frequency of board meetings have also been found to have inverse relationship with firm performance. The study supports board independence to improve transparency in board decision-making process. CEO compensation has been found to have inverse relationship with firm performance. The robustness of our results has been measured with the usage of three dependent variables, and we have found same results with varying significance level.Research limitations/implicationsDue to selection of globally broad sample set qualitative aspects of corporate governance could not be covered. Nevertheless, there is a need to go beyond the quantitative techniques (secondary data) of measuring corporate governance mechanisms.Practical implicationsThe population set is unique combination of big players and global diversification. Hence, the corporate governance practices of these firms as understood from the results of this study can be bench-marked for emerging corporates of varying global context.Originality/valueThe research is original and unique as it significant and globally diverse population of Fortune Global 500 Companies over a period of 8 years for 11 variables of interest. Results are helpful in bench marking for the rest of market players.

Impact of Product Mix and Corporate Governance Practices on Earnings Volatility-Evidence from Banking Sector of Pakistan

The study examines the relationship between product mix and corporate governance on earnings volatility with the help of degree of total leverage (DTL) model. The present study attempts to fill the gap by investigating the relationship between product mix and corporate governance on earnings volatility for developing financial market during the period of 2005-2015. Earnings volatility is analysed by two proxies’ .i.e. revenue volatility and degree of total leverage. This study has used mainly two types of product mix that consists of lending and fee-based activities while board size, board independence and CEO power is used to measure corporate governance. The results of the study signify the adverse impact of fee-based activities on earnings volatility in the banking sector of Pakistan. Corporate governance confirms the board size and power of CEO in the board as contributing factors to control earnings volatility. The findings are useful to the bankers and regulators to comprehend the role of diversification and corporate governance in creating value and reducing risk for the stakeholders.

Corporate governance characteristics and valuation: Inferences from quantile regression

Prior literature on corporate governance and performance provides mixed evidence on the impact of various corporate governance measures on performance indicators. However, most of literatures adopt the Ordinary Least Square (OLS). This method is based on the central tendency, which may not appropriately represent the reality in cases where the dependent variable ranges between upper and lower values and hence the relationship may not be homogenous across different percentiles of the dependent variables. A variable having a positive impact based on the central tendency for firms may not be the case for the firms in the upper or lower bounds. Thus, estimating the means using OLS may not reflect and represent the heterogeneity in the estimated relationship. Therefore, quantile regression estimates the relationship at any point conditional on the distribution of dependent variable. This would enable us to generate various estimated coefficient at certain quantile of dependent variable. Therefore, the objective of the study is twofold. First, this study aims to investigate the relationship between corporate governance and performance using OLS. Second, this work further explores the impact of corporate governance mechanisms on performance using quantile regression so as to compare and to shed light on whether there is heterogeneity in the influence of these variables on the performance of listed companies across quantiles. The results of the study provide evidence that quantile approach shows inconsistency in the result with OLS and hence indicating the impact depends on the scale size. This theoretically provides further support that OLS may represent a poor estimation approach for the reality of firms.

Relationship of Internal Audit Quality and Corporate Governance Measures of Multinational Corporations (MNCs) of Pakistan

The internal audit is a primitive element for good corporate governance. This need has been largely felt in the developing countries to enhance and promote the corporate governance mechanism. This research evaluates the implication of internal audit of Multinational Corporations (MNCs) of Pakistan on corporate governance’s quality. The outcomes of this research reveal significance of internal audit role in corporate governance of MNCs. The significance of audit committee and management in this aspect is predominant. Similarly the results also show the vitality of corporate governance in terms of quality is significant when there is independent audit department with requisite expertise of auditing. However, the reliability of internal audit is primarily determines the characteristics of management of corporate governance. Contrary to this, the implication of internal audit is insignificant on the external audit workers as well as the board of directors of MNCs in Pakistan.

Relationship of Internal Audit Quality and Corporate Governance Measures of Multinational Corporations (MNCs) of Pakistan

The internal audit is a primitive element for good corporate governance. This need has been largely felt in the developing countries to enhance and promote the corporate governance mechanism. This research evaluates the implication of internal audit of Multinational Corporations (MNCs) of Pakistan on corporate governance’s quality. The outcomes of this research reveal significance of internal audit role in corporate governance of MNCs. The significance of audit committee and management in this aspect is predominant. Similarly the results also show the vitality of corporate governance in terms of quality is significant when there is independent audit department with requisite expertise of auditing. However, the reliability of internal audit is primarily determines the characteristics of management of corporate governance. Contrary to this, the implication of internal audit is insignificant on the external audit workers as well as the board of directors of MNCs in Pakistan.

Where Institutional Logics of Corporate Governance Collide: Overstatement of Compliance in a Developing Country, Bangladesh

AbstractManuscript TypeEmpirical.Research Question/IssueHow do conflicting institutional logics predict and explain the overstatement of corporate governance compliance in a developing country?Research Findings/InsightsA unique opportunity to study overstatement of compliance is available through checklists published in annual reports by companies in Bangladesh. A data set contrasting with that available from checklists is collected by a confidential survey of company secretaries. Overstatement of compliance with the country's Corporate Governance Guideline issued in 2006 is measured by comparing the published compliance with that revealed by the survey. There is significant overstatement of compliance in annual reports, particularly with respect to the less directly observable provisions of the Guideline. The overstatement is positively associated with control by a sponsor family and is negatively associated with the presence of an institutional investor on the board of directors.Theoretical/Academic ImplicationsThe logic associated with the regulative framework of an Anglo‐American‐based corporate governance model conflicts with the logic of a cultural‐cognitive institutional framework in a developing country. The resulting contest of legitimacy motivates firms to overstate compliance with the Corporate Governance Guideline 2006 in annual reports.Practitioner/Policy ImplicationsThis study highlights the challenges of introducing an Anglo‐American model of corporate governance in a developing country. National and international investors should seek to understand the reality of the corporate governance structure of firms in developing countries, rather than relying solely on compliance reported in annual reports. For researchers, there may be limitations in using the compliance reported in annual reports as a measure of corporate governance.

Equity Compensation and Tax Avoidance: Disentangling Managerial Incentives from Tax Benefits and Reexamining the Effect of Shareholder Rights

Much empirical evidence is consistent with properly incentivized executives engaging in more tax avoidance. However, other studies provide evidence consistent with tax avoidance facilitating managerial rent extraction. We address these mixed results by reexamining some of the earliest empirical evidence that tax avoidance and rent extraction are complementary activities. Specifically, we reexamine the negative relation between executives’ equity compensation and tax avoidance that is concentrated in firms with weaker shareholder rights. Although this pattern of results is consistent with complementarities between tax avoidance and rent extraction, we propose it is also consistent with tax exhaustion theory because the substantial tax benefits from equity compensation reduce firms’ demand for additional tax avoidance. We also draw on recent findings that suggest shareholder rights indices are problematic as a measure of corporate governance in the context of tax avoidance. Our results suggest tax exhaustion is a more compelling explanation for cross-sectional differences in the relation between executives’ equity compensation and tax avoidance. Further, failing to control for tax avoidance opportunities when using shareholder rights indices can confound inferences. Although our analyses do not disprove the notion that managers can use tax avoidance to facilitate rent extraction, they challenge the notion that this behavior is widespread.

Corporate Governance Determinants of FII in Indian IT Firms

The objective of this study is to investigate the impact of corporate governance characteristics on foreign ownership in the Indian information technology industry. The ownership pattern of a firm and board characteristics are analysed to understand their impact on inflow of foreign institutional investors to the firms. Panel data for 9 years from 113 Indian IT firms, which are publicly listed, have been used. The results show that firms with more concentrated promoter holdings have lesser foreign investments. Apart from the total number of board members, measures of corporate governance including the number of independent members on board and an independent board chairman have been found to be insignificant. The outcomes point to the need of a strong performance before relying on international investments for fundraising.

A multi-methodology on building a corporate governance index from the perspectives of academics and practitioners for firms in Greece

Purpose The purpose of this paper is to look inside the “black box” in corporate governance (CG) measurement, and shed some light on how to construct a transparent, reliable and valid index, considering equally both the academics and practitioners’ perspectives. Design/methodology/approach A synthesized literature review is presented and a CG index is developed combining the strengths of three different methodologies: the Delphi method, the classical test theory (CTT) and the analytic hierarchy process (AHP). This approach helps authors to break the process into separate steps and to select the appropriate techniques to support their decision regarding the norms, the criteria, the variables and the weights that someone should use to construct a CG index. Findings The authors’ analysis indicates that a well-designed CG index requires a combination of research methods to identify the best options to solve several methodological issues in index construction. For the application of this multi-methodology in Greece, the authors used two equal and independent samples to explore the different perspectives regarding the importance of the index criteria and sub-criteria. This process provides evidence that the opinion of academics and practitioners in Greece tend to converge. Moreover, it is found that this multi-methodology produces the highest variation in CG scores and ranking orders, as opposed to a traditional approach, in measuring CG disclosure, an important issue with econometric implications. Research limitations/implications The limitations of this study are associated with the methods used. Practical implications This paper provides practical implications for investors and commercial vendors. For the former, it highlights the need to be more cautious and/or suspicious when they use CG ratings, meaning that they should comprehend the base of the ratings models, and for the latter, it demonstrates the importance of enhancing the transparency in CG indices construction. Originality/value The value of the paper lies in improved understanding of the methodological issues in constructing CG indices. This is quite interesting because this approach could serve as a roadmap for other researchers.

Corporate governance and firm performance in developing countries: evidence from India

PurposeThis study aims to examine the impact of corporate governance on firm performance for a large representative sample.Design/methodology/approachThis empirical analysis focuses on a large number of companies covering 20 important industries of the Indian manufacturing sector for the period 2001-2010. Several alternative specifications and estimation techniques are used for analysis purposes, including system generalized methods of moments, which effectively overcomes the problem of endogeneity and simultaneity bias.FindingsOn one side, the findings indicate that larger boards are associated with a greater depth of intellectual knowledge, which in turn helps in improving decision-making and enhancing the performance. On the other side, the results indicate that return on equity and profitability is not related to corporate governance indicators. The results also suggest that CEO duality is not related to any firm performance measures for the sample firms.Practical implicationsThe outcomes of the analyses advocated that companies that comply with good corporate governance practices can expect to achieve higher accounting and market performance. It implies that good corporate governance practices lead to reduced agency costs. Hence, it is concluded that firms of the developing world can possibly enhance their performance by implementing good corporate governance practices.Originality/valueDeparting from the conventional system of the prior studies and instead of focusing on a single measure framework, a range of measures of corporate governance and firm's performance variables are used. Also, several alternative specifications and estimation techniques are used for analysis purposes. Furthermore, the sample also covers a large sample of manufacturing firms.

Audit committee effectiveness, audit quality and earnings management: a meta-analysis

Purpose – Many researchers, in several contexts, have investigated the influence of audit committee effectiveness and audit quality variables on reducing the extent of earnings management, and empirical evidence is rather inconsistent. Design/methodology/approach – The aim of this paper is to meta-analyze the results of 58 prior studies that examined whether differences in results are related to moderating effects associated with corporate governance mechanisms or measures of earnings management. Findings – The findings show that the meta-analysis identifies many significant relationships. The independence of the audit committee, its size, expertise and the number of meetings have a negative relationship with earnings management. Similar negative relationships exist between auditor size, specialization and earnings management. Research limitations/implications – This study contributes to the corporate governance literature. Further, recognizing the function of an audit committee and audit quality shows the value of considering an institutional setting in governance research. This study is significant to academic and practitioner literatures, policy makers and professional accounting bodies as it shows that governance reforms promote companies to adopt good governance practices. The results also give useful information to investors in examining the effect of audit committee characteristics and audit quality on earnings quality. Originality/value – This study extends existing research on audit committee and audit quality to oversee both accrual and real earnings management using meta-analysis. Thus, this study has the potential to help stakeholders, board of directors, regulators and auditors, who are related with enhancing the supervision of firms and reducing the opportunities given to managers, to engage in earnings management.

The corporate governance and financing of small-cap firms in Canada

Purpose – The purpose of this paper is to examine the interaction between corporate governance and capital structure for small publicly traded firms in Canada. Design/methodology/approach – The authors hand-collect data for all companies listed on the Canadian junior stock exchange and construct measures of corporate governance. The authors focus on a time period when the sample firms were unregulated in their governance choices. Since firms decide simultaneously on the level of corporate governance provisions and capital structure, the authors use simultaneous equation models as well as instrumental variables analysis to address endogeneity. Findings – The authors find that a strong relation exists between small-firm capital structure and corporate governance practices. Firms with low level of collateralizable assets have low leverage and chose better corporate governance provisions. All else equal, the firms with better corporate governance are more likely to issue new equity than debt. Overall the results support theories that predict a link between corporate governance and financing policy, where small-cap firms with low debt capacity incur costly shareholder protection to facilitate access to equity financing. Originality/value – The authors contribute to prior research by providing the first empirical evidence on the choice and impact of corporate governance on capital structure for junior small- and micro-cap firms.

A Direct Test of the Free Cash Flow Hypothesis: Evidence from Real Estate Transactions

This paper tests (Jensen The American Economic Review, 76, 323–329 1986) free cash flow hypothesis using data on real estate transactions. We find that firms with either higher free cash flow or higher cash reserve pay more fore real estate, which is consistent with the free cash flow hypothesis. We also find that the agency costs of free cash flow associated with real estate transactions are more severe when firms have lower Tobin’s Q. Furthermore, we find that among the commonly used corporate governance measures, only equity compensation is effective in mitigating the agency problem of free cash flow.

Corporate social responsibility and corporate cash holdings

We identify three channels and the corresponding mechanisms through which corporate social responsibility (CSR) may affect corporate cash holdings. CSR firms are expected to have relatively low cash holdings because they tend to have low idiosyncratic risk due to their higher social capital with stakeholders. CSR firms also tend to have low systematic risk due to greater loyalty from CSR investors and/or customers. Lower systematic risk may increase or decrease cash holdings. Although low systematic risk induces firms to reduce their cash holdings, it also induces firms to hold a short debt maturity structure, with higher refinancing risks that higher cash holdings may mitigate. The agency view of CSR argues that entrenched managers in a firm with strong corporate governance may use CSR activities to collude with stakeholders in order to get higher managerial discretion (including cash) to extract private benefits. However, the corporate governance role of CSR implies that CSR is also effective in reducing the agency problems associated with the cash holdings decision. Using 2364 firms with 14,206 firm-year observations over the period 1991–2011, we establish that the positive effect of CSR on cash holdings via the systematic risk channel is robust, while the effects of CSR via the other two channels are not. Our findings are robust to different estimation methods and alternative measures of cash holdings, CSR, risks and corporate governance.

Corporate governance and value creation index

This study aims to create a methodology to measure good governance and value creation with the help of an index composed of two sub-indices which corresponds to corporate governance and value creation (CGVC). The proposed index measures corporate governance quality that collapse into one number (a governance rating or index) and helps in analysing the effectiveness of corporate governance index in predicting value creation. We believe there is no one “best” measure of corporate governance, however, the most effective governance system depends on context and firm related circumstances. Thus, it is generally difficult for an index, or any one variable, to capture such nuances which may be critical for making informed decisions. Having said that, the index beautifully helps in giving a fair idea about governance practices followed by companies’ in India. The CGVC index is constituted after investigating governance practices in BSE 100 companies which accounts for nearly 66% of the market capitalisation (as of March 2014). The study investigates corporate governance practices followed by the company in terms of 11 parameters identified (based on various recommendations given by the several committees) coupled with value created for different stakeholders. The period under study (2006-07 to 2013-14) is known for several volatilities and has remained one of the key themes in the global business environment. Economic uncertainties and changing business landscape left investors unnerved. While growth in largest economies declined, it had ripple effect on emerging economies. We have followed a two-step methodology where equal weightage is assigned to both the sub-indices. For sub-indices we have followed survey methodology where we interviewed personnel including board members, entry and mid-level employees of companies, regulatory participants, and stock brokers. Lastly, the paper aims to fill the gaps and conduct a thorough review of corporate governance and its relationship with value creation for one of the fastest growing emerging markets i.e., Indian economy.

Appraisal of corporate governance in a lower middle income country: The case of Ghana

Article history: Received December 17, 2015 Received in revised format December 18, 2015 Accepted December 21 2015 Available online December 23 2015 Accountability is instrumental for ensuring that a trusting relationship exists between shareholders and management of corporations in order that there will be enhanced investor confidence. Towards this end, corporate governance measures are instituted to make the executives or management of business organizations accountable for their stewardships of the organizational resources or shareholders’ investments. It is against that backdrop that the Securities and Exchange Commission in Ghana has also developed a code on best practices on corporate governance. However, the extent to which the provisions in the code are consistent with the theoretical and empirical literature is unknown. This paper, therefore, sought to explore whether or not gaps exist between the corporate governance policy and practices in Ghana and extant literature. This paper achieves this by examining characteristics of the board as they exist in Ghana in relations to the literature. The characteristics examined in this paper include responsibilities, optimal size, independence, board composition, and audit and compensation committees of boards. Recommendations are made based on the literature to address gaps that exist.

Corporate governance impact on bank performance evidence from Europe

This paper investigates the impact of corporate governance on European bank performance during the period 2002-2011. Using a sample of 73 banks from 11 European countries, we examine the relationship between corporate governance measures more specifically the board size and composition, the gender diversity and the CEO duality on the European bank performance. During the period 2002-2011, our results show that the board size and the gender diversity have a positive and significant impact on bank performance. Large board of directors with more female members led to better bank performance, whereas, the board composition and the CEO duality have no significant effect in explaining the bank performance for the European countries. During the global financial crisis, our findings show that the board size and the board composition are negatively and significantly correlated to the bank performance. Smaller boards of directors with less number of independent (non-executive) directors have outperformed the ones with larger boards and more independent directors during the crisis. However, the gender diversity and the CEO duality have no significant impact on the European bank performance.

Is There an Optimal Board Structure? An analysis Using Evolutionary-algorithm on the FTSE Bursa Malaysia KLCI

Abstract Optimal board structure suggests a firm can operate efficiently and experiences better firm performance, given its board composition. We explore whether in-sample (pre-Global Financial Crisis) companies with optimal board—which subscribes to the corporate governance best practice—dominates the so-called non-optimal board firms, and if they remain the best companies out-of-sample (Global Financial Crisis period). Using two common measures of accounting performance—return on equity (ROE) and earnings per share (EPS)—we utilize evolutionary algorithm to optimize board compositions of CEO duality, board size and independent, non-executive directors. Out-of-sample, our results indicate that optimal board firms outperform their non-optimal counterparts in terms of the ROE and EPS, although insignificant. We argue that while board composition is a popular corporate governance measure, determining an optimal board structure for superior firm performance might be elusive.

Creditor Rights, Claims Enforcement, and Bond Returns in Mergers and Acquisitions

By means of an international sample of cross-border mergers and acquisitions (M&As) involving firms with outstanding Eurobonds from the US, Europe, and other countries around the world, we show that bond performance around M&A announcements is sensitive to cross-country differences in creditor protection and claims enforcement in a court of law. Bidder and target bonds perform significantly better when they become exposed to a jurisdiction with stronger creditor rights or with more efficient enforcement of creditor claims. These spillover effects in better creditor protection outweigh the effects of legal origin and exposure to other more general corporate governance measures such as the rule of law or better anti-director rights. The spillovers are intensified by the ability of creditors to perform insolvency arbitrage across legal systems, and are higher for longer maturity bonds, bonds issued by firms with high asset risk, and bonds issued by firms with a higher likelihood of financial distress.