External Corporate Governance Mechanisms Research Articles

EXAMINING THE RELATIONSHIP BETWEEN DISCLOSURE LEVEL, OWNERSHIP STRUCTURE AND EARNING MANAGEMENT IN THE TEHRAN STOCK EXCHANGE

Earnings are one of the basic elements of financial statements, which has always been of interest to different groups and it is used as a measure of continuity of activity, efficiency and revision of earnings contracts, predicting future cash flows for investment. Managers, to mislead shareholders on the actual economic performance of the firm, often manage earnings. Earnings management is a biased intervention on external financial reporting that is done to secure unusual earnings for shareholders or managers. Given the importance of earnings management in financial and accounting literature, in this study, we examine the effect of different internal and external mechanisms and disclosure level on earnings management. In this study, to estimate the model we have used the data of 143 firms listed on Tehran Stock Exchange, obtained by screening or systematic elimination over the 2005-2014 period. The results show that the impact of institutional ownership variable (as an external mechanism of corporate governance) on earnings management is positive and significant. The concentration of ownership (as an internal mechanism of corporate governance) on earnings management is positive and statistically significant. The impact of disclosure on earnings management is negative and significant. In addition, the results show that firm size is positively correlated with earnings management. The other two control variables, the ratio of market value to book value of equity and financial leverage have a negative impact on earnings management. Based on the results we suggest that institutional investors and major shareholders play a more active role in supervision and help to align the interests of shareholders and managers to decrease the agency problems and finally improve the firm's performance.

Bank Dividends, Agency Costs and Shareholder and Creditor Rights

Using data on listed bankes in 51 countries, we analyze whether banks’ dividend payouts are influenced by the relative strengths of the agency conflicts faced by their shareholders and creditors. We show that dividend policy depends on the relative strengths of these agency conflicts, but with a more decisive role played by the agency cost of equity than the one of debt, in contrast to results found in the literature on non-financial firms. We then further investigate whether those relationships are shaped by differences in funding structure, levels of capitalization and capital stringency, and potential differences in external corporate governance mechanisms.

Mergers and Acquisitions in Latin America: Industrial Productivity and Corporate Governance

This paper examines the impact of industrial productivity on transnationals M&As from OECD countries towards Latin American countries in the period 1996 to 2010. It also analyzes the relationship between external mechanism of corporate governance and transnational M&As. For this purpose we use a gravitational model at the industry level. We find that industry productivity and higher standards of corporate governance in the country of origin promote transnational M&As activity. However, it is also found that higher levels of capital and technological productivity decreases transnational M&As activity.

In(Ex)Ternal Corporate Governance and Innovation: A Review of the Empirical Evidence

This empirical review aims to discern the role of both internal and external corporate governance in enhancing firm innovation activity. It highlights the incentives and obstacles corporate governance creates for the innovation activity of firms. The extant literature reverberate several key observations. The number of inside vs. independent directors, better protection of shareholder rights as well as higher ownership concentration appears to facilitate firm R&D expenditures and intensity, and more patents. Director stock option incentives as well as greater disclosure and transparency (of innovation activity) and greater stakeholder involvement also appear beneficial to firm innovation. Better presence of institutional investors, anti-takeover provisions, and existing competition are also observed to positively impact firm innovation activity. On the other hand, the literature offers implication that in instances where corporate governance provisions are mandated then firms can become dissuaded from engaging in innovation activity. Despite the general sentiment regarding the benefits of good corporate governance on enhancing firm innovation outcomes, it is noted the majority of studies offer evidence from the context of developed countries only. Nonetheless, there exists growing evidence that from an emerging market context, firm governance can similarly be closely linked to innovation outcomes among countries that have weak country governance. Further study on how both internal and external corporate governance mechanisms promotes or encumbers innovation activity at the level of the firm appear central in advancing theoretical arguments on the ways in which firms can achieve an ideal balance in terms of voluntarily adopting vs. mandating corporate governance provisions.

An evaluation of governance mechanisms as determinants of performance: A case study of Australian universities

The premise underlying the introduction of corporate governance principles in the Australian higher education sector is that good governance results in good performance. The purpose of this paper is to evaluate the influence of internal and external corporate governance mechanisms as determinants of performance in the context of Australian publicly-funded universities. Secondary data from annual reports were transformed to create indices of internal and external governance practices, and teaching, research and financial performance. Relationships between governance and performance were analysed using correlation analysis. The study illustrated in this paper is important as literature suggests that corporate governance mechanisms and the influence of these mechanisms on performance are contradictory. The results of this study do not support the contention that in Australia, the governance of universities has a significant relationship with their performance.

КОРПОРАТИВНІ КОНФЛІКТИ В СИСТЕМІ ЕКОНОМІЧНОЇ БЕЗПЕКИ ПІДПРИЄМСТВА

place of corporate conflicts in the system of security. approaches to the definition of economic conflict, interest corporate conflict. The basic types of threats to security, which carries the corporate governance. Established that any element inside and outside the company (corporation) in terms of security can act simultaneously in four roles: the subject of security; facility security (protected element); sources of threat; object threat. Consider the types of corporate conflicts depending on the participants analyzed the conditions of their emergence, plant and equipment are presented minimize them. Determined that prevent corporate conflicts is reduced to improve internal and external mechanisms of corporate governance.

Managerial and Disciplinary Responses to Abandoned Acquisitions in Bidding Firms: A New Perspective

AbstractManuscript TypeEmpiricalResearch Question/IssueExisting research suggests that internal and external corporate governance mechanisms substitute for one another to mitigate agency problems in bidding firms. This paper tests whether the interaction between these mechanisms is more complementary.Research Findings/InsightsWhile there is evidence for disciplinary responses to bids for unrelated targets involving strategic retrenchment and significant asset divestment, the influence of the information conveyed by this characteristic on the likelihood of post‐abandonment discipline is not amplified when boards are less independent.Theoretical/Academic ImplicationsThe results suggest that certain characteristics are used to distinguish between abandoned bidders which require discipline and those that do not. However, our findings do not suggest that interaction between internal and external governance mechanisms is contingent on board independence. Instead, these interactions between shareholders and boards seem to be contingent on a range of company, industry, and situation‐specific factors.Practitioner/Policy ImplicationsWhile policy in the UK has focused on board independence as a means of effective corporate governance, our results suggest that this is not a panacea. Effective governance involves active owners, communicating their interests to boards, and boards responding accordingly. Further encouragement of such communication before, during, and after acquisitions will improve signals to managers that shareholders can target the necessary discipline of those whom they perceive to need it most.

Corporate governance mechanisms and audit report timeliness: empirical evidence from Oman

This study provides empirical testing of evidence on whether internal and external corporate governance mechanisms are associated with audit report timeliness. We employ data from companies listed on the Omani capital market. Using a panel data approach, we discover that only internal corporate governance mechanisms associated with timely audit report. More specifically, we find board characteristics such as size and expertise, and audit committee characteristics such as financial expertise, are associated with improved audit report timeliness. By using composite measure for internal corporate governance mechanisms, we also find that audit committee quality enhances audit report timeliness while board quality does not. We further demonstrate that corporate governance mechanisms play a substitution role rather than a complementary role in explaining audit report timeliness. Thus, we conclude that corporate governance mechanisms in Oman are not as effective as in more developed countries and that regulators in such a less developed country should impose and encourage substantial corporate governance practices instead of merely adhering to pro-forma practices.

Corporate Governance Index and Firm Performance: Empirical Evidence from India

Prior studies using an index of corporate governance to explore the relationship between corporate governance and firm performance have found a positive linkage between the two that is better governed firms exhibit better financial performance. Following the seminal work of Gompers et al. (2003. Quarterly Journal of Economics, Vol. 118, No. 1, pp. 107–155) of creating a Corporate Governance Index (CGI) to study the relationship between corporate governance and firm performance, similar studies have been reported not only from developed markets like Germany, Canada, Hong Kong, Switzerland and Australia, but also from emerging markets like Ukraine, Russia, Greece, Thailand and India. In the present study, we investigate the relationship between corporate governance and firm performance in the Indian context by constructing a Corporate Governance Index (CGI) based on internal and external corporate governance mechanisms. Further, we use value-based performance measure-Economic Value Added (EVA), as the primary metrics to measure firm performance. Besides EVA, traditional measures such as Return on Net worth (RONW), Return on Capital employed (ROCE) and Tobin's Q have also been used to evaluate the linkage between corporate governance and firm performance. Using various econometric techniques, we conclude that there is a positive relationship which exists between corporate governance based on the CGI and firm performance, when the performance is measured in terms of the value-based performance tool-EVA. The relationship could not be validated for the traditional performance tools-RONW, ROCE or Tobin's Q.

External auditor types and the cost stickiness of listed companies

External auditing is an important method of corporate governance that can effectively monitor and restrict a manager’s opportunistic behaviour and reduce cost stickiness. We focus on Chinese A-shares listed companies from 2002 to 2010 to explore the governance role of external auditors in cost stickiness. We classify audit firms into three types: the Big Four International, the Big Ten Domestic, and the non-Big Ten Domestic. The results show that the cost stickiness of firms audited by the Big Four International is significantly lower, while the cost stickiness difference between firms audited by the latter two types is not significant. Further tests show that the restriction on cost stickiness for the Big Four International is more significant when the largest shareholder’s shareholding ratio is lower or when the local market is less developed. These results indicate that the restriction placed by audit quality on cost stickiness varies with other corporate governance mechanisms. Our results are qualitatively unchanged under different robustness tests, including propensity score matching. This study shows that Big Four International audit firms can better reduce cost stickiness, which provides evidence of the higher audit quality of these firms and extends the study of restrictive factors on cost stickiness to external corporate governance mechanisms.

External Corporate Governance Mechanisms: Mergers and Acquisitions on the Brazilian Market

The research aims to answer the following question: What is the effectiveness of mergers and acquisitions in the Brazilian market as external corporate governance mechanism? The main objective of the study is to verify if mergers and acquisitions operations in Brazilian market may act as an external mechanism of corporate governance, replacing managers and, as a consequence of changes in management, improving financial performance.

How do Competitive and Regulatory Pressures Interact with Internal Corporate Governance?: Evidence from the Cameroonian Banking Sector

The objective of this article is to analyse the impact of both external and internal mechanisms of corporate governance on banks performance in Cameroon. The internal governance mechanisms consist of those linked with the Board of directors (its size and composition) and the ownership structure (ownership concentration, equity capital of each type of shareholder). External mechanisms consist of pressure from competitors, and regulatory pressure from the banking Commission following the adoption of equity principles or rules. Research carried out on a sample of 11 Cameroonian banks showed the effect of complementarity between the control exerted by internal stakeholders (institutional shareholders, insiders ownership, size of the Board of directors) and competitive pressure. On the contrary, a substitution effect was detected between State administrators and competitive pressure. Results obtained also revealed the substitution effect between control exercised by the Board of directors and regulatory pressure.

An exploratory study of earnings management detectability, analyst coverage and the impact of IFRS adoption: Evidence from China

Analysts serving as external monitors to managers is a topic of considerable interest in the analyst coverage literature. There are two outcomes of analyst coverage studies: curbing and stimulating earnings management. However, recent studies (such as Yu, 2008) only provide evidence supporting the curbing side. Given the fact that the data of these studies focus on developed markets and the finding of Rodríguez-Pérez and Hemmen (2010) that external governance mechanisms may stimulate earnings management in an opaque information environment, we conjecture whether stimulating side would be dominant in emerging markets. China offers a valuable setting for us to test the question. Using the data of China capital market from 2003 to 2009, we find that analyst coverage stimulates earnings management through above-the-line items (ALIs) where earnings management cannot be easily detected, and curbs earnings management through below-the-line items (BLIs) where earnings management can be easily detected. We also find that the adoption of International Financial Reporting Standards (IFRS) in China does create many new opportunities for managers’ earnings management but does not significantly improve the monitoring effect of analyst coverage. We only find that compared to those without analyst coverage, firms with analyst coverage have a lower level of earnings management through BLIs after IFRS adoption. These findings suggest that information opacity may weaken the monitoring effect of external corporate governance mechanisms and high quality accounting standards in the literal sense may not enhance the monitoring effect of external corporate governance mechanisms if it is not compatible with the market’s institutional environment. In addition, we find that firms with earnings meeting the benchmark have a lower level of earnings management, which indicates that bright-line accounting based rules used in emerging capital markets may constrain the managers’ behavior.

Corporate Governance and Collateral Requirements: Evidence from China's Listed Firms

Using a sample of China’s listed firms during 2007-2009, we examine the effect of internal and external corporate governance mechanisms on collateral requirements of bank loans. We find that governance of foreign shareholders, other large shareholders and the two-tier boards affect collateral requirements. In addition, our result indicates the effect of internal governance on collateral requirements dependents on the type of dominant shareholder. We also find evidence that higher-quality institutions help to reduce the collateral requirements. Overall, our research takes the governance issues into the general determinants of collateral which has important policy implications for governance reform in China’s ever-growing markets.

Corporate governance mechanisms and disclosure in medium-sized listed firms: substitutes or complements?

This paper, focusing on a non-Anglo-Saxon market, attempts to advance knowledge in the understanding of the complementary/substitute relationship between governance mechanisms and corporate disclosure in medium-sized listed firms. The manuscript applies content analysis techniques and proposes a disclosure quality score index, based on the quantity, the variety and the completeness of information disclosed. Moreover, OLS regression analysis is performed for testing the explanatory power of internal and external corporate governance mechanisms as determinants of communication quality. The results demonstrate the relevance of internal control mechanism, as well as their current substitutive nature respect to disclosure. In addition, empirical evidence show that a diffuse ownership along with the existence of a high number of committees are associated with increased qualitative levels of voluntary disclosure.

The Relationship Between Institutional Investment and Earnings Management

The emergence of corporate scandals at the end of the 20th and beginning of the 21th century raised doubts regarding the integrity of financial reporting and the soundness of firms' corporate governance practices. The practice of earnings management is considered to be one of the important causes of these scandals due to its harm to the transparency and quality of financial statements. The discretion exercised by managers in accounting result in agency costs arising from the mismatch between the goals and desires of the principle and the agent causing investors to make suboptimal decisions. The recent surge in institutional investors' shares and associated degree of activism increased their importance as an external control mechanism of corporate governance. Accordingly, the primary purpose of this study is to evaluate the role of these investors on earnings management and alignment of the interests of owners and managers within the context of agency theory. Consequently, two main hypotheses; namely, active monitoring and managerial myopia induced by institutional investors are tested by panel data analysis utilizing data belonging to the firms listed on Borsa Istanbul during the 7 year period between 2005 and 2011, inclusive. The absolute value of discretionary accruals obtained from the performance adjusted cross-sectional industry based accrual model proposed by Kothari, Leone and Wasley (2005) is used as the proxy of earnings management to evaluate whether the presence of institutional investors mitigate or stimulate managers' discretionary accounting practices. Additionally, further analysis is conducted to evaluate the existence of monitoring and clientele effects to better interpret the direction of the relationship between the associated variables of interest.

Global Governance: Bringing External Corporate Governance into the Corporate Governance Equation

Corporate governance research has largely focused on internal governance mechanisms that are designed to align the interests of managers and shareholders. However, much of this work largely ignores the role of external corporate governance mechanisms. This symposium is organized to discuss how external governance mechanisms can help to align the firms’ different stakeholder interests. Our expert panel will discuss several external mechanisms including the media, the market for corporate control, and the legal/institutional environment. We will then discuss how different configurations of external and internal governance mechanisms can lead to more effective corporate governance.

Interactions of Legislative Environment, Ownership Structures and Control Rights: A Review of Literature

The legislative environment prevailing in an economy can be an important determinant of how the firms are governed and the extent to which minority shareholders and other stakeholders are protected. The results of empirical literature on legislative environment as an external corporate governance mechanism indicate that legal and regulatory mechanisms are fundamental determinants in the evolution of corporate governance structures (LaPorta, Lopez-de-Silanes, Shleifer and Vishny (1997, 1998, 1999, 2000 and 2002). In an ideal corporate governance model, one share is equal to one vote which means that cash flow right (ownership right) is equal to the control right (voting right). In reality, trade offs exist between ownership and control rights in every system no matter what the country’s corporate governance system is classified as: - an outsider (dispersed ownership structure) or insider (concentrated ownership structure) -.This paper aims to investigate the comprehensive literature on investors protection topic and taxonomy of different corporate governance systems of countries from various legal origins. In this context, this paper analyzes different mechanisms to concentrate or diffuse control rights with reference to Turkish Commercial Code and Capital Market Laws.

Governance Through Trading: Does Institutional Trading Discipline Empire Building and Earnings Management?

This paper empirically identifies an important external corporate governance mechanism through which the institutional trading improves firm values and disciplines managers from conducting value-destroying activities. We propose a reward-punishment intensity (RPI) measure, and show that it is positively related to firm’s subsequent Tobin’s Q. Importantly, we find that firms with higher RPI exhibit less subsequent empire building and earnings management. Furthermore, we show that the exogenous liquidity shock of Decimalization augments the governance effect of institutional trading. We also find that the discipline effect is more pronounced for firms with moderate institutional ownership concentration, higher managers’ wealth-performance sensitivity, and higher trading liquidity, which further supports the governance role of the RPI. The results are robust to using a subsample containing firms with reduced institutional ownership and to using two instrumental variables.

Corporate Governance and impact on Bank Performance

This study aims at examining the corporate governance mechanisms and their impact on performance of commercial banks in the absence of organized stock exchange. The study assessed the relationship between selected internal and external corporate governance mechanisms, and bank performance as measured by ROE and ROA. The study used structured review of documents, and commercial banks financial data were collected covering a period 2005 to 2011. The findings indicated that board size and existence of audit committee in the board had statistically significant negative effect on bank performance; whereas bank size had statistically significant positive effect on bank performance. Similarly, capital adequacy ratio, as a measure of external corporate governance mechanism, had statistically significant positive effect on bank performance. In addition, absence of organized stock exchange; high government intervention; lack of corporate governance awareness, absence of national standards of corporate governance, as well as accounting and auditing; and weak legal framework to protect minority shareholder rights are the major factors with adverse impact on corporate governance and bank performance in Ethiopia.