Country-level Governance Research Articles

Corporate Social Responsibility and Country Governance: An International Comparative Study Amid the COVID-19 Pandemic

This paper assesses the association of ESG scores with stock returns and highlights the moderating role of the COVID-19 pandemic and the country’s governance. The study uses panel data regression models to assess the relationship between ESG factors and stock returns, focusing on the moderating role of country governance and the COVID-19 pandemic. The results reveal that governance quality significantly enhances the positive effects of ESG practices on returns, particularly during times of crisis. These suggest that higher overall ESG scores are related positively to financial performance, and this relation is enhanced during the COVID-19 pandemic. Specifically, the two dimensions of ESG that matter most are environmental and governance. Country-level governance is important because firms in well-governed countries amplify the benefits of high ESG scores. The opposite is true for the higher controversies scores, whose bad financial outcome is magnified during the pandemic. These results present an argument for the resilience of firm financial performance, dependent on strong ESG practices and governance frameworks. This holds great interest for investors and policymakers in associating good ESG considerations with the effective management of financial risks, leading to sustainable returns during periods of widespread economic uncertainty.

Impact of firm characteristics and country-level governance on global energy stocks during crises

Two successive crises have raised the need to understand the dynamics of the global energy sector during these crises. This study examines the effects of the Russia-Ukraine War (RUW) and the COVID-19 pandemic on the energy sector across developed and emerging markets. Additionally, it examines the role of firm- and country-specific variables in stimulating energy stocks. We employ a rigorous event study methodology to analyse data from 387 firms spanning 44 countries and reveal that the RUW exerted a more significant global impact on the energy sector compared to the pandemic, both before and after the event day. Notably, emerging markets displayed early reactions before the global announcement of the COVID-19 pandemic. Remarkably, the American markets were hardest hit by the pandemic, while Asia and the Pacific, Europe, and the Middle East and Africa fared relatively better. Intriguingly, our cross-sectional analysis demonstrates that firm-specific characteristics (leverage and firm size) and the country-level governance variable, corruption control, influenced market performance during these events. Conversely, country-level development variables demonstrated minimal impact. This study enhances the understanding of how global crises uniquely impact the global energy sector. It also demonstrates how country-level governance variables could influence stock market returns.

Impact of Firm-Specific and Macroeconomic Determinants on Environmental Expenditures: Empirical Evidence from Manufacturing Firms

This research aims to examine the association between firm-specific and macroeconomic determinants and environmental expenditures in the Indian manufacturing sector. Furthermore, it seeks to investigate the moderation effect of country-level governance and economic development on the association between macroeconomic, firm-specific, and environmental expenditures. The current study is based on 70 manufacturing firms for the period of 2011 to 2021. The dependent variable is environmental expenditures and the independent variables are firm-specific and microeconomic determinants. The results revealed that market capitalization and firm size have a positive and significant impact on environmental expenditures. On the other hand, inflation and the rule of law negatively and significantly affect environmental expenditures. Regarding the moderation effect, the results revealed that the rule of law and GDP positively moderate the association between inflation and environmental expenditures. Hence, this research has significant implications for corporate executives, financial experts, regulators, and other interested parties.

How does ownership of insiders and institutions affect future value? Influence of country-level governance

How does ownership of insiders and institutions affect future value? Influence of country-level governance

The Influence of Corporate and Country-Level Governance on Firm Payout Policies: A Summary of Worldwide Market

Since the pandemic in 2020, many firms paused or reduced their dividend payout as shifting to a defense strategy. However, the total dividends payout in the second quarter of 2022 by S&P500 firms is 11.8% more than that in the period of 2021 and share buyback spending is 11.7% higher. Thus, the companys payout policy is still a significant concern for investors. This research summarizes several findings on the interaction of payout policy with corporate governance and with country-level governance and discusses the dependence between these two factors. This research finds that country-level governance is positively related to a firms payout policy, and because of the correlation between firm-level and country-level governance, the interaction between firm-level governance and dividend policy varies with legal strength: in weak legal regimes, stronger corporate governance leads to higher dividend payout, and in strong legal regimes, they correlate in the opposite way, as the shock repurchase is preferred over dividend.

Corporate carbon performance and firm risk: Evidence from Asia-Pacific countries

This study examines the association between corporate carbon performance (CCP) and firm risk using a sample of 9,212 firm-year observations from 13 countries in the Asia-Pacific region over the period 2002–2021. We also examine the moderating role of the quality of country-level governance in the association between CCP and firm risk. We find that CCP is negatively associated with a firm’s total, idiosyncratic and systematic risk and that country-level governance quality accentuates the negative association between CCP and firm risk. We also find that country-level business culture, emissions trading schemes, climate change performance and attention to carbon emissions accentuate the negative association between CCP and firm risk. Given the growing demands from regulatory bodies for increased transparency on carbon performance, the insights gained from our research hold significant relevance for regulators, policy makers, investors, financial analysts, scholars and businesses.

Determinants of digitalization: Evidence from Asia and the Pacific countries

PurposeDigitalization is one of the major factors that fosters economic growth across the world. However, the level of digitalization varies significantly between developed and developing countries, with the latter often lagging behind. To bridge this gap, it is crucial to pinpoint the drivers of digitalization, specifically from the macroeconomic and country-level governance dimensions. Therefore, this study aims to investigate the determinants of digitalization, particularly for countries in Asia and the Pacific region.Design/methodology/approachOur study utilizes unbalanced panel data from 46 Asian and Pacific countries for the period of 2001–2021. Initially, we analyzed the data using conventional econometric methods, such as pooled ordinary least squares (POLS), random-effects model (REM) and fixed-effects model (FEM). Moreover, we employed endogeneity-corrected techniques and alternative proxies to enhance the robustness and reliability of our findings.FindingsOur findings reveal that economic development progress, government expenditure relative to country size and political stability are key drivers of digitalization. In contrast, corruption at the country level emerges as a significant impediment. Notably, our results remain robust to endogeneity-corrected techniques and alternative proxies of digitalization. Overall, these insights can inform policymakers, helping them to understand the macroeconomic and governance factors shaping digitalization and guide their decision-making toward effective policy interventions.Originality/valueThis study’s empirical findings add significant value to the existing literature by quantifying the impact of macroeconomic and governance factors on digitalization in selected countries. This offers valuable insights for policymakers, particularly in nations with lower levels of digitalization.

Country-level governance quality, foreign ownership, and firm investment: evidence from WBES database

Country-level governance quality, foreign ownership, and firm investment: evidence from WBES database

Ownership structure and financial reporting quality: Moderating role of regulation

This study examines how ownership structure (OS) affects the financial reporting quality (FRQ) of listed firms in India. It also investigates whether the interaction of firm-level governance (business group) and country-level governance (Companies Act, 2013) yields optimal outcomes. This study examines FRQ measured using accruals and real earnings management (AEM and REM). Higher earnings management lowers FRQ and vice-versa. Firms affiliated with business groups are likelier to choose real over accruals earnings management. They trade off accruals and real earnings management to expropriate minority shareholders. This pattern reverses after a change in regulation. Thus, stringent regulations may lower FRQ (suboptimal outcomes). High-promoter holding firms have lower accruals quality, while high-institutional holding firms use discretionary expenses to manage earnings.

Impact of Communication Infrastructure on FDI Inflows in Pakistan: Moderating Effect of Country Level Governance

Impact of Communication Infrastructure on FDI Inflows in Pakistan: Moderating Effect of Country Level Governance

Impact of country-level governance on entrepreneurial performance: a cross-country analysis

Impact of country-level governance on entrepreneurial performance: a cross-country analysis

The Impact of Corporate-and Country-level Governance Mechanisms on the Firm's Disclosure Quality: Evidence from MENA Countries

Purpose: The paper aims to investigate the impact of corporate and country-level governance mechanisms on the firm's disclosure quality.
 Design/methodology/approach: The paper employs a panel dataset comprising 96 financial institutions listed on the stock markets of four countries in the MENA region: Palestine, Jordan, Kuwait, and Qatar. This dataset spans five years, from 2016 to 2020. Data primarily originate from the annual reports of these institutions and are subjected to analysis through pooled OLS, fixed effect (FE), and random effect (RE) methodologies.
 Findings: The main findings of this study reveal that corporate governance (CG) factors, including board size, board meetings, and audit committee size, have a positive impact on disclosure quality. Additionally, concerning country-level governance, the role of law positively influences disclosure quality, whereas political stability and corruption negatively influence disclosure quality.
 Research limitations/implications: This study's main limitations are missing data, especially regarding the audit committee information, and the lack of a database covering the firms in the MENA region. The findings can help managers, policymakers, and other stakeholders enhance the firm's disclosure by adopting good corporate and country- level governance practices.
 Originality/value: The study develops a disclosure quality index that examines various disclosure requirements attributes, encompassing financial and non-financial disclosure aspects. Such an index adds value to prior research on disclosure quality. Additionally, this study expands the scope of previous research by incorporating wide aspects of CG attributes and investigating the role of country-level governance.

Country-level governance and sustainable development goals: implications for firms’ sustainability performance

PurposeThe purpose of this study is to examine the impact of country-level governance on sustainability performance, taking into account the effect of sustainable development goals (SDGs) and board characteristics.Design/methodology/approachThis study uses panel data analysis using fixed effect models to investigate the influence of country-level governance on sustainability performance while considering the effect of SDGs and board characteristics. The sample comprises 8,273 firms across 41 countries during the period spanning from 2016 to 2021. The sample is divided into two categories based on the score of SDGs.FindingsThe findings of this study show that countries with high SDGs score have better overall country-level governance and board attributes which have a statistically significant positive impact on sustainability performance. However, for those countries with low SDGs, political stability shows a statistically insignificant and negative impact on sustainability performance, while government effectiveness indicates a statistically insignificant positive impact on sustainability performance.Originality/valueThis study contributes to the literature by providing empirical evidence on the relationship between country-level governance, SDGs, board characteristics and sustainability performance. The study also highlights the importance of considering the effect of SDGs on the relationship between country-level governance and sustainability performance. The findings of this study could be useful for policymakers and firms in improving their sustainability performance and contributing to sustainable development.

Macro-prudential regulations and systemic risk: the role of country-level governance indicators

Macro-prudential regulations and systemic risk: the role of country-level governance indicators

Dividend policy framework and bank risk-taking in Africa: do women inclusion in governance system offer new insight?

This study examines the role of women included in governance system in explaining the impact of dividend policy framework on the risk-taking of banks, using a panel dataset of 52 African countries over the period, 2006–2020. The empirical outcome confirms that independent women on the board has a lower probability of paying dividend, reduce dividend yield and induce less risk-taking of banks while women in country-level governance position seek to protect the interest of shareholders and subsequently increase the likelihood of dividend payments and risk-taking of banks. The study found that banks that pay dividends face stricter market discipline, which in turn reduces banks' risk-taking. The study found that dividend policy framework generally acts as a complement for risk-taking when independent women are included in corporate boards while it acts as a substitute control device for banks’ risk-taking when women are included in country-level governance positions. Based on the net effects, the study found robust and strong evidence to support that the dividend policy framework reduces the risk-taking at higher level of women included in governance system.

Country Level Governance as A Capital Structure Determinant: A Case of Pakistani Non-Financial Listed Firms

Current paper investigated the effects of country governance indicators and firm level variables on the capital structure of non-financial listed firms registered with Pakistan Stock Exchange (PSX) for the interval of 2002-18. The collected panel data was analyzed by employing panel data analysis techniques e.g., pooled OLS, fixed effect and random effect (FR/RE) model and 2-step system GMM. The purpose of employing these techniques was to capture the un-observed heterogeneity and endogeneity in the model. FE model with robust standard error was applied to control the heteroskedasticity in the model. The suitability of pooled OLS and RE model was decided on the basis of P-value of “Breusch and Pagan Lagrangian Multiplier Test” (BPLM). The results revealed that corruption perception, country governance variables and firm level variables have a considerable impact on capital structure of non-financial registered firms. Equally theory and practice can benefit from the study's findings. The study aims to theoretically incorporate new independent variables into the capital structure literature in the context of Pakistan, including political patronage, democratic regime, rule of law, abuse of power, quality of regulation, stability of politics, voice and accountability, and government effectiveness. On the practical side, the findings provide guidelines for the firms to be careful about these determinants that may be helpful in minimizing the default risk associated while lending funds. Future research may be conducted by replicating in other sectors to validate the results.

How country governance situation affect firm financing arrangements: empirical evidence from selected Asian economies

Purpose This study aims to explore the potential impact of country-level governance in corporate financing structures. Design/methodology/approach A two-step system generalized method of moment was used due to the endogeneity issue. The whole sample comprises 3,761 firms in five economies – China, India, Pakistan, Singapore and South Korea – from 2007 to 2016. Findings The results indicate that the debt option for financing is not favorable under governments with an adequate governance arrangement. However, there is a direct and significant link between country governance and equity financing because in adequate governance arrangements, the possibilities of information asymmetry are minimal and businesses consider equity a more appropriate and safer financing instrument. In contrast, firms prefer to trade-credit financing in poor governance economies, which confirms an adverse link between trade credit and adequate governance. Practical implications The country’s governance should be considered a sensitive matter when deciding about corporate financing. Originality/value This arrangement of variables has not been previously analyzed in the literature, suggesting the study’s novelty.

Does ESG investing pay‐off? An analysis of the Eurozone area before and during the Covid‐19 pandemic

AbstractWe examine whether the stock return performance of 620 Eurozone companies based on their environmental, social and governance (ESG) ratings both before and during the Covid‐19 pandemic on both a nominal and risk adjusted basis. We also look at how country level governance indicators interact with our samples of ESGHigh and ESGLow companies to affect both nominal and risk adjusted investment returns. We use both panel data and cross‐sectional regressions as well as the difference‐in‐differences approach to derive the empirical results. We generally find some evidence that highly rated ESG firms performed slightly worse than lower rated ESG both overall and during the pandemic. However, once we control for governance at the country level, we find that in high governance scoring countries ESGHigh companies perform better than ESGLow companies. Finally, when we examine the relative performance of EU companies compared to companies in economies less impacted by the Covid‐19 pandemic, namely South Korea and Australia, we find that during the pandemic, the South Korean and Australian companies performed much better than their counterparts in Europe.

The impact of public governance perception on the quality of financial reporting

The article examines the relationship between public governance perception (PG) and the overall quality of the financial reporting index (OQFRI). The study combines the World Bank’s Worldwide Governance Indicators (WGIs), which are used as a measure for country-level governance. In addition, the study of Tang et al. for the overall financial reporting index (OQFRI) is used to measure the quality of financial reporting. Our balanced panel data set has 418 observations, constructed with 38 countries and the period from 2004 to 2014 is tested using a linear mixed model (LMM) to consider both random and fixed effects. The results indicate a positive relationship between regulatory quality, political stability, the rule of law, government effectiveness and quality of financial reporting. But, findings reveal that voice and accountability and control of corruption have no significant impact on the quality of financial reporting. Our results suggest that institutional quality and public governance perception should be considered by auditors while evaluating the quality of financial reports and their risk. Also, it is important to consider the role of public governance in addition to the role of corporate Governance in improving the quality of financial reporting.

Geopolitical risk and corporate tax behavior: international evidence

PurposeThis study examines the association between geopolitical risk (GPR) and corporate tax, which is a major source of revenue for the government and a significant explicit cost for firms. The authors use a comprehensive measure of GPR to study its effects on corporate taxes by using an international sample.Design/methodology/approachThe authors adopt the geopolitical measure constructed by Caldara and Iacoviello (2022) as a proxy for GPR and cash-effective tax rate benchmarked with statutory tax rate to measure corporate tax avoidance. The authors employ panel regression with fixed effects (FEs) to investigate the impact of GPR on corporate tax avoidance. The authors also conduct a battery of robustness tests to ensure the strength of the study’s results.FindingsThis study’s empirical results indicate that sample firms increase their tax avoidance amid increasing GPR. Further analyses show that financial constraints incentivize firms to avoid taxes during rising geopolitical tensions. The authors also provide evidence on the role of firm-level and country-level governance in weakening the association between GPR and tax avoidance.Practical implicationsPolicymakers and governments may strengthen the enforcement rule to limit aggressive tax practices of corporates during GPR to balance fiscal deficit. In addition, this study sheds light on the debate among administrators and politicians over the efficacy of current tax laws and governance structures in the presence of heightened GPR.Originality/valueThe authors extend the literature on GPR by analyzing its effect on corporate tax avoidance. Unlike existing single-country studies, the authors use a cross-country setup to investigate the impact of GPR on tax avoidance, making this study’s results more generalizable as the authors control for a host of country, industry, and time factors. Apart from political uncertainty, terrorism, and climatic issues, the authors document GPR as a strong macroeconomic driver of corporate tax avoidance. The authors make a new contribution to the literature on the moderating role of governance and institutional factors on the association between tax avoidance and GPR in an international context. The authors also contribute to the literature on macroeconomic determinants of tax avoidance.