Corporate Governance Mechanisms Research Articles

Corporate governance for sustainable development: A study on mechanism configuration

There is a dearth of configuration analysis on the factors that constitute corporate governance mechanisms within the framework of corporate sustainable goals in existing literature. Specifically, the impact mechanisms related to various combined mechanisms have not been comprehensively defined. This study employs Qualitative Comparative Analysis (QCA) approach to explore the effects of various configurations of corporate governance mechanisms on sustainable development, based on a sample of 2959 Chinese listed companies. Our analysis identifies four distinct pathways that facilitate the achievement of sustainable development goals: 1) enlarging board size, providing managerial incentives, establishing sustainability committees, and enhancing corporate transparency; 2) promoting board diversity, providing managerial incentives, establishing sustainability committees, and enhancing corporate transparency; 3) reducing ownership concentration, providing managerial incentives, establishing sustainability committees, and enhancing corporate transparency; 4) encouraging individual investment, providing managerial incentives, establishing sustainability committees, and enhancing corporate transparency. Additionally, a comparative analysis of different pathways has revealed substitutional relationships between board size and diversity, ownership concentration and investor structure, while highlighting the complementary relationship of managerial incentives, sustainability committees, and corporate transparency. Challenging the erstwhile linear research paradigm, this study contributes to understanding the pathways for achieving sustainable development goals from a configurational perspective and elucidates the relationships between corporate governance mechanisms. It offers novel and comprehensive evidence for examining the intricate nexus between corporate governance mechanisms and sustainable development. Keywords: Stakeholder theory; Sustainable development; Corporate governance mechanisms; Mechanism configurations; fuzzy-set Qualitative Comparative Analysis (fsQCA).

Nexus between boardroom independence and firm financial performance: evidence from South Asian emerging market

This study empirically investigates the linkage between boardroom independence and the financial performance of non-financial firms in an emerging market featured by family-controlled businesses and concentrated ownership. The relationship is tested in a sample of 152 non-financial firms listed on the Pakistan Stock Exchange over a period from 2003 to 2018. Firms’ financial performance is measured through return on assets (ROA), return on equity (ROE), market-to-book ratio (MBR), and Tobin’s Q (TQ), while boardroom independence is measured through the proportion of non-executive directors on the corporate board. Using the dynamic GMM approach to address the possibility of endogeneity, it was found that boardroom independence is significantly negatively related to the financial performance of the sample firms. This negative impact is due to the reason of close ties of outside independent directors (non-executive directors) with dominant shareholders and management in personal, financial, and social terms. A significant negative influence of the board size and CEO duality on firms’ financial performance was also observed. The present study will add to the existing literature on corporate governance and firm financial performance using firm-level manually collected data. Further, our findings will also help the policymakers by providing empirical insights for strengthening corporate governance mechanisms in emerging market economies, specifically in the context of Pakistan.

The impact of corporate governance and state ownership on the default probabilities of Chinese firms

This study investigates the impact of state ownership and corporate governance mechanisms on the default risk in China since the sanctioning of default of state-owned firms in 2014. We find a positive relationship between inside ownership and default risk for both state-owned and non-state-owned firms. Institutional ownership serves as a monitoring mechanism that reduces default risk, irrespective of state ownership. Non-state-owned firms with CEO duality have higher default probabilities. Larger boards and more independent boards reduce the default probabilities of state-owned firms. Pandemic effects are less severe for state-owned firms.

Foreign Institutional Ownership and Earnings Management

This study investigates the relationship between foreign institutional ownership (FIO) and earnings management (EM) using 552 firms of non-financial sector companies that publish annual financial reports for 2015–2021. We use ordinary least squares (OLS) for equation estimation. The results show that, overall, FIO has a negative impact on earnings management. Tests were also conducted on the FIO group: banks, insurance, pension fund mutual funds, and securities companies. The test results indicate that each group of institutional investors has a negative effect except for securities companies, which positively impact earnings management. The positive influence of securities firms shows that securities firms are more focused on trading strategies than managerial controls. The findings of this study are expected to contribute to the corporate governance literature and the quality of financial reporting. Institutional ownership as a corporate governance mechanism is expected to control earnings management which can reduce the quality of financial reporting. Keywords: institutional ownership, earnings management, agency theory

Does News Media Affect Firm Innovation in Emerging Markets? Evidence from China

We examine whether and how news coverage affects innovation using an extensive collection of more than 188,000 firm‐specific press articles written by journalists from the most influential Chinese newspapers. We find that news coverage has a positive impact on firm innovation outputs. This positive effect is more pronounced for firms with weak internal governance and external monitoring, opaque corporate disclosure, high R&D intensity, and limited access to financing for innovation, for news articles that are related to innovation and corporate governance, and for news articles that are issued by news media that are subject to less political intervention and by socially unconnected news media. Our analysis of firm innovation strategies shows that the increased innovation outputs are a result of an increase in in‐house R&D investment and innovation efficiency, rather than acquisition of innovation from external channels that can quickly increase quantifiable innovation outputs. We also find that news coverage reduces analyst earnings forecast dispersion and insiders’ tunnelling of corporate resources and managerial perks, while increasing firms’ investor base. Overall, our research provides new insights into the role of the news media in firm innovation in an emerging market, especially when firms have a poor information environment and corporate governance mechanisms, and when news coverage has high informativeness and independence.

The value effect of sustainability: evidence from Latin American ESG bond market

ABSTRACT We use the event study methodology to examine the effect of 115 environmental, social, and governance (ESG) bond issuances on the stock price of Latin American listed firms over the period 2016–2022. Consistent with the signaling theory, firms sending a signal of commitment to sustainability obtain a positive and significant average Cumulative Abnormal Return (CAR) of 1.97% during an event window of 18 days. The CAR is higher for first-time issuers, reaching 2.28%. Firms with smaller and more diverse boards are associated with higher CARs. However, ownership concentration reduces the CARs due to the potential misbehavior and expropriation risk from controlling shareholders. These results suggest that firm-level corporate governance mechanisms are critical to the ESG bonds signaling effect. Overall, our findings indicate that investors in Latin American capital markets positively value the reduction of information asymmetries regarding firms’ sustainability efforts, especially in a firm that mitigates potential agency conflicts.

Interlocking directorships and firm performance: the role of board diversity

PurposeThis study aims to examine the impact of interlocking directorships on firm performance in Turkey, with a specific focus on the moderating role of board diversity.Design/methodology/approachUsing a panel dataset comprising the top 100 firms listed on Borsa Istanbul from 2014 to 2018, this study employs regression analysis to investigate the relationship between interlocking directorships, board diversity, and firm performance. It firm-level financial data and directorship information to assess the effects of interlocking directorships on firm performance while also considering the moderating influence of board diversity.FindingsThe findings of this study reveal several important insights. First, the results confirm the “busyness hypothesis” as an increase in the number of interlocks per director negatively impacts firm performance, indicating reduced monitoring effectiveness. However, the study also demonstrates that board diversity plays a significant moderating role. Specifically, board diversity positively influences the relationship between interlocking directorships and firm performance, suggesting that a diverse board can mitigate the negative effects of interlocks and enhance overall firm performance.Originality/valueThis study contributes to the existing literature in several ways. First, this study extends our understanding of the relationship between interlocking directorships and firm performance, considering contingency factors in the Turkish market. Second, our findings imply that board diversity mitigates the negative impact of busy interlocking directorates and improves firm performance, which provides invaluable directions to firms in setting their boards. Moreover, this research enhances corporate governance practices in Turkey and beyond in other emerging markets with similar corporate governance mechanisms by identifying the importance of board diversity and its moderating influence.

Does corporate governance influence environmental, social and governance disclosure practices of state‐owned enterprises? An international study

AbstractThis paper provides fresh insights into the impact of corporate governance mechanisms on environmental, social and governance (ESG) disclosure practices of state‐owned enterprises (SOEs). To accomplish this study's research objective, we collected ESG and corporate governance data from Refinitiv Eikon's database on a balanced sample of 253 SOEs from 37 worldwide countries over 5 years (2018–2022), obtaining a total of 1265 observations. A battery of fixed and random effects panel regression models has been estimated to test the impact of board characteristics, like board size, board independence, board gender diversity, number of board meetings, Chief Executive Officer (CEO) duality and the presence of a corporate social responsibility (CSR) committee, on overall and individual ESG disclosure scores of sampled SOEs. Results show that while board size and CEO duality negatively affect SOE ESG disclosure, board independence and gender diversity, as well as the number of board meetings and the existence of a CSR committee, exert a positive influence.

Innovation capital disclosure and independent directors: evidence from France

AbstractThis study aims to understand whether corporate governance mechanisms affect innovation capital disclosure (ICD) provided voluntarily on corporate websites by SBF 120 listed firms in France. The study tests multivariate models using pooled OLS, random effects, and generalized method of moments models. Firms use ICD as a useful, timely communication tool to highlight their innovation efforts. Our findings suggest that independent non-executive directors (INEDs) exhibit a conservative approach to the nature of innovation that requires extensive investigations with risky outcomes. They support discretion by limiting the extent of publicly disclosed information about research and development (R&D) progress, technological advances, and innovation output to protect the firms’ intellectual proprietary. INEDs seem to balance preserving firms’ competitive advantage and ensuring higher transparency levels to satisfy stakeholders’ needs. Additionally, board tenure moderates the relationship between INEDs and ICD. This study underscores the importance of the financial reporting of information about innovation capital that captures firms’ innovation capacities in a knowledge-based economy. It provides significant insights for management, policy-makers, and regulators who are involved in refining corporate reporting policies. This study is the first to examine the incentives of INEDs in influencing reporting practices related to a firm’s innovation investments, particularly in high-technology firms.

Cross‐ownership and corporate ESG investment: Promotion or suppression?

AbstractEnvironmental, social, and governance (ESG) investing is the new mainstream of sustainable development in the “dual‐carbon” era and serves as a crucial indicator for assessing enterprises' high‐quality development. Cross‐ownership, as an important participant in the capital market, significantly influences corporate business decisions. However, whether the impact of cross‐ownership on corporate ESG investment manifests as a synergistic governance effect or competitive collusion effect is a vital question. This study empirically investigates the impact of cross‐ownership on ESG investment, using listed companies in heavily polluting industries from the Shanghai and Shenzhen A‐shares between 2015 and 2022 as the research sample. The findings reveal that cross‐ownership positively influences corporate ESG investment by reducing information asymmetry, alleviating financing constraints, and enhancing corporate governance. This research not only expands the theoretical understanding of cross‐ownership and corporate ESG investment but also offers empirical guidance for improving corporate governance mechanisms and attaining sustainable development.

Determinants of corporate environmental performance and the moderating effect of economic crises

PurposeThis paper aims to identify the effect of environmental management systems (EMSs), commitment to stakeholders and gender diversity on corporate environmental performance (CEP) and the extent to which an economic crisis moderates these relationships.Design/methodology/approachA regression analysis was conducted on a sample of 14,217 observations from 1,933 firms from 26 countries from 2002 to 2010. The estimator used is ordinary least squares with heteroscedastic panel-corrected standard errors (PCSEs), which allows us to obtain consistent results in the presence of heteroscedasticity and autocorrelation.FindingsThe results show that EMSs and stakeholder engagement are mechanisms that drive CEP but lose their effectiveness in times of crisis. However, the presence of women on boards has a positive effect on CEP that is not affected by an economic crisis.Research limitations/implicationsThe study has some limitations that could be addressed in the future. We present board gender diversity as a governance mechanism because its role is strongly related to non-financial performance. Future studies could focus on other corporate governance mechanisms, such as the presence of institutional or long-term investors. In addition, other mechanisms could be found that can counteract poor environmental performance in times of crisis. Finally, it might be useful to contrast these results with the crisis generated by the coronavirus pandemic.Practical implicationsThe results obtained have important practical implications at the corporate and institutional levels. At the corporate level, they highlight, as essential contributions, that environmental management systems and stakeholder orientation are not effective in times of economic crisis, except for with the presence of women on the board.Social implicationsFollowing the crisis, the European Commission has promoted gender diversity on boards as a mechanism to improve the governance of entities – improving, among other aspects, sustainability. In this sense, another one of the practical implications of the study is support for the policies that the European Union has implemented over the last two decades.Originality/valueThe paper analyses how a crisis affects the moral and cultural institutional mechanisms that promote CEP. Gender diversity on the board of directors not only promotes environmental performance but also appears to be a governance mechanism that ensures this performance in times of crisis when the other mechanisms lose their effectiveness. The study proposes specific policies that help maintain environmental performance in an economic crisis.

A proposed multidimensional model for predicting financial distress: an empirical study on Egyptian listed firms

Although there has been a growing interest by researchers worldwide over the past decades to identify the factors pertaining to corporate financial distress and to develop financial distress prediction models that serve as early warning signs to the various firm stakeholders, notably to date, studies that were conducted were context specific and cannot be objectively generalized to other countries and rendered mixed inconclusive results. Therefore, the main objective of this study is to thoroughly investigate the factors that affect corporate financial distress in Egypt and to develop a multidimensional financial distress prediction model. Using comprehensive data of EGX100 listed firms, the researcher examines the role played by financial ratios, market-based indicators, macroeconomic factors, and corporate governance mechanisms in modeling corporate financial distress. Empirical results indicate that after controlling for the COVID-19 effects, the most significant financial ratios in predicting corporate financial distress are the working capital to total assets ratio, earnings before interest and taxes to total assets ratio, and the sales to total assets ratio. Such ratios are negatively related to the likelihood of corporate financial distress. However, the market value of equity to total liabilities ratio, and GDP growth rate have a positive impact on the likelihood of financial distress. However, the retained earnings to total assets ratio, the corporate governance mechanisms, the firm market capitalization, the interest rate, and the consumer price index are insignificant in predicting corporate financial distress in the Egyptian context. The resulting model demonstrates outstanding classification accuracy at around 96%.

How to deter earnings manipulation in Chinese banks? A study from the combined effects of corporate governance, enterprise resources, and supervisory mechanisms

AbstractThe study proposes methods for deterring earnings manipulation in Chinese commercial banks, recognizing it as an ongoing problem with the potential to destabilize investors and financial markets. The increasing integration of the global financial system has heightened the importance of addressing this issue, given the systemic risk posed by large individual financial institutions. Utilizing the Fuzzy Set Qualitative Comparative Analysis method (fsQCA) on 139 Chinese commercial banks in 2021, the paper explores factors influencing banks' earnings manipulation behavior. The study reveals several key findings: (1) Factors associated with reducing the likelihood of earnings manipulation in commercial banks are diverse and multifaceted. (2) Multiple paths exist to achieve earnings manipulation, categorized into Resource‐guided, Corporate Governance, Resource and Supervisory Mechanism, Supervisory Mechanism, and Corporate Governance as the main mechanism. Among these, the Supervisory Mechanism exhibits the highest consistency. (3) Hiring “Big Four” accounting firms as auditors emerges as a significant deterrent against earnings manipulation in commercial banks. (4) Banks with powerful major shareholders affiliated with the government or ample resources are effective in deterring earnings manipulation. These two factors are complementary, while a bank's growth prospects and industrial competition serve as substitute factors.

The Influence of Corporate Governance Mechanisms on Fraud Probability: Evidence from Russian Companies

This study examines the impact of corporate governance mechanisms on the probability of corporate fraud occurrence. We evaluate the board size, the degree of independence, and the frequency of meetings of the board and its committees. We also attempt to analyse the board’s gender diversity, but since boards are not gender-diverse in Russia, the significance of this variable cannot be tested. Our empirical study is based on 160 observations of MOEX-listed Russian companies, among which fraudulent behaviour has been revealed in 32 companies over a 5-year period from 2014 to 2018. The relationship between the probability of fraud occurrence and corporate governance was investigated employing a logit model. The data was collected from firms’ annual reports and Thomson Reuters Eikon. Data on fraud cases is based on the evidence from the press (including the leading news sources and specialised websites). We detected a significant negative relationship between nomination and remuneration committee chairmen’s independence, the share of independent directors, the independence of board and audit committee chairmen and the likelihood of fraud. We also discovered the insignificant influence of board and its committees’ size and their meetings’ frequency on fraud probability. This paper contributes to the academic research on the relationship between corporate governance mechanisms and probability of fraud occurrence, emphasizing the special role of the establishment of nomination and remuneration committee chairman independence in Russian companies.

Governance mediation in the era of disruptive technologies: unveiling new perspectives on the risk of material misstatements

Purpose This study aims to examine the mediating effects of corporate governance mechanisms like the board of directors on the association between disruptive technology adoption by audit clients and the risk of material misstatements, including inherent risk and control risk. In particular, the authors study the mediating effects of board characteristics such as board size, independence and gender diversity. Design/methodology/approach Based on a sample of 100 audit clients listed on the FTSE 100 from 2015 to 2021, this study uses structural equation modelling to test the research objectives. Findings The findings indicate a significant and negative association between disruptive technology adoption by audit clients and inherent risk. However, there is no significant evidence observed for control risk. The utilisation of disruptive technology by the audit client has a significant impact on the board characteristics, resulting in an increase in board size, greater independence and gender diversity. The authors also find strong evidence that board independence mediates the association between disruptive technology usage and both inherent risk and control risk. In addition, board size and gender exhibit distinct and differential mediating effects on the association and across the two types of risks. Research limitations/implications The study reveals that the significant role of using disruptive technology by audit clients in reducing the risk of material misstatements is closely associated with the board of directors, which makes audit clients place greater emphasis on the construction of effective corporate governance. Practical implications This study offers essential primary evidence that can assist policymakers and standard setters in formulating guidance and recommendations for board size, independence and gender quotas, ensuring the enhancement of effective governance and supporting the future of audit within the next generation of digital services. Social implications With respect to relevant stakeholders, it is imperative for audit clients to recognise that corporate governance represents a fundamental means of addressing the ramifications of applying disruptive technology, particularly as they pertain to inherent and control risks within the audit client. Originality/value This study contributes to the existing literature by investigating the joint impact of corporate governance and the utilisation of disruptive technology by audit clients on inherent risk and control risk, which has not been investigated by previous research.

Corporate Governance Mechanisms and Financial Performance: An Analysis of Listed Companies in Brazil

Purpose: The aim of the study was to investigate the corporate governance mechanisms and financial performance: an analysis of listed companies in Brazil.
 Methodology: This study adopted a desk methodology. A desk study research design is commonly known as secondary data collection. This is basically collecting data from existing resources preferably because of its low cost advantage as compared to a field research. Our current study looked into already published studies and reports as the data was easily accessed through online journals and libraries.
 Findings: The analysis of listed companies in Brazil found that strong corporate governance practices are associated with improved financial performance. Factors such as board independence, transparency, and shareholder rights positively influence profitability, liquidity, and market valuation. This highlights the vital role of effective corporate governance mechanisms in fostering investor confidence and driving sustainable financial success in Brazil.
 Unique Contribution to Theory, Practice and Policy: Agency theory, stakeholder theory & resource dependency theory may be used to anchor future studies on the corporate governance mechanisms and financial performance: an analysis of listed companies in Brazil. By emphasizing the pivotal role of board independence, transparency, and shareholder engagement, the study provides tangible guidance on governance practices that can be effectively implemented to bolster financial performance. Policymakers tasked with overseeing the corporate governance landscape in Brazil

Effects of Audit Committee on Fraudulent Financial Reporting Among Listed Firms in Kenya.

Fraudulent financial reporting poses significant risks to the integrity of financial markets, investor confidence, and the overall economy. As a result, effective corporate governance mechanisms are crucial in mitigating the occurrence of fraudulent activities. The audit committee, as a key component of corporate governance, plays a vital role in overseeing financial reporting and providing assurance on the reliability of financial statements. This paper aims to explore the effects of audit committee characteristics on fraudulent financial reporting of listed firms in Kenya. Specifically, the study assessed the effect of Audit Committee; gender, financial expertise, size and independence on fraudulent financial reporting. The study was anchored on the Fraud Pentagon theory. Explanatory research design and longitudinal research design was employed in this study where secondary panel data was obtained through content analysis from audited financial statements spanning from 2012 to 2021. The study targeted listed firms in Kenya during the study period and only firms that met the inclusion and exclusion criteria were retained. After applying the inclusion/exclusion criteria only 40 firms formed the study population. Data was analyzed using descriptive and inferential statistics with the significance of each independent variable being tested at 95% confidence level. The findings show that Gender (β1 = -.1154, p=.000.05) and Financial expertise (β2 = -.200, p=.000.05), Size (β3 = -.1457, p=.001.05), and Independence (β4 = -.1818, p=.000.05) had negative and significant effect on fraudulent financial reporting on firms in Kenya. Thus, the study concluded that audit committee characteristics such as gender variability, audit committee size, audit committee financial expertise and audit committee independence significantly influence fraudulent financial reported among listed firms in Kenya. Based on the findings, the study recommends enhancing the effectiveness of the audit committee in preventing fraudulent financial reporting, organizations should strive for gender diversity within the committee. This can be achieved by actively seeking and appointing qualified female candidates to the audit committee. Promoting diversity ensures a range of perspectives and experiences, leading to more robust discussions, increased scrutiny of financial reporting practices, and improved decision-making. Secondly, Organizations should prioritize the independence of the audit committee by ensuring that committee members are free from any conflicts of interest and have no direct ties to management. Additionally, Organizations should carefully consider the size of the audit committee to optimize its effectiveness in addressing fraudulent financial reporting. Lastly, Organizations should establish mechanisms for continuous monitoring and evaluation of the audit committee's performance. Regular assessments of the committee's effectiveness in detecting and preventing fraudulent financial reporting can help identify areas for improvement.

The Impact of The Computerized Accounting Information System in Reducing Financial Risks in Jordanian Commercial Banks

Purpose: The purpose of this study was to assess the impact of computerized accounting information systems (CAIS) on reducing financial risks within Jordanian commercial banks listed on the Amman Stock Exchange. This involved examining the components, characteristics, and benefits of CAIS in this context.   Methods: The study employed a questionnaire-based approach to gather information, distributing 75 questionnaires among financial managers and internal auditors within Jordanian commercial banks. A total of 64 questionnaires were retrieved and analyzed to draw conclusions.   Results and Discussion: The analysis revealed a significant impact of various variables related to computerized information systems in mitigating financial risks within the sampled banks. This finding underscores the importance of CAIS in enhancing risk management practices within the banking sector. Notably, the study highlights the necessity of corporate governance implementation and the preparation of specialized reports to enhance financial risk disclosure processes.   Implications of the Research: The findings of this research have several implications for both academia and practice. Firstly, they emphasize the crucial role of CAIS in reducing financial risks within commercial banks. Secondly, they underscore the importance of implementing robust corporate governance mechanisms to strengthen risk management frameworks. Additionally, the study suggests the need for further research to explore the impact of accounting information systems on different types of risks and their consequent effects on financial performance.   Originality/Value: This study contributes to the existing literature by providing insights into the specific context of Jordanian commercial banks and their utilization of CAIS for managing financial risks. By identifying the components, characteristics, and benefits of CAIS in this setting, the research adds valuable knowledge to the field of accounting and finance. Moreover, its recommendations for enhanced corporate governance practices and specialized reporting can inform practical strategies for risk management in banking institutions.

ESG Reporting as a Corporate Governance Mechanism. The Case of Publicly Listed Energy Companies

ESG Reporting as a Corporate Governance Mechanism. The Case of Publicly Listed Energy Companies

Women on Board and ESG Performance: Insights from the Italian Utilities Sector

The purpose of this paper is to investigate the relationship between gender diversity and environmental, social and governance (ESG) performance in the Italian utilities sector. The study examines whether the presence of women on the board of directors (BoD) is related to ESG dimensions. We analyzed a sample of 482 utility companies for the period 2018-2022 and we developed an econometric model applying unbalanced panel regression data with firm fixed effects and controls per year. Within a multivariate regression model, the authors considered the ESG score provided by Refinitiv Eikon to test the research hypotheses. Findings show that the presence of women on board of directors improves ESG performance when a critical mass of female board members (at least three) is reached. A critical threshold of female directors also positively influences the scoring of environmental and social pillars. From a managerial perspective this study draws attention to BoD composition encouraging utility companies to define internal corporate governance mechanisms thoroughly. The overall findings support managers, policy makers and regulators on how to improve ESG performance through gender diversity on BoD. This paper offers an in-depth examination of the ESG practices of utility firms, and it attempts to bridge the gap in prior literature on the determinants of ESG performance in the Italian utilities sector. This study is the first that investigates the relationship between board gender diversity and ESG performance in such a context exploring how a critical mass of women on BoD affects ESG dimensions.