External Corporate Governance Mechanisms Research Articles

Strategic responses to hostile takeover threats: Empirical evidence on enhancing corporate social engagement

AbstractUnderstanding the dynamics between external corporate governance mechanisms and social engagement offers insights into how corporate strategies towards social capital are shaped. We explore the impact of hostile takeover threats on corporate social engagement by utilizing a measure of takeover vulnerability. This allows for a detailed examination of how exposure to takeover threats influences firms' engagement in social engagement initiatives. Our analysis reveals a positive and causal relation between the degree of takeover threats and the level of social commitments in firms, suggesting that the presence of hostile takeover threats enhances corporate social responsibility as a means of external governance and reduces agency costs. The findings support the hypothesis that the threat of hostile takeovers prompts firms to invest more in social commitments, potentially as a strategic defense mechanism.

The moderating role of duality split on the relationship between CEO narcissism and earnings management

Purpose The purpose of this study is to examine the moderating effect of an exogenous corporate governance shock that curbs Chief Executive Officers’ (CEOs) power on the relationship between CEO narcissism and earnings management practices. Design/methodology/approach The authors performed a quasi-experiment using a differences-in-differences approach to examine Brazil’s duality split regulatory change on 101 Brazilian public firms during the period 2010–2022. Findings The main findings indicate that the introduction of duality split curtails the positive influence of CEO narcissism on earnings management, suggesting that this corporate governance regulation may act as a complementary corporate governance mechanism in mitigating the negative consequences of powerful narcissistic CEOs. Further robustness checks indicate that the results remain consistent after using entropy balancing and alternative measures of CEO narcissism. Practical implications In emerging markets, where governance systems are frequently perceived as less than optimal, policymakers and regulatory authorities can draw insights from this enforcement to shape governance systems, reducing CEO power and, consequently, improving the quality of financial reporting. Originality/value To the best of the authors’ knowledge, this is the first study to examine whether a duality split mitigates the influence of CEO narcissism on earnings management. Thus, this study contributes to the corporate governance literature that calls for research on the effectiveness of external corporate governance mechanisms in emerging markets as well as the CEO narcissism literature that calls for research on moderating factors that could curtail negative consequences of narcissistic CEO behavior.

Effectiveness of governance mechanisms on bank financial performance in a changing world: evidence from a Small Island Developing States

The unique Coronavirus has speedily spread all over the world distressing all economies around the globe. This epidemic is not simply a health issue because it has affected the whole world in diverse facets due to the governmental measures taken to combat against it such as lockdowns, movement restrains, and social distancing strategies. It has also caused substantial damage to each part of the banking system as well as its performance where Small Island Developing States (SIDS) is not an exception. Thus, this study contributes to the limited literature by providing the first empirical evidence on the impact of covid19 on the role of internal and external Corporate Governance (CG) mechanisms in relation to bank performance (BP) in a SIDS. The purpose of this study is to evaluate the effectiveness of governance mechanisms on BP during pandemic and also look for whether the covid19 as a moderator has affected the CG variables in relation to BP. To answer the research questions, all the 18 banks operating in Mauritius from the years 2020-2022 are considered. Mauritius because it is one of the strongest economies with a ranking of second among SIDS. As per the result of this study, there is sufficient evidence to conclude that CG mechanisms are effective as some explanatory variables such as OI, AUDC, and CEOD are helpful in anticipating BP as measured by ROA, ROE, and NIM during the pandemic. Therefore, Ho is not rejected. That is, governance mechanisms are effective in relation to BP in this changing world. The evidence suggests that the adherence to CG mechanisms lead to some improvement in performance. Therefore, it is possible to minimise the adverse impact of covid19 on BP through effective governance.However, the result from moderated multiple regression (MMR) has confirmed that the insignificant effects of BIND, BDIVER, and BoSIZE on performance of banks recorded from both fixed effect model regression and dynamic panel data estimation results were due to covid19.In order to curtail the adverse effect of covid19 pandemic, the organistaion and board should recognise opportunities and build new strategies to acclimate to the uncertainties caused by the covid19 pandemic. Banks should also adhere effectively to the code of CG and not just to fulfill the legal requirements.

Ownership structure and bank performance: the impact of market competition

ABSTRACT This paper investigates whether and how ownership concentration, as an intearnal mechanism of corporate governance, and market competition, as an external mechanism of corporate governance, interact to influence bank performance. In other words, we test whether ownership concentration and competition are complementary or substitutes. To do so, we use a unique hand-collected database covering commercial banks based in 17 Western European countries from 2006 to 2019. Consistent with previous studies, we find that ownership concentration and market concentration increase the profitability and risk-taking behaviour of banks. Furthermore, no evidence of non-linearity of competition is found for our sample of European banks. Regarding the interaction effect, our results indicate that market competition seems to foster the profitability of banks with concentrated ownership. In addition, we find that risk-taking behaviour of banks with controlling shareholders increases when they operate in competitive markets. These results suggest that ownership concentration and market competition are complementary, and hence banks may benefit differently from these corporate governance mechanisms to improve their performance.

External tournament incentives and corporate social irresponsibility

AbstractWe integrate the perspectives of tournament and agency theories to examine whether, how, and when external tournament incentives influence firms' corporate social irresponsibility (CSI). Using data on Chinese listed companies from 2003 to 2020, we show that external tournament incentives positively affect firms' CSI. Essentially, CEOs can use CSI to rapidly improve the firm's short‐term performance and thus increase their chances of winning external tournaments. Therefore, CEOs have an incentive to push companies to implement more CSI in response to external tournament incentives. Meanwhile, we find that good external corporate governance mechanisms (short‐selling pressure, marketization, and social trust) inhibit CEOs' opportunistic tendency to use CSI in response to external tournament incentives, thus attenuating the positive impact of external tournament incentives on CSI. This study extends the literature on external tournament incentives and CSI and provides important insights for shareholders and policymakers to effectively curb CSI.

Corporate digital transformation and idiosyncratic risk: Based on corporate governance perspective

This study examines the relationship between corporate digital transformation and idiosyncratic risk. We employ crawler technology to gather “digital transformation” characteristic words in annual reports, and innovatively construct a proxy variable for corporate digital transformation. Using 12,516 observations from 2941 listed companies in China across the period 2014 to 2020, we find that the relationship between corporate digital transformation and idiosyncratic risk presents as “U-shaped”. The results are still robust when we address the endogeneity concern, and use alternative measures of the dependent variable, further validate the U-shaped relationship as well as exclude special samples. The moderating effect of management shareholding and product market competition is further explored from internal and external corporate governance mechanisms, respectively. Results show that internal and external corporate governance mechanisms strengthen the relationship between digital transformation and idiosyncratic risk. In general, our research results enrich the study of corporate digital transformation and risk management, which gives some insight into corporate governance in the digital age.

Is Marriage a Turning Point? Evidence from Cash Holdings Behaviour

AbstractGiven that marriage transforms people, with wide‐ranging and long‐lasting impacts, we examine the role of CEOs' marital status on firms' cash holdings behaviour. Using a large sample of US‐listed firms, we find that single CEOs stockpile more cash than their married counterparts do. Our finding is robust to controlling for various CEO characteristics, CFO influence, tackling endogeneity concerns and using alternative measures of cash. Moreover, we show that exogenous CEO turnover resulting in appointments of single (married) CEOs increases (decreases) cash holdings. Additional results show that single‐CEO firms practise a more conservative payout policy and save more cash from operating and financing cash flows. Consistent with agency theory, single CEOs extract more compensation from the accumulated cash, leading to a lower value of cash holdings. External corporate governance mechanisms mitigate the relationship between single CEOs and cash holdings. Our results show that single‐CEO firms are more prone to agency problems.

Can analyst coverage enhance corporate innovation legitimacy? ——Heterogeneity analysis based on different situational mechanisms

Corporate innovation legitimacy is the key guarantee for listed companies to obtain returns from innovation activities. The purpose of this paper is to investigate the effect of analyst coverage on corporate innovation legitimacy based on effective supervision hypothesis and market pressure hypothesis. Moreover, it examines the moderating effect of analyst coverage characteristics, individual corporate behavior, external governance mechanism on the relationship between analyst coverage and corporate innovation legitimacy. The hypotheses are tested using a data set of Shanghai and Shenzhen A-share listed companies from China Research Data Service Platform (CNRDS) database, Hexun.com and CSMAR database. To overcome sample selection bias and reverse causality, this paper conduct robustness test using propensity score matching, lag variable, substitution variable and sample reduction to ensure the reliability of the research conclusions. Findings show that analyst coverage can effectively improve the innovation legitimacy of listed companies. In addition, based on the heterogeneity of the above relationship in different contexts, further research finds that the depth of analyst tracking, and the assessment of analyst optimism strengthen the positive impact of analyst coverage on innovation legitimacy. The implementation of green social responsibility brings a good reputation for the company, thereby helping analysts to focus on improving the legitimacy of innovation; In the market environment with relatively perfect external governance mechanism, the stronger the effect of analyst coverage on corporate innovation legitimacy. Prior studies mostly considered the R&D investment and other factors to overlook how other dimensions influence companies from the perspective of quantity. The research conclusion confirms the significance of analyst coverage as an external corporate governance mechanism, further enriches the theoretical research framework of innovation legitimacy, and has certain reference value for the improvement of innovation quality of listed companies.

The role of analyst coverage and value-relevance of energy efficiency

PurposeThe purpose of this study is to examine whether financial markets value a firm’s specific corporate environmental performance (CEP), i.e. its energy efficiency. This study also investigates the mechanism through which energy efficiency is associated with firm value.Design/methodology/approachFor the empirical study, a sample of 324 US-listed non-financial firms during the period 2006–2019 was accessed from Thomson Reuters Refinitiv. Using baseline ordinary least squares regression models, this study first estimates the association between energy efficiency and firm value. It then tests the role of analyst coverage (the number of sell-side financial analysts following the firm) in ascertaining the value relevance of energy efficiency. To ensure the robustness of the results, alternative estimations including endogeneity and sample bias correctness tests were performed.FindingsThe study shows that energy efficiency is associated with firm value, and the role of analyst coverage as an external corporate governance mechanism is positive and significant on the value relevance of energy efficiency. Furthermore, this study documents that the relationship is shaped by sustainability-related internal and external risks, indicating that financial analysts’ role becomes more imperative when firms are subject to high scrutiny.Originality/valueThis study contributes to the literature by examining the intersections of energy efficiency, analyst coverage and firm value. It attempts to demonstrate how and why CEP and financial performance are linked. In the context of growing environmental concerns, the pressure of climate change and achievement of net-zero carbon emissions, this study provides valuable insights into the financial market wherein firms’ environmentally responsible behaviours are value-enhancing, and governance mechanisms are impactful. This study suggests that financial analysts can serve as an effective external corporate governance mechanism.

Allocative efficiency of internal capital markets: Evidence from equity carve-outs by diversified firms

We examine whether equity carve-outs (ECOs) lead to improvements in the functioning of the internal capital markets (ICM) of diversified firms. Divestitures, including spin-offs, sell-offs, and equity carve-outs, can be employed by firms to improve allocative efficiency. Equity carve-outs, unlike other forms of divestiture, leave the parent's ICM largely intact but provide the opportunity to enhance internal and external corporate governance mechanisms that can improve the parent's ICM. Using a US sample of 354 equity carve-outs completed between 1980 and 2013, we find that the allocative efficiency of parents is augmented significantly following transaction completion. This increase in allocative efficiency is driven by improvements in both the external and internal governance characteristics of parent companies, consistent with the expectation that motivates equity carve-outs.

Effects of External Corporate Governance Mechanism on Financial Distress Risk: Evidence from Chinese Listed Firms

We explore the effects of external corporate governance measures on financial distress risk for the non-financial listed firms in China. For empirical analysis, we use panel regression models to handle the panel data collected from the CSMAR for 2010-2020. As a proxy for the financial distress risk or dependent variable, we employ the Z-score (Altman, 1968) which measures the financial distress risk inversely. As measures for external corporate governance mechanism or explanatory variables, we choose product market competition, control market competition, bank borrowing ratio, external audit, government supervision, supplier trust and customer support. In addition, we take three control variables, namely, company size, listing period, and operating profit ratio. Overall, our findings are largely consistent with prior studies, showing that the external corporate governance mechanism exert significant influence on financial distress risk. Among the independent variables, product market competition, external audit, supplier trust and customer support have a significant positive relationship with financial distress risk, while bank borrowing ratio has a significant negative association with the financial distress risk. Of the control variables, firm size and operating profit ratio are positively associated with the financial distress risk, while listing period is negatively associated with the financial distress risk of the company. These findings would be useful for corporate decision makers, institutional and individual investors, and government policymakers in devising investment strategy and government policies to alleviate the likelihood of financial distress risk.

Does the Agenda-Setting Effect Always Work?

The media is viewed as an external mechanism of corporate governance in a large body of literature. In agenda-setting research, the media can exert influence on corporate emissions behavior by controlling the public and government agenda. However, it is unclear whether such effect will be influenced by the regional institutional environment. The authors construct a theoretical framework including different types of media and corporate environmental behavior, which is used to investigate the impact of institution informatization on the media agenda-setting effect. The authors then used a sample of Chinese industrial enterprises from 2011 to 2014 to test this hypothesis. The empirical results reveal that both printing and electronic media elicit improvement on corporate environmental performance. Institutional informatization can significantly enhance the disincentive effect of electronic media on corporate emissions, while the moderating role in the relationship between printing media and corporate emissions is not significant.

Moderating the connections: media coverage and firm market value

PurposeThe purpose of this paper is to explore how a politically connected firm moderates the relationship between media coverage and market value. More specifically, the authors are interested in the interplay of an external corporate governance (CG) mechanism with an internal one. By interacting different mechanisms, this paper advances the empirical setting of application and functions of the corporate governance.Design/methodology/approachThis paper tests the hypotheses presented using panel data with a fixed-effect model, by assembling and exploiting a unique, hand-collected set of data on media coverage consisting of over 164,000 media reports and a politically connected board of directors comprising over 12,000 CVs tracked from 2010 to 2014. Data is originally from Brazil, a country where political connections are highly used by firms and that has been a place of much research on corporate political activity.FindingsThe results of this paper suggest that a politically connected board of directors can mitigate the negative effects of media coverage on market value. Overall, the results imply that the validity of a CG mechanism might be affected by other mechanisms.Research limitations/implicationsThe findings of this paper imply the need for research focusing on the mutual effects of different CG mechanisms. While CG is understood as a set of mechanisms, new research could focus on the interplay of these mechanisms.Practical implicationsThe findings suggest that the presence of former politicians and government officers on the board dissipates bad news reported by the media and boosts market value when media is positive. To maximize investment returns, investors should analyze firms' political human capital.Originality/valueTo the best of the authors’ knowledge, this paper is the first to develop hypotheses on the moderation effects of a politically connected board on the relation between media coverage and market value. This is relevant because this brings insights on how firms could jointly manage these mechanisms.

The impact of audit committee on financial reporting quality

The above research papers confirm the fact the accuracy and credibility of financial reports issued by listed firms are crucial for an efficient and viable stock market. Unfortunately, accounting fraud and other financial market misconduct are prevalent in the global market, and have seriously damaged interests of shareholders around the world. To prevent this bad phenomenon and to improve investor confidence, governments around the world have implemented a series of reforms to strengthen internal and external corporate governance mechanisms. Many of these regulatory changes have focused on the composition of an audit committee, a board sub-committee in charge of overseeing a firm’s financial reporting process, internal control structure, internal audit functions, and external audit services. Thus, the aim of this paper is to show the relationship between the impacts of audit committee on financial reporting quality. To achieve the objectives of the paper, the researcher relied on reviewing 15 related studies that were published in different journals and by different authors for time periods (2016 - 2020).

Board characteristics and demand for audit quality: a meta-analysis

PurposeThe study explores extant knowledge on the nature of the relationship between internal and external corporate governance mechanisms, particularly board characteristics and audit quality, respectively, while also investigating how the relationship varies across geographies.Design/methodology/approachThe extant knowledge is synthesized using a meta-analysis, which is conducted using a sample of 56 empirical studies from publications of varying grades. The studies span over 25 years (1996–2021) and cover 147 empirical samples (343,787 firm-year observations) across more than 20 countries. The dependent variable is audit fees, and the independent variable captures 12 different measures of board characteristics.FindingsOverall, the results reveal a positive association between board characteristics and audit fees, indicating complementarity between governance mechanisms. Effect size analysis shows board characteristics, like size and independence, are positively associated with audit fees. However, heterogeneity is noted for some characteristics, and further analysis by geography (developed vs emerging countries) explains the heterogeneity.Practical implicationsThis study helps multiple stakeholders like firms, shareholders, boards, regulators and policymakers in designing and strengthening governance frameworks.Social implicationsBoth governance and auditing literature benefit from identifying specific board characteristics that drive audit quality consistently across different institutional settings and samples. Heterogeneity analysis helps improve the understanding of contradictions documented in prior literature.Originality/valueThis meta-analysis is the first to explore the interplay between internal and external corporate governance mechanisms, with a focus on board characteristics and audit quality. The study provides valuable insights on how different governance mechanisms influence each other while highlighting, for the first time, how the interaction between governance mechanisms varies by a country's level of development.

Drivers of environmental and social sustainability accounting practices in Nigeria: a corporate governance perspective

PurposeThis study aims to investigate corporate governance mechanisms affecting environmental and social sustainability accounting practice (SAP). Four internal (quality of information technology [QIT], market orientation, business strategy and structure of accounting department) and two external (environmental uncertainty and market competition) governance mechanisms were examined.Design/methodology/approachThe population of the study is comprised of 56 publicly listed manufacturing companies on the Mainboard of the Nigerian Stock Exchange. Data were collected using a questionnaire which was completed by senior finance personnel in each company in the sample. Structural equation modelling, logistic regression and quantile regression analysis were used to analyse data.FindingsThe results show that the extent to which Nigerian companies have implemented SAP is moderate. The authors find that the level of SAP implementation is significantly associated with market orientation and business strategy, but not with the QIT and structure of accounting department. The results also show that both external corporate governance mechanisms (i.e. environmental uncertainty and intensity of competition) have no significant effect on SAP.Practical implicationsThe insignificant influence of external corporate governance mechanisms on SAP corroborates the contention that external pressure on companies to implement sustainability initiatives in developing countries is weak.Originality/valueThis study contributes to the literature on sustainability in developing countries and incrementally adds to knowledge on the corporate governance mechanisms driving SAP in jurisdictions characterised by lax regulatory framework and weak institutional apparatus on sustainability.

Does electronic economics matter to financial technology firms?

This paper addresses the notion of electronic economics by examining financial technology (fintech) firms' performance and corporate governance quality, using data from the United States. The findings support our maintained assumption that due to the economics of electronic platforms perused by financial technology firms, these firms outperform firms from other industries (non-Fintech). The final sample comprises 1,712 company-year observations between 2010 and 2019 (pre-COVID-19). The evidence suggests that our corporate governance quality index, developed from Organisation of Economic Cooperation and Development (www.oecd.org/corporate/corporate-governance-factbook.htm, 2019) guidelines, accurately captures corporate governance quality in the United States, principally due to the inclusion of an anti-bribery policy indicator, in the index. The results suggest that this evidence is not merely an artefact due to the corporate governance quality index potentially capturing priced risk factors. Our findings reveal that fintech firms have superior corporate governance quality than non-fintech and that fintech firms place more reliance on internal versus external corporate governance mechanisms, vis-a-vis companies in other industries.

Do Sell‐Side Analysts Play a Role in Hedge Fund Activism? Evidence from Textual Analysis*

ABSTRACTWe investigate variation in information production by sell‐side analysts and its potential role in hedge fund activist intervention, an important external corporate governance mechanism that creates shareholder value. Using textual analysis to derive an activism dictionary from intervention objectives and tactics, we find substantially more activism content in pre‐intervention analyst reports of target firms than propensity score matched control firms. Activism content is associated with more detailed reports containing more quantitative information. Target firm intervention‐date stock returns are significantly higher when activist intention (13D) filings are supported by reports with more general and objective‐specific activism content. Of activists' public letters to stakeholders, 31.9% directly mention sell‐side analysis, amplifying the association between target returns and analyst report information. The relationship between analyst information and activism returns is robust to using brokerage closures as an exogenous shock and is consistent with analyst incentives. Activist funds with no prior disclosed position in target firms and more experienced funds capture higher returns from sell‐side information. Overall, our results suggest sell‐side analysts play a significant informational role in supporting hedge fund activism.

Firm Value Response to Internal and External Corporate Governance in the Nigerian Stock Market

The slow pace of firm valuation and the rising occurrences of fraud have been attributed in part to corporate governance. This research aims to educate the companies and their management who are capable of reversing the current pace to a much better pace. This study also aims to ascertain the firm value response to internal and external corporate governance using evidence from the Nigerian stock market, which covers the period from 2012 to 2019. To determine the response of firm value to the internal and external corporate governance mechanisms, two indexes were determined using the Principal Component Analysis (PCA), and data was sourced from the annual reports of the sampled firms listed on the Nigerian stock market. The variables used were firm value proxied by Tobin’s Q, and the internal corporate governance index composed of board independence, board meeting, board size, and board education; and then the external corporate governance index was represented by corporate disclosures, audit type, timeliness of reporting, and corporate governance code. The data was analyzed through a series of tests including the descriptive statistics, PCA, correlation matrix, and panel data static estimators, amongst others. The findings obtained from the analysis show that internal corporate governance has a positive and significant influence on firm valuation and that external corporate governance has a negative and insignificant influence on firm valuation.

Financial distress, earnings management and Big 4 auditors in emerging markets

PurposeThe purpose of this study is to examine the association between financial distress and accruals-based earnings management in emerging markets, and the role that auditors play in that association.Design/methodology/approachThis study relies on a sample of 33,455 firm-year observations from 20 emerging markets, covering a large period of analysis of 20 years. A multivariate analysis is performed by considering the level of financial distress as the dependent variable, and the accruals-based earnings management and dummies for the type of auditor as the main independent ones.FindingsThe authors predict and find empirical evidence that firms facing greater financial distress engage in income-increasing accruals-based earnings management in emerging markets, and that such engagement is lower in firms audited by Big 4 firms compared to those audited by non-Big 4 auditors. The authors also find significant differences across Big 4 audit firms in their role of constraining income-increasing earnings management strategies in firms with high levels of financial distress.Originality/valueThe study adds to previous literature by investigating the association between financial distress and accruals-based earnings management in a comprehensive sample of 20 emerging markets, by providing important overall cross-country empirical evidence that has not been addressed by previous literature. The authors also bring new knowledge by discussing the role played by the Big 4 audit firms in limiting earnings management practices by firms with high levels of financial distress. Such a limitation serves as an important external corporate governance mechanism to restrain managers’ opportunistic behaviour in firms facing financial distress – especially in emerging economies characterized overall by institutional voids.