Effect Of Internal Governance Mechanisms Research Articles

Financial inclusion disclosure, internal governance quality, and bank ownership structure: An exploratory study in Egyptian banks

The purpose of this study is to enhance sustainability and investigate the effectiveness of internal governance mechanisms in enhancing financial inclusion (FI) disclosure quality in Egyptian banks. Pooled ordinary least squares (OLS) regression analysis is employed, using data from Egyptian banks listed over an eight-year period, from 2014 to 2021. Two indices are constructed: a FI disclosure quality index and an internal governance quality index. The findings of the study indicate that compliance with corporate governance best practices strengthens the monitoring quality of internal governance mechanisms in Egyptian banks. This, in turn, has a significant positive impact on the levels of FI disclosure. Results further show that ownership structure influences this relationship. Overall, the study findings support the notions of agency, stakeholders, and moral legitimacy theories. The study's originality lies in its focus on emerging FI practices in less-developed economies, and its relevance to regulators, policymakers, and professional bodies seeking to enhance FI practices and disclosures. The research also highlights the importance of the banking sector in achieving the national sustainable development goals (SDGs) by 2030 and facilitating informed decision-making by various stakeholder groups. The study's findings are supported by the robustness of the empirical analysis.

When the Going Gets Tough, the Books Get Cooked:Product Market Competition and Financial Misconduct

This paper extends the research on financial misconduct by developing a new perspective based on general strain theory, and more specifically on the strain effect of product market competition. Previous literature suggests that product market competition can provide incentives for managers, but we argue that it can also lead to financial misconduct. In so doing, we take a strain perspective in making the argument that product market competition should be positively associated with the occurrence of misconduct, as it magnifies the threat arising from the possibility of firm liquidation and executive dismissal. We also examine the effect of internal governance mechanisms that are commonly deployed to minimize the agency problem. We argue that CEO option pay will negatively moderate the relationship between product market competition and the occurrence of financial misconduct, in line with the prevailing wisdom of corporate governance research. By contrast, while board independence has often been proposed as an effective governance mechanism to reduce the number of undesirable managerial behaviors, we argue it can exacerbate the threat of executive dismissal resulting from competition, creating incentives for fraudulent behavior. An empirical study of U.S. manufacturing firms provides broad support for our arguments.

Executive Network Centrality and Corporate Reporting

This paper investigates the association of corporate reporting and executive network centrality, which measures an executive’s relative position in a massive network consisting of outside corporate leaders. I find that high-centrality chief executive officers (CEOs) and chief financial officers (CFOs) are generally more likely to engage in financial misreporting than low-centrality CEOs and CFOs. I also find that the influence of CFO network centrality is greater than that of CEOs in financial misreporting. Further analyses show that the monitoring effect of internal governance mechanisms on high-centrality executives is very limited and that the discipline of the managerial labor market is weaker for high-centrality CFOs as well. My results hold for a subsample subject to exogenous shocks to CFO connectedness and are robust to a series of alternative specifications including using CFO fixed effects. Taken together, my findings suggest that corporate reporting can be influenced by executives’ social network position, with high-centrality CFOs using their social power to make adverse corporate reporting decisions to gain personal benefits. This paper was accepted by Brian Bushee, accounting.

Impact of corporate governance compliance and board attributes on operating liquidity in pre- and post-corporate governance reforms

PurposeThis study aims to investigate the impact of corporate governance compliance, governance reforms and board attributes on operating liquidity of Pakistani listed non-financial firms. The study further tests how these relationships vary in the pre- and post-corporate governance reforms.Design/methodology/approachFixed-effect regression model is used on 10 years panel data from 2007 to 2016 for a sample of 170 firms listed on the Pakistan Stock Exchange. Two-stage least squares model is used for addressing the endogeneity problem.FindingsThe findings reveal that governance compliance and governance reforms negatively affect operating liquidity. Among the board attributes, board meetings, directors’ remuneration, board foreign diversity and board gender diversity are significantly related to operating liquidity. Further exploration indicates that internal governance mechanisms are less effective to safeguard shareholders from expropriation during weak external governance. This suggests that strong external governance is inevitable to the effectiveness of internal governance mechanisms. Overall, the study findings support the agency theory.Practical implicationsThe findings provide valid recommendations to policymakers interested in safeguarding the investors to focus on macro-level governance for making the micro-level governance effective. Further, the results provide the executives with an insight to improve the compliance level with the code of corporate governance.Originality/valueUnlike prior studies, this study examines the impact of corporate governance compliance and novel board attributes – directors’ attendance at board meetings, number of board committees, directors’ remuneration and board foreign diversity on operating liquidity. Further, the study subdivides its sample period into pre- and post-corporate governance reforms to examine how external governance influences internal governance effectiveness.

Executive Network Centrality and Corporate Reporting

This paper investigates the association of corporate reporting and executive network centrality, which measures an executive’s relative position in a massive network consisting of outside corporate leaders. I find that high-centrality chief executive officers (CEOs) and chief financial officers (CFOs) are generally more likely to engage in financial misreporting than low-centrality CEOs and CFOs. I also find that the influence of CFO network centrality is greater than that of CEOs in financial misreporting. Further analyses show that the monitoring effect of internal governance mechanisms on high-centrality executives is very limited and that the discipline of the managerial labor market is weaker for high-centrality CFOs as well. My results hold for a subsample subject to exogenous shocks to CFO connectedness and are robust to a series of alternative specifications including using CFO fixed effects. Taken together, my findings suggest that corporate reporting can be influenced by executives’ social network position, with high-centrality CFOs using their social power and influence to make adverse corporate reporting decisions to gain personal benefits.

The Effects of Internal Governance Mechanisms on Voluntary Disclosure

Researches on the effects of internal governance mechanisms report contradictory results. Some researchers argue that internal governance mechanisms are able to reduce agency problems, but others assert that they are not effective and just spend firms’ resources. This study suggests that internal governance mechanisms may have different effects depending on managerial activities. Managers tend to comply with internal governance mechanisms in the managerial activities, such as disclosing activity, whose results are obvious and assessable because the consequences of their actions can be easily observed and evaluated by governance mechanisms. In the other hands, because it is difficult to evaluate whether managers’ actions are for shareholders’ value in ambiguous and non-assessable activities, managers eagerly entrenches themselves to protect their position and privilege. Therefore, internal governance mechanisms are more effective in obvious and assessable managerial activities than ambiguous and non-assessable ones. In this study, I investigated the effects of internal governance mechanisms on voluntary disclosure; the obvious and assessable activity. An empirical test was conducted on 331 Korean firms in 2017. This study found that the stronger internal governance structure, such as outside directors and stock option, the more a manager is likely to disclose the performance expectation or goal.

Internal governance mechanisms and the performance of decentralized financial systems in Niger

PurposeThe purpose of this paper is to study the effect of internal governance mechanisms on the financial and social performance of Niger’s decentralized financial systems (DFS).Design/methodology/approachThis paper investigated the impact of the board size and the CEO/chairman duality on financial performance and sustainability, respectively, measured by the return on assets (ROA) and operational self-sufficiency on one side and social performance measured by the size of loans granted and the percentage of female borrowers on the other side.FindingsThe results show that board size positively and significantly affects the ROA. The author also concludes that the duality of decision and control functions promotes the financial viability of the DFS. Regarding the impact of internal governance on social performance, the author finds that board size positively and significantly affects loan size.Research limitations/implicationsThis study focuses on Niger’s 13 largest DFSs. However, an analysis that also includes smaller firms may show different results.Practical implicationsA board size of between 5 and 15 members is recommended. This would help to incorporate key skills and the active involvement of all members.Originality/valueThis research highlights the importance of including internal governance mechanisms, underscores an interesting problem and answers questions raised in the existing literature by invalidating or confirming the results that have been obtained thus far. As the players in the microfinance sector recognize that sound governance is an important factor for a successful outcome in any microfinance institution objective, the paper helps shed some light on the situation of DFS in Niger.

Does corporate governance influence the efficiency of working capital management of listed firms

Purpose The purpose of this paper is to explore the relevance of corporate governance in the quest to attain organizational efficiency in the working capital management of listed firms. There is a consensus that efficiency of working capital management is vital for firm’s growth and survival, yet another consensus is the role of corporate governance in limiting managerial self-serving behavior and ultimately improving firm’s efficiency. If the foregoing views hold, then the empirical question “Is corporate governance important for firm-level working capital efficiency?” becomes important. Design/methodology/approach Panel data on 13 non-financial firms listed on the Ghana Stock Exchange were employed in a pooled OLS regression. Findings The results of the study indicate mostly a negative effect of internal governance mechanisms on the cash conversion cycle, the inventory, receivables’ periods and payables’ periods, implying that governance structures do affect the efficiency of working capital management. Firm characteristics like age, size and profitability also emerged as relevant influences on the efficiency of working capital management. Research limitations/implications Data for the study cut across several sectors thus limiting the specificity with which findings can be applied. Originality/value These findings have implications for board composition in the quest for firm-level efficiency while raising the need for more industry-specific enquiries.

Principal-principal internal governance mechanisms and the firms' performance: evidence from an emerging market

The current study investigates the effect of internal governance mechanisms, adopted by the most actively traded companies on the Egyptian Stock Market in 2008-2009, and the performance of these firms. To investigate the aforementioned phenomenon, the current study develops two indices namely: shareholders' rights and investor relations (SRIRI) and ownership and control structure (OCSI). After controlling for the variables that may affect this relationship, the current study regresses the firms' performance measured by market, accounting, and hybrid type methods of valuation on the aforementioned indces. OCSI has more explanatory power than SRIRI, however, the results are inconclusive. The non-complementariness of the two corporate governance indices is evidenced. Considering the time and small sample size constraints, the current study contributes to the existing literature by operationalising the independent and joint effect of two principal-principal corporate governance mechanisms on firms' performance in an emerging market such as Egypt.

External auditor's characteristics, corporate governance and audit reporting quality

The present study is aimed at investigating the combined effect of internal governance mechanisms along with the external auditor reputation on audit reporting quality. This paper is based on a study simple consisting of 28 Tunisian companies listed on the             Tunisian Stock Exchange (TSE) over the period 2006-2013. In this respect, and for further consolidating evidence to be provided an empirical study applying multivariate regression panel data, has been undertaken. The results reached have revealed well that timely disclosure is on average some 155 days to be released highly exceeding regulatory ceiling limit, and only 21, 43% of companies have received "modified" audit opinion. Thus, our results have shown the persistence of substitution effects between control effectiveness as implemented by the directors' Board or by the ownership structure in a quest for a brighter external audit reputation, for the sake of ensuring prompt and reliable information.

The impact of internal attributes of corporate governance on firm performance

PurposeThe purpose of this paper is to investigate whether internal attributes of corporate governance such as board size, outside directors, CEO duality, managerial ownership, and ownership concentration affect the performance of Pakistani firms.Design/methodology/approachPanel econometric technique namely pooled ordinary least squares is used to estimate the relationship between internal governance mechanisms and performance measures (i.e., return on assets, return on equity, earnings per share, and market‐to‐book ratio) using the data of non‐financial firms listed on the Karachi stock exchange Pakistan during 2004‐2008.FindingsThe empirical results indicate that board size is positively, whereas outside directors and managerial ownership are negatively related to the return on assets, earnings per share, and market‐to‐book ratio. Ownership concentration is positively related to all measures of performance used in this study. CEO duality is positively related to earnings per share only. As far as control variables are concerned, leverage is negatively related to the return on assets, return on equity, and earnings per share. Alternatively, firm size is positively related to all measures of performance. In sum, empirical results indicate that internal governance mechanisms have material effects on firm performance.Practical implicationsEmpirical results provide support to managers to understand how internal governance mechanisms affect the firm performance. Moreover, results provide support to regulatory authorities for enacting laws to make internal governance mechanisms work more effectively in the country.Originality/valueThis paper contributes to the literature by exploring the effects of internal governance mechanisms on firm performance using the data of Pakistani firms. Moreover, empirical findings somehow proceed to confirm that theories of corporate governance surely provide some support to explain the relationship between internal governance mechanisms and firm performance.

Internal governance mechanisms and firm performance in China

Corporate governance issues arising from concentrated ownership structure in emerging economies have received growing attention. Adopting a principal–principal perspective, this paper employs structural equation modeling to evaluate the independent and interdependent effects of internal governance mechanisms in enhancing firms’ value in China. Based on a 3-year dataset covering 304 publicly listed companies over 2003–2005, our findings suggest that ownership concentration has the most significant governance effect and has impacted negatively on firm performance. Furthermore, the governance role of the board of directors and supervisory boards is found to have been hindered by ownership concentration, rendering them unable to improve firm performance at present.

Substitution effects of internal governance mechanisms: evidence from Switzerland

This paper explores the substitution effects among three governance mechanisms, board monitoring potential, incentives and ownership structure, in a sample of 176 publicly listed companies in Switzerland, a country characterised by bank-centred governance system and high degree of ownership concentration. Our results suggest that whereas ownership concentration per se does not substitute for monitoring by the board, shareholdings held by board and top management and presence of a shareholder on the board act as substitutes for board independence. Moreover, we found that substitution effects differ with the identity of the largest shareholder. Firms owned by financial institutions exhibit a negative relationship between board independence and shareholder representation on board, whereas in family controlled firms board and managerial ownership is the main substitute for board monitoring.

Managerial Entrenchment and the Effectiveness of Internal Governance Mechanisms

Founder CEOs of poorly performing firms are less likely to be replaced than non founders. Furthermore, founder CEO firms are much more prevalent in our sample of poor performing firms than in the general population. We also report that simply replacing a founder CEO is not sufficient to increase long-term stock returns unless the founder leaves both the firm and the board. In addition founder CEO firms are less likely than non founder CEO firms to: (i) replace the CEO with a financier; (ii) experience financial distress; (iii) file for bankruptcy; (iv) restructure assets; or (v) be targeted for takeover.