Country-level Investor Protection Research Articles

Impact of financial reporting quality on investment efficiency and role of investor protection in frontier markets

PurposeThis study aims to examine the link between financial reporting quality and investment efficiency in publicly listed firms in frontier markets, taking into account country-level investor protection. By comparing real and accrual earnings management, this paper demonstrates the context-dependent nature of the impact of financial reporting quality. It emphasises the importance of improving investor protection and reducing agency conflicts in promoting investment efficiency in frontier markets.Design/methodology/approachAccounting data from 1998 to 2020 are collected for all listed firms in six frontier market countries across 21 industries. Fixed-effect regression analysis is used to test causal relationships; several robustness checks are performed; and two-stage least squares is used to address endogeneity concerns.FindingsHigher financial reporting quality improves investment efficiency in frontier markets. Furthermore, the positive effect is amplified when country-level investor protection in frontier markets is strong.Originality/valueThese findings add to the growing body of evidence showing that financial reporting quality improves investment efficiency, even in frontier markets. Furthermore, the level of investor protection within a country strengthens this relationship, particularly in firms that are prone to underinvestment.

External governance mechanisms and capital structure: A cross-country analysis

This paper seeks to examine how external governance mechanisms related to shareholder protection and creditor rights affect the choice of corporate leverage. The main objective of the study is to examine the relationship between country-level investor protection and the choice of capital structure at the firm level. The sample includes 7490 companies from 40 countries. Data were collected from all publicly listed companies between the years 2013 and 2022, listed in the Van Dijk ORBIS Bureau, based on the fiscal year 2022. This paper opts for the panel data methodology. The results suggest that companies leverage themselves consistently with the Pecking Order Theory. It was observed that the mechanisms associated with the protection of both classes of investors (i.e., shareholders and creditors) significantly influence the capital structure of the companies. The results were robust to several variations in the model studied and indicate that greater investor protection makes firms less likely to use third-party capital. The opposition of insiders (executives and majority shareholders) to debt’s moderating role at their managerial discretion may be the driving force behind this. The differential of the study lies in the distinction between the mechanisms that affect the protection of minority shareholders and those that affect the rights of creditors.

Corporate Cash Holdings and Share Buyback: Evidence from Emerging Markets

This study evaluates corporate cash holdings (CCHs) as a determinant of share buyback for three emerging economies, India, Malaysia, and South Korea, from 2002 to 2020. We find CCH as a significant determinant of share buyback for our sample nations. Our results suggest that share buyback is a flexible way for firms to distribute excess cash across our sample nations. Our study also documents the impact of different country-level investor protection frameworks on buybacks. A favorable relationship between a strong investor protection environment (good governance) and buyback explains the effective role of buyback in resolving agency conflicts compared to dividends. JEL Codes: C5, F3, G3

Algorithmic Trading and Post-Earnings-Announcement Drift: A Cross-Country Study

Synopsis The research problem This study investigates whether algorithmic trading matters to post-earnings-announcement drift (PEAD) across 41 countries. Motivation The increasing importance of algorithms has sparked interest in how computer-triggered trades affect the formation of securities prices. Thus, a large body of research has emerged to probe the instantaneous impact of algorithmic trading on price discovery; however, little work explores the role of algorithms in efficient pricing of low-frequency financial statements. In addition, the literature on PEAD always highlights firm-level drivers of this phenomenon, whereas its country-level institutional determinants remain silent. The test hypotheses H1: Earnings-announcement algorithmic trading does not impact PEAD. H2: Country-level investor protection does not impact the association between earnings-announcement algorithmic trading and PEAD. H3: Country-level information dissemination does not impact the association between earnings-announcement algorithmic trading and PEAD. H4: Country-level disclosure requirements do not impact the association between earnings-announcement algorithmic trading and PEAD. Target population Various stakeholders include market traders, firm managers, regulators, and scholars. Adopted methodology Ordinary Least Square (OLS) Regressions. Analyses We follow Saglam [( 2020 ) Financial Management, 49, 33–67] to measure algorithmic trading using the transaction-level data. Based on a global sample covering 41 markets, we estimate the regression of PEAD on four proxies for algorithmic trading after considering firm-specific controls and fixed effects of country and year. Findings We find a negative and significant association between earnings-announcement algorithmic activity and PEAD. The documented relation retains despite addressing the endogeneity problem. Further analyses indicate that algorithmic participation mitigates investor disagreement, alleviates trader distraction, and reduces market friction, thus facilitating efficient pricing of earnings information. Finally, the impact of algorithmic trading on PEAD is more prominent in countries with stronger investor protection, faster information dissemination, and stricter disclosure requirements.

An analysis of the meta-analysis of board characteristics and demand for audit quality

PurposeThe purpose of this study is to discuss Kalia, Basu and Kundu's (KBK’s) paper's motivation, findings and contributions and suggest further development.Design/methodology/approachThis paper is to discuss the meta-analysis of board characteristics and demand for audit Quqality by KBK.FindingsKBK paper is well motivated and makes new contributions to the literature. Future research can expand the sample and examine the moderating effects of institutional factors such as ownership structure, regulatory reforms and country-level investor protection and legal enforcement.Originality/valueBased on the review of KBK’ spaper, this study suggests that future research should expand the sample and examine the moderating effects of institutional factors such as ownership structure, regulatory reforms and country-level investor protection and legal enforcement.

Insider ownership and stock price crash risk around the globe

Insider ownership is one of the most important aspects of corporate governance. In this study, we examine how insider ownership affects firms' stock market downside risk, as measured by stock price crash risk, globally. We use a large-scale international sample consisting of observations from 40 countries, and find an inverted U-shaped relationship between insider ownership and stock price crash risk. These results remain unchanged by extensive robustness tests using various settings and specifications. We also identify some factors that moderate the relationship between insider ownership and stock price crash risk: the degree of ownership dispersion at the country level, and country-level investor protection regimes / information environment / financial system structure (bank- or market-based).

Market discipline or rent extraction: Impacts of share trading by foreign institutional investors in different corporate governance and investor protection environments

Minority investors' reliance on market discipline can vary with different country-level investor protection and firm-level corporate governance environments, which affect both discipline and rent extraction incentives of foreign institutional investors (FIIs). Using data from 47 economies between 2009 and 2017, we find that firm value increases with FIIs aggressive trading but decreases with FIIs discreet trading. The positive and negative impacts of FIIs trading are strengthened when investor protection is stronger, but weakened when corporate governance is stronger. Our analysis enhances understanding of trade-offs of FIIs trading between discipline and rent extraction in different corporate governance and investor protection environments.

Cross-border spillover of institutional activism: The monitoring role of locally-aggressive foreign institutional investors

Using data from 32 countries for the period 2008–2018, this study examines the previously unexplored monitoring role of foreign institutional investors that are aggressive monitors in their home markets. First, consistent with the short-termist view of cross-border activism spillover, we show that ownership by locally-aggressive foreign institutional investors is negatively associated with firm value. Second, using country-level investor protection and investment horizon, we find that the negative influence on value only holds for common-law and long term locally-aggressive foreign investors. Contrarily, we find that the association between foreign activists from civil-law countries and value is positive and consistent with the managerial-disciplining view of cross-border activism spillover. Findings for total foreign ownership and locally-acquiescent foreign ownership remain similar to those reported in previous studies. Our findings are robust to endogeneity concerns, multiple specifications, and alternative measures of monitoring aggression in home markets.

Country-level corporate governance and lines of credit

Agency problems related to country-level investor protection are important determinants of corporate liquidity management. This paper extends the work of Dittmar, Mahrt-Smith, and Servaes (2003) on country-level governance effects on corporate liquidity but with a focus on line of credit. Since both line of credit and cash constitute integral elements of a company's liquidity policy, a complete understanding of how country-level governance affects liquidity management requires that we also examine its impact on firm-level utilization of line of credit. Using a large sample of international firms from 44 countries, we find that in economies where investor protection is strong, the likelihood and the magnitude of line of credit obtained is higher. We also show that the substitutability of the line of credit and cash holding is stronger in these countries. Our study implies that minority owners in countries with strong investor protection can force corporate managers to disgorge cash and increase their reliance on monitored liquidity through line of credit.

The effects of analysts’ tax expense forecast accuracy on corporate tax avoidance: An international analysis

A spotlight has recently been cast on the role of analysts as monitors of corporate tax planning, but investigations beyond the US are rare. After extension to the international setting, I investigate whether the strength of investor protection impacts the relationship between analysts’ tax expense forecast accuracy and tax avoidance. Using a sample from 24 countries, I find that firms with high analysts’ tax expense forecast accuracy engage in lower levels of tax avoidance than firms with low forecast accuracy; this relationship is greater for firms in countries with weaker investor protection. These findings suggest that the extent of country-level investor protection substitutes for firm-level governance in constraining managerial incentives for tax avoidance.

International M&A Laws, the Market for Corporate Control and Risk-taking

In this study, we examine the effect of the market for corporate control (MCC) on firm risk-taking exploiting the staggered enactment of country-level merger and acquisition (M&A) laws of thirty-four countries as a plausibly exogenous source of variation in MCC. Consistent with the theoretical argument of temporal traps, our empirical study shows that MCC brings unintended consequences by discouraging value-relevant corporate risk-taking. Further examination of the heterogeneous effect of enabling institutions, our investigation reveals that country-level investor protection and transparency environment positively moderates the effect of MCC. Our study highlights the complementary role played by institutions to translate the effect of MCC towards discouraging value-destroying investment conservatism.

The effect of corporate governance and investor protection environments on the value relevance of new accounting standards: the case of IFRS 9 and IAS 39

The first-time adoption of IAS/IFRS accompanied by the issuance of new international accounting standards has provided mixed results regarding their ability to improve accounting quality. A possible reason is that not only the quality of the standard-setting process, but also other factors might affect accounting quality and one of its dimensions, namely, value relevance. By analysing data from a sample of 316 financial entities listed in 43 countries from all over the world and adopting IFRS 9 in place of IAS 39 as of 1st January 2018, this paper tests whether the quality of firm-level corporate governance and country-level investor protection environments affects the value relevance of equity values calculated according to the requirements of IFRS 9 and IAS 39. The results suggest that, despite both accounting standards providing investors with value relevant information, in the presence of high-quality corporate governance or a high-quality investor protection environment, IFRS 9 is more value relevant than IAS 39, whereas the opposite is true in the presence of low-quality corporate governance or a low-quality investor protection environment. The research results provide the first empirical evidence of the value relevance of the new accounting standard on financial instruments and contribute to the debate on the existence of other factors that, together with the quality of the IASB standards, affect the quality of financial reporting.

Investor Protection and the Substitution Effect of Corporate Governance and Product Market Competition on Firm Value

International research has firmly established that a substitute relationship exists between corporate governance and product market competition on firm value. In this study, I reexamine this substitution effect in an international setting, allowing the relation to vary with investor protection. As hypothesized, I find that investors place a higher value on the substitution effect of corporate governance and product market competition in countries where the legal and regulatory mechanisms to protect investors are weak. This finding suggests that country-level investor protection has a moderating role in affecting the substitution between product market competition and corporate governance on firm value. These results, which are robust to several sensitivity tests and alternative specifications, are consistent with an equity agency cost benefit, resulting from product market competition and corporate governance, which is valued more by investors where investor protection is weak.

Are insiders equal? Evidence from earnings management in closely held East Asian firms

In analyzing newly collected data on the ultimate ownership structure of publicly traded firms in nine East Asian economies, we contribute to international accounting research by providing evidence on earnings management in insider-controlled firms in this region. We find that family-controlled firms engage in less (more) accrual-based (real) earnings management than other insider-controlled firms. Our analysis suggests that controlling families, unlike other types of ultimate owners, tend to substitute real earnings management for accrual-based earnings management. To help empirically clarify the role that two incentives (entrenchment versus signaling) play in driving the substitution between real and accruals-based earnings management, we examine their valuation impact and find that both types negatively affect the future valuation of family firms. In another set of results consistent with expectations, we document that country-level investor protection and firm external financing demand shape the practice of earnings management in family-controlled firms.

Firm-level and Country-level Corporate Governance: Does One Substitute or Complement the Other?

In this paper, I examine whether firm-level and country-level corporate governance substitute or complement each other. In contrast to previous multi-country studies, I address this question using a within-country framework and show that the effect of firm-level corporate governance on performance decreased following major country-level investor protection reforms in Israel in 2011. Using a difference-in-differences design, I find that firms with poor governance prereform, reduced the volume (in NIS) and number of their related-party transactions and increased in value post-reform, thereby minimizing the differences between them and the wellgoverned firms. Moreover, using a two-stage approach I provide evidence that the decrease in the related-party transactions among the firms with the pre-reform poor governance was a possible channel for their post-reform increase in value. These findings are consistent with the substitution hypothesis. The rationale is that the reforms set a unified higher standard of investor protection that substituted for the governance mechanisms in the poorly governed firms. Accordingly, these firms curtailed shareholder expropriation and increased in value.

Does inside debt alleviate banks' risk taking? Evidence from a quasi-natural experiment in the Chinese banking industry

This paper investigates the causal effects of inside debt on banks' risk-taking behavior by using a quasi-natural experiment of compensation deferring policy in the Chinese banking industry. We find that the policy reduces banks' risk-taking by approximately 16.25%. Banks with high levels of government control significantly reduced their risk-taking after the compensation deferring policy was enacted, while those with low levels did not have the same response. By showing that CEOs' compensation deferring significantly reduces banks' risk-taking in an emerging market, we offer direct evidence for the academic understanding of the governance role of inside debt in emerging markets with weak country-level investor protection. Our results provide timely empirical evidence for government regulators who are concerned about the costs and benefits of banks' risk shifting or the risk of the financial system.

Aggressive tax planning and stock price synchronicity: evidence from China

PurposeThe purpose of this paper is to investigate the association between aggressive tax planning and stock price synchronicity.Design/methodology/approachEmploying the special institutional background of China, this study constructs tax aggressiveness and stock price synchronicity measures for a large sample of Chinese stocks spanning the period 2003–2015. The authors employ OLS regression as the baseline methodology, and a fixed effect model, the Fama–Macbeth method and GMM as sensitivity checks. Matched samples and difference-in-difference analyses are used to control for endogeneity.FindingsThe authors find a significant and positive association between aggressive tax planning and stock price synchronicity. Because material information about risky tax transactions tends to be hidden in various tax accruals accounts, aggressive tax strategies make financial statements less transparent, thereby, increasing information asymmetry and decreasing stock price informativeness. The authors also find that the firms engaging in aggressive tax planning exhibit relatively high corporate opacity. In addition, the authors find that improvements in the tax enforcement regime, ownership status and high-quality auditors all constrain the adverse effects of tax aggressiveness.Practical implicationsThis study has important practical implications for China’s regulators, who are striving to reduce the tax burden of enterprises. It also helps investors to consider investment decisions more appropriately from a taxation perspective.Originality/valueFirst, this paper contributes to the stock price efficiency literature by identifying the effect of a hitherto unexamined factor, namely, firm-level aggressive tax planning, on the efficiency of stock prices. Second, this study provides further empirical evidence to support the agency view of tax aggressiveness, and the informational interpretation of stock price synchronicity. Third, this study helps us better understand the effects of firm-level tax policy on firm-specific information capitalization in an environment where overall country-level investor protection is relatively weak.

The Impact of Eliminating the 20-F Reconciliation on the Cost of Debt: An Exploratory Study

ABSTRACT In 2007, the U.S. Securities and Exchange Commission voted to eliminate the 20-F reconciliation requirement for foreign issuers listing their stocks or bonds in the U.S. capital markets and preparing their financial statements under International Financial Reporting Standards (IFRS). Distinct from prior research focusing on the equity market, we investigate the impact of eliminating the 20-F reconciliation on the cost of debt in the U.S. listed foreign bond market. Employing a difference-in-differences approach, we document that bond yield spread increases for foreign IFRS bond issuers after the elimination of 20-F reconciliation. The results suggest that bondholders, on average, view the elimination of 20-F reconciliation as an information loss. Cross-sectional analyses reveal that the positive association between the elimination of 20-F reconciliation and bond yield spread is more pronounced for firms with greater stock return volatility, lower institutional ownership, weaker reporting incentives, and higher country-level investor protection. JEL Classifications: M41; G15; G18.

Do anticorruption efforts affect banking system stability?

ABSTRACTThis paper examines whether the level of anticorruption efforts in a country affects the stability of its banking system. After analyzing banking system stability in a large international sample of 26,865 of bank-year observations across 40 countries during 1987–2013, we argue that the following factors are involved: (1) anticorruption efforts, (2) inflation rate, (3) transparency, and (4) adoption of International Financial Reporting Standards. Our results support the idea that having a high anticorruption rating is related to high banking system stability. We also find that this relationship depends on a country’s inflation rate and level of country-level investor protection, supporting the notion that anticorruption is relatively more important in poorer information environments. In addition, given that anticorruption has a stronger effect on financial stability when banks are within a corrupt environment, we posit that corruption may have insider marginal effects.

Are Insiders Equal? Evidence from Earnings Management in Closely Held East Asian Firms

In analyzing newly collected data on the ultimate ownership structure of publicly traded firms in nine East Asian economies, we contribute to international accounting research by providing evidence on earnings management in insider-controlled firms in this region. We find that family-controlled firms engage in less (more) accrual-based (real) earnings management than other insider-controlled firms. Our analysis suggests that controlling families, unlike other types of ultimate owners, tend to substitute real earnings management for accrual-based earnings management. To help empirically clarify the role that two incentives (entrenchment versus signaling) play in driving the substitution between real and accruals-based earnings management, we examine their valuation impact and find that both types negatively affect the future valuation of family firms. In another set of results consistent with expectations, we document that country-level investor protection and firm external financing demand shape the practice of earnings management in family-controlled firms.