Corporate Governance Measures Research Articles

Institutional Investor Monitoring Motivation and the Marginal Value of Cash

This paper examines whether the motivation of institutional investors in monitoring a firm is positively related to the relative importance of the firm’s stock in their portfolios. We find that greater motivated monitoring institutional ownership is associated with a higher marginal value of corporate cash holdings, which cannot be explained by other corporate governance measures and institution types. Further, we find that the economic effect of institutional monitoring on the marginal value of cash falls with decreasing institutions’ monitoring motivation. Based on these findings, we construct a monitoring motivation-weighted institutional ownership measure and document a positive relation between it and the marginal value of cash. Our results are robust after controlling for the endogeneity of institutional ownership, three cash regimes, firm size, and changes in US public firms over time.

The role of weighting in corporate governance ratings

This methodological paper highlights the differences and the resulting implications from the application of the three most commonly applied weighting index methods to measuring corporate governance quality at an aggregate level: the Dichotomous; the partial compliance (PC) unweighted; and the Experts’ methods. In particular, first, we demonstrate how each method is applied and provide the details needed for readers to replicate each method. Second, we employ these methods on a sample of companies and compare the corresponding scores by testing their differences statistically. Third, as an indicative example of the potential implications arising from the use of these measures, we test whether the relation between market value and corporate governance levels differs, depending on the method applied. We find that the three methods produce significantly different overall and relative (i.e., ranking order) scores and, consequently, the relation between market value and corporate governance levels differs, depending on the method applied. Thus, we contribute to the corporate governance literature by showing that weighting in corporate governance indices matters and we recommend simultaneous application of at least two methods (i.e., the PC unweighted and the Experts’ methods) for deriving robust findings.

The impact of Islamic Financial Services Board Standard No. 3 on corporate governance of listed firms in Kuwait

This paper investigates whether corporate governance standard No. 3 that has been issued by Islamic Financial Services Board (IFSB-3) has improved corporate governance structure of firms listed in the Kuwait stock market. In addition, the paper investigates whether the influence of IFSB-3 on corporate governance varies between Islamic and conventional financial institutions. We test two hypotheses using a sample of firms listed in Kuwait stock exchange over a period of 2000–2013. Ordinary least square regression and fixed effects estimation techniques are applied to test the hypotheses. The findings reveal all corporate governance measures indicate that the corporate governance has improved after the issuance of IFSB-3. The results also reveal that the improvement in corporate governance after the implementation of IFSB-3 is higher for Islamic than for conventional financial institutions. This suggests that IFAB-3 is more important for Islamic than conventional institutions. Accordingly, we conclude that corporate governance guideline (IFAB-3) has improved the corporate governance structure of firms listed in the Kuwait stock market. In this context, the study increases the awareness of standard setters, academics, investors, regulators, and many other stakeholders about the effect of IFAB-3 in the region. Finally, our study fills evident gap in the literature by investigating the influence of corporate governance guideline (IFSB-3) on corporate governance structure in a unique setting that is often ignored by accounting scholars, which helps to widen our knowledge on accounting practices across the globe.

Does investing in sound corporate governance pay? A South African study

Despite increased recognition of the importance of sound corporate governance practices in emerging markets, previous researchers reported inconclusive evidence on the association between corporate governance and financial performance. Authors that predominantly focused on board-related variables might, however, have failed to reflect the complex nature of corporate governance. The financial performance measures employed in the majority of previous studies also ignored the potential risk-reducing benefits that sound corporate governance could hold for emerging market firms. The purpose of this article was thus to investigate the relationship between a comprehensive measure of corporate governance and the risk-adjusted performance of selected South African companies. A unique corporate governance database was compiled by conducting content analysis on the considered companies’ annual reports over the period 2002 to 2010. Aspects related to nine corporate governance categories were taken into account. In addition to the accounting and market-based performance measures that were employed in previous studies, South African companies’ risk-adjusted performance was also taken into account. The capital asset pricing model and the Fama-French three-factor model were employed to estimate risk-adjusted abnormal returns for four corporate governance-sorted portfolios. Both estimations revealed that the portfolio comprising of companies with the highest corporate governance scores managed to significantly outperform the market.

The Relationship between Corporate Governance and Tax Avoidance Evidence from Germany Using a Regression Discontinuity Design

This paper analyses the relationship between corporate governance and tax avoidance. This study aims to highlight the wide-ranging effects of institutional investors, which channel into corporate policy. This analysis uses a regression discontinuity design (RDD) in a two-stage instrumental variable (IV) model and takes advantage of the exogenous variation in the index membership around the index threshold. The sample comprises the firms in the German prime standard indexes. The DAX (MDAX) index consists of the largest 30 (next-largest 50) publicly listed firms by market capitalization in Germany. This paper argues that the differences in corporate governance result from the value-weighted composition of the market capitalization-based indexes. The findings show a significant discontinuity in the level of the corporate governance characteristics at the cutoff. The largest MDAX firms show stronger corporate governance characteristics compared to the smallest DAX firms. The analysis shows that strong corporate governance characteristics drive down the effective tax rate for the DAX companies. This paper contributes to existing research by establishing a causal relationship between corporate governance and taxes. The sample consists of large listed companies and the findings may not be transferrable to small- and medium-sized enterprises. The paper is the first to analyze the relationship between corporate governance and taxes for a German sample using a RDD design. This is the only paper measuring corporate governance directly in the index setting. Different from previous research, the largest MDAX firms do not show increasing tax rates upon inclusion in the DAX, where they were the smallest firms then. Instead, lower tax rates are observed.

Performance of Indian IPOs: An Empirical Analysis

The present research study contributes to the extant literature on underpricing rather uniquely by addressing the under-researched linkage of corporate governance to underpricing. The originality of this effort also lies in being one of the initial efforts of exploring governance in context of initial public offering (IPO) underpricing in Indian settings. The study comprises an empirical analysis of 404 Indian IPOs studied for their board structures and ownership attributes using IPO prospectuses. Drawing support from the signalling theory, the variables board size and board committees exhibit a significant positive relationship to the IPO returns on the listing day. In Indian markets characterized by concentrated family-owned firms, promoter ownership does work as an effective signal for investors who take cues of firm potential from ownership patterns. Corporate governance measures have a miniscule contribution in explaining the underpricing of Indian IPOs and indicating that investors do not incorporate these as a major consideration in their investment decision.

IMPACT OF CORPORATE GOVERNANCE ON INTERNET FINANCIAL REPORTING IN A GROWING ECONOMY: THE CASE OF NIGERIA

The study aims at examining the impact of corporate governance on IFR among listed banks in Nigeria. The review of literatures reveal that IFR is one of the most efficient means of communication with investors and the practices of corporate governance by firms also influence their level of disclosures made through the internet. A quantitative research was carried out where the relationship between corporate governance variables and IFR was empirically examined. The corporate governance variables used for analyzing the impact of corporate governance on IFR include shareholders’ voting right, percentage of management ownership, percentage of block ownership and percentage of independent directors. The data on the top ten listed banks in Nigeria was collected from secondary sources from year 2010 to 2015. The findings suggest that the measures of corporate governance have significant influence on the level of IFR of banks in Nigeria, it also shows that shareholders’ voting right, percentage of independent directors and banks size have significant positive impact on the IFR of banks. The result of the regression analysis show that a negative relationship exists between managerial ownership and block ownership with IFR of Nigerian Banks. It is recommended that listed Nigerian banks should make frequent disclosures of financial information on their websites if they have high shareholder equity as source of fund in capital structure and also to attract investors and show transparency .

Research on Some Defects and Its Measures of Corporate Governance in Transnational Firm Groups of China

The aim of this paper is discuss corresponding issues on the corporate governance of Transnational Firm have a considerable effect on the development strategy and competitiveness. With the world economy becoming globalization trend, Chinese economy is growing rapidly and the international competitive market which companies participate in is prone to be complicated increasingly. This paper first tries to analysis the current status of corporate governance and the pertinent core issues in Chinese Transnational Group Enterprise, and then further discusses and studies the feasible model on corporate governance of them. The conclusion of paper is offering a specific corporate governance model which all companies can choose and follow, it is still advantageous to senior management who are exploring actively the construction of appropriate corporate governance mechanism in Chinese Transnational Firm Groups.

Cost of Tax Avoidance: Examining the Role of Product Market Structure

Examining product market structure, we show that market leaders engage in greater levels of all forms of tax planning and generate more sustainable tax positions. Importantly, examining cost of equity capital we document asymmetrical benefits to tax avoidance for market leaders in that while they participate in benefits to tax optimization, unlike the case for non-leader firms, they are shielded from additional risk premiums required for more aggressive levels and forms of tax avoidance. Realized tax risk, however, has economically meaningful effect on investors’ perception of overall firm risk regardless of market power. Moreover, we confirm the findings in Cook et al. (2015) that at low/(high) levels of tax avoidance investors outweigh benefits/(incremental risks) of tax optimization/(avoidance). Overall, our analysis validate arguments that there exists negligible ex-ante costs to tax avoidance particularly for firms with significant market power. These results are robust to linear vs non-linear modelling assumptions, returns-based models, post-FAS109 period estimates and to measures of income mobility, financial constraints and corporate governance.

The Role of Corporate Governance in Firm Performance

The objective of this study is to examine the role of corporate governance to increase firm performance. The measure of corporate governance are corporate governance mechanism and Corporate Governance Perception Index (CGPI). Samples are companies that followed CGPI award at 2005-2014. The examination of the relationship of corporate governance and firm performance is conducted by regression of corporate governance mechanism variables and control variables to profitability. Corporate governance mechanisms are board size, board independence, outside directors, audit committee size, audit committee meeting, audit quality, and CGPI. Control variables are leverage and firm size. The results of this study indicate that board independence negatively influence profitability, audit committee meeting positively influence profitability, audit quality positively influence profitability, CGPI positively influence profitability, leverage negatively influence profitability, and firm size negatively influence profitability.

Corporate Governance and Bidder Abnormal Returns in M&A

we examine how corporate governance influences long-term and short-term bidder returns from China’s domestic mergers and acquisitions during 2010-2016. This paper examines a range of corporate governance measures while controlling for bidder and deal characteristics. Our long-term regression analyses show that the positive impact of executive ownership remains. Independent directors record a negative effect on abnormal returns.)

Board Characteristics, Audit Committee and Ownership Structure Influence on Firm Performance of Manufacturing Firms in India

The study investigates the relationship and impact of corporate governance measures such as board characteristics, audit committee and Ownership Structure on the financial performance of the selected manufacturing firms listed in Bombay Stock Exchange (BSE). The study empirical in nature and applies panel data regression analysis to a sample of 357 manufacturing firms listed in BSE during the period 2006-2015. The study found that board size is positively and significantly linked to both the financial performance measures, i.e. Return on assets (ROA) and Return on Equity (ROE) but the negative and insignificant impact in case of Tobin’s Q. Audit committee independence is significant and negatively affected by ROE. The same promoters' shareholding is negatively and significantly related to all the financial measures and there is an insignificant negative relationship between institutional shareholding and both financial performance measures (Tobin’s Q and ROA). The study implies that to improve the performance and accordingly the value of firms, the percentage of promoters' ownership should be decreased as it has positive linkages with the financial performance. The board members have potential knowledge and expertise in the field should be increased as it has aligned with accounting based financial performance. Further, it will help the investors to pay special attention to the corporate governance, audit committee and type of ownership of firms while making the investments.

The Impact of Corporate Governance on Firm Performance in Commercial Banks of Bangladesh

In the era of globalization and MNCs, the issue of governance has become the central of corporate culture which works as a key influential factor in global capitalism. Corporate governance (CG) is defined as a system of rules, practices and processes by which a company is directed and controlled. The main objective of this study is to explore the impact of corporate governance on firm performance in Bangladesh. Research on CG primarily investigated different CG principles. The study incorporates four CG principles such as rights of shareholders, role of stakeholders in CG, Disclosure and transparency and the responsibilities of board directors based on the Organization of Economic Cooperation and Development (OECD) Principles and Bangladesh Bank (BB) revised principles of Corporate Governance. The firm performance was assessed by measuring financial performance based on return on assets (ROA). Data were obtained from 22 listed banks on the Dhaka Stock Exchange (DSE) to measure corporate governance principles and firm performance. Subjective data was collected from the top management of the respected banks. The companies with 10 years operational background were selected randomly for this study. The data were analyzed using different statistical tools by the help of STATA. The result of the statistical analysis shows the effects of corporate governance concept, CG principles, obstacles that affect CG and enablers that affect CG, on firm performance. This study further supports the argument that when firm implement good corporate governance principles, it experiences improved firm performance, i.e., financial performance. This study, with its emphasis on developing a corporate governance model, makes a significant contribution to the body of knowledge on corporate governance in emerging economies like Bangladesh. 

What is the Relation (if any) Between a Firm’s Corporate Governance Arrangements and its Financial Performance?

We present a model to test the null hypothesis that firms organize their corporate governance arrangements optimally given the constraints they face. Following the literature, the model rejects the null if the conditional correlation between governance and performance is significantly different from zero. Our model provides a clean test of this hypothesis by controlling for measurement errors in all observed variables and avoiding simultaneous equation biases by casting our model as a reduced-form bivariate equation. We model governance, performance and the constraints on the firm’s investment decisions as latent variables. We estimate of the conditional correlation between our measures of corporate governance and firm financial performance to be statistically speaking equal to zero. This result therefore provides empirical support for the in-equilibrium view of corporate governance arrangements.

Corporate governance and corporate performance: financial crisis (2008)

Purpose This paper aims to investigate the impact of corporate governance, as measured by the Corporate Governance Index, on firm performance and dividend payouts during the financial crisis of 2008. Design/methodology/approach The empirical approach followed in the study involved constructing a comprehensive measure of corporate governance for 298 non-financial companies listed on the Warsaw Stock Exchange in the years 2006-2010. Findings The results show that prior to the crisis, there was a positive association between corporate governance and performance as measured by Tobin’s q. Moreover, the study presents evidence that higher corporate governance leads to an increase in cash dividends. Amid the financial crisis, corporate governance was positively associated with a higher return on assets, yet this was not observed when measured by Tobin’s q. Additionally, during this period, better-governed companies paid dividends less generously than firms with lower corporate governance standards did. Originality/value The study provides new evidence on the impact of corporate governance on firm performance and valuation in an emerging market during the financial crisis. Moreover, the study shows that governance mechanisms operate differently in crisis and non-crisis periods.

Corporate governance practices, self-dealings, and firm performance: Evidence from India

This paper investigates the effects of firm-level corporate governance practices on firm performance for publicly traded Indian firms where founder ownership is concentrated. We develop a comprehensive measure of corporate governance and show that corporate governance is positively associated with firm performance. This relationship becomes stronger when founder ownership is high. We next focus on the specific channel through which governance improves firm performance, namely self-dealing by controlling owners. We find that better governance mitigates self-dealing by controlling owners and thereby improves future firm performance. Overall, our study substantiates the key relationship between the quality of corporate governance and firm performance in the presence of founder ownership.

Editorial

This issue presents a forum on corporate governance and earnings quality. Corporate governance received worldwide attention following colossal corporate collapses around 2001. Subsequently, many countries around the world issued both hard and soft regulations. Regulators around the world not only issued “comply or explain” type governance codes but also enacted new legislation with the aim to protect investors. Naturally, researchers are interested to investigate whether the various corporate governance measures, whether legislated or not, mitigate agency costs in any way.

The Effect of Cross‐Border Mergers and Acquisitions on Earnings Quality: Evidence from China

Despite the fruitful research on the motives and outcomes of cross‐border mergers and acquisitions (M&As) of Chinese multinational corporations (MNCs), there has been scant research on the impact of cross‐border M&As on corporate governance. In this article, we fill the research gap by exploring whether cross‐border M&As may lead to an improvement in corporate governance of Chinese acquirers. In particular, we examine the impact of cross‐border M&As on earnings quality of Chinese MNCs. We find that the acquisition of a target firm from a developed country leads to a significant improvement on the acquirer's earnings quality. In comparison, the acquisition of a target from an emerging market does not have such an impact. Our results are robust to various corporate governance measures, alternative econometric methods, and controls of relevant firm characteristics and macroeconomic variables. Finally, we show that the effect of cross‐border M&As on earnings quality is more pronounced in non‐state‐owned enterprises (non‐SOEs) that have conducted large M&A deals. Our article offers new insight to the international business literature on latecomer perspective and liability of foreignness. © 2016 Wiley Periodicals, Inc.

Does good corporate governance constrain cash flow manipulation? Evidence from India

PurposeThe purpose of this paper is to examine whether firm-level corporate governance measures and regulatory reforms constrain manipulation of operating cash flows, an important firm performance indicator.Design/methodology/approachThe sample comprises firms from an emerging market, India, with data from 2005 to 2011. The authors use the methodology given in the paper by Lee (2012) and multiple regressions.FindingsThe authors find that cash flow manipulation is likely to increase with an increase in the controlling ownership. Furthermore, board diligence and better audit fail to curb such manipulation. However, the authors do find that such manipulation has gone down in the recent years, and diligent boards constrain it, possibly due to the recent steps taken by the Indian Government for improving the corporate governance environment in India.Practical implicationsThe findings can act as feedback for the regulators and policy makers. Potential investors and analysts may also benefit from the study, since they can be more vigilant about the firms’ cash flow manipulation practices and can demand better governance.Originality/valueThe findings suggest that good corporate governance makes managers substitute earnings management with cash flow manipulation.

The governance-performance relationship: evidence from Ghana

PurposeThe purpose of this paper is to investigate the impact corporate governance, measured by a governance index, on the performance of listed firms in a developing economy, Ghana. It also evaluates the effect of the introduction of a code of corporate governance on compliance rates across Ghanaian firms as well as assessing the impact of the code’s introduction on firm performance for the study period 2000-2009.Design/methodology/approachThe paper develops a Ghanaian corporate governance index (GCGI) containing 33 provisions to measure corporate governance quality during the pre-code and the post-code sub-periods. The authors use a panel data analytical framework and fixed effects regressions to analyse the governance-performance relationships.FindingsAfter controlling for endogeneity, the authors find a statistically significant and positive relationship between the GCGI and firm performance. The analysis shows evidence of a statistically significant increase in the degree of compliance with the Ghanaian Code from the pre-2003 sub-period to the post-2003 sub-period. The authors also find that the introduction of the code has led to improved firm performance. However, not all elements of corporate governance appear to have a significant effect on firm performance.Research limitations/implicationsOne limitation of this study is the development of a corporate governance index. The binary coding used to construct the GCGI may not reflect the relative importance of the different corporate governance provisions. This means that all elements included in the index are given equal weighting. Future research may assign weights to each of the corporate governance provisions but this may have the disadvantage of making subjective judgements relative to the importance of each corporate governance provision recommended by the Ghanaian Code.Practical implicationsThese results have important implications for both policy makers and companies. For policy makers, it is encouraging for the development of a code of corporate governance to regulate firms rather than enforcing rigid laws that may not be value relevant. For companies, the improvement in compliance with a code of corporate governance can provide a means of achieving improved performance.Originality/valueThis paper adds to the limited evidence on the governance-performance relationship in developing economies and in particular it analyses the role of a governance index. It is also the first paper to compare the pre- and the post-code governance index-performance relationship in an African or developing country.