External Corporate Governance Research Articles

CEO foreign experience and corporate financial investment

Using a hand-collected sample of CEOs' foreign experience data for Chinese listed firms from 2008 to 2018, we investigate the impact of CEO foreign experience on corporate financial investment behaviors. We find a significantly negative association between CEO foreign experience and risky financial investment and a significantly positive association between CEO foreign experience and safety financial investment, suggesting CEOs with foreign experience can help constrain their firms' risky investment. The result is robust to Heckman two-stage analysis, instrumental variable approach, propensity score matching, and other robustness tests. Further analyses reveal that CEOs with foreign experience act as a key role of inhibiting the risky financial investment when firms have suffered poor internal or external corporate governance. Moreover, the relation between CEOs' foreign experience and financial investment is more pronounced when CEOs have financial background or CEO's tenure is shorter. The relation between CEOs' foreign experience and financial investment is more significant when CEO's overseas background belongs to a common law country or region. After replacing the dependent variable, this paper finds that CEO's overseas background also inhibits firm's share price risk and business risk. Finally, this conclusion is consistent with the CFO's overseas experience as the research object. Overall, the findings suggest that CEO foreign experience matters for corporate financial decisions in emerging markets.

Friendly boards and capital allocation efficiency

AbstractThis study examines the effect of friendly boards on capital allocation efficiency. We provide evidence that firms with friendly boards have a positive and statistically significant effect on capital allocation inefficiency. We find our results robust to different measures of friendly boards and capital allocation inefficiency, alternative model specifications, omitted variable bias, self‐selection bias and other endogeneity concerns. We also show that the positive association between friendly boards and capital allocation inefficiency is lower in firms with high external corporate governance quality but higher in firms with high financial constraints. The findings imply that poor board monitoring and high agency conflicts in firms with friendly boards lead to high capital allocation inefficiency.

Blockchain mania: A perspective on corporate executive opportunism

This study investigates whether investors' overreactions to blockchain-related announcements is driven by corporate executive opportunism in the Chinese capital market. We manually collect blockchain-related announcements made by Chinese listed firms over 2016–2022 and conduct an event study to estimate market reaction. The announcements are further categorized as value-driven and speculation-driven announcements. Although both announcement types elicit positive short-term market reactions, the long-term reactions to speculation-driven announcements fade and even reverse, while the value-driven ones remain positive. Additionally, we determine that speculation-driven announcements are followed by seasoned equity offerings, negative news releases, and reductions in the stockholdings of large shareholders and executives, suggesting corporate executive opportunism. Finally, we demonstrate the efficacy of internal and external corporate governance in reducing corporate executive opportunism. Our study sheds light on market reactions to blockchain-related announcements from the perspective of executives’ opportunism.

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.

Returnee directors and green innovation

This study examines the effect of returnee directors, defined as local directors who have studied or worked in foreign countries, on a firm’s green innovation. Utilising robust econometric modelling, we examine a large sample of A-share nonfinancial firms listed on the Shenzhen and Shanghai stock exchanges. Our findings reveal a positive and significant relationship between returnee directors and green innovation. Interestingly, this association remains consistent across both environmentally sensitive and non-sensitive industries. However, it becomes more pronounced when returnee directors are non-executive, function within state-owned enterprises, number more than one on the board, or operate in firms with poor internal and external corporate governance environments. Furthermore, we demonstrate that returnee directors, armed with foreign education or work experience, increase green innovation. The results withstand a series of robustness checks, including the Heckman two-step sample selection model and propensity score matching. Overall, the results suggest that returnee directors drive green innovation.

Does ESG report greenwashing increase stock price crash risk?

ABSTRACT From the perspective of non-financial information greenwashing, this paper investigates the impact mechanism of environmental, social and governance (ESG) report greenwashing on stock price crash risk. The results indicate that ESG report greenwashing increases the stock price crash risk. In high earnings management companies, ESG report greenwashing is positively correlated with stock price crash risk, and ESG report greenwashing and earnings management are complementary. Further analysis shows that better internal and external corporate governance can suppress the impact of ESG greenwashing. In addition, in the voluntary disclosure and private enterprise samples, ESG report greenwashing has a greater impact on the stock price crash risk. Mechanism analysis found that the greenwashing of ESG reports intensified the information asymmetry，which increased the stock price crash risk. Overall, our evidence is consistent with the masking effect of socially responsible information, and that ESG greenwashing increases the stock price crash risk.

Egregious separation payments The role of internal and external corporate governance

Egregious separation payments The role of internal and external corporate governance

Women's Empowerment and Participation in Islamic Financial Planning Diversity, Equity and Inclusion: Evidence from Maqasid al-Shari`ah

The study places a strong emphasis on women’s empowerment, given the quick changes in society that are occurring right now. Many women are pursuing various sorts of employment, including self-employment, in this era of economic liberalization and women's empowerment. However, this study aims to investigate the connection between Islam and women's empowerment by examining Maqasid al-Shari'ah perspectives on this matter. To have a thorough understanding of Islam and women's empowerment, it is imperative to consider the role played by women in the financial sector and their contribution to economic progress. Using an experiment, this study examined the relationship between confidence, gender, and race in dealing with a financial planner among various groups and races with colour and creed. The study's implications are significant for comprehending the obstacles and chances that under-represented groups encounter in pursuing financial planning success. The alignment of industry measures to raise the proportion of women and persons from varied backgrounds in the financial services sector led to the focus of this study on women and diversity. This essay examines the primary factors influencing diversity and the place of women in various financial management, CSR, and external corporate governance roles. This research also focuses on women's leadership and social diversity, focusing on female managers committed to fostering and maintaining equity and diversity inside their organizations. This study demonstrates how women plan financially for retirement based on psychological concepts and sociodemographic variables, highlighting the importance of financial management and planning for women. It showed a strong correlation between the investor's choice of investments and the strong relationship between the women's decision-making processes on the mental and financial levels. To assess the core idea of Maqasid al-Shari’ah from primary and secondary Islamic knowledge sources, which serves as a model for women's empowerment, and to pinpoint the obstacles to women's empowerment and participation in Islamic financial planning in terms of diversity, equity, and inclusion, this study employs the qualitative method.

Does effective corporate governance mitigate the negative effect of ESG controversies on firm value?

This study examines the effect of corporate governance on the relationship between ESG controversies and firm value. Panel data consisting of 883 non-financial Chinese listed firms from 2018 to 2022 are analyzed. We find a significant and negative impact of ESG controversies on firm value. The presence of effective corporate governance is found to mitigate the negative impact of ESG controversies on firm value. The findings are robust to the two step GMM, 2SLS method and heteroskedasticity test. Then we explore the influence of internal governance factors and external corporate governance factors respectively. Among the internal factors, we find that board gender diversity, board independence, equity incentive, and high reputation VC/PE shareholdings all have a significant and positive impact, while board size and sustainability committees have no significant impact. In terms of external governance factors, ESG controversies in regions with fierce market competition have a relatively small impact on firm value, while those in regions with perfect legal environment have a more severe impact on firm value. Further analysis shows that environmental, social and governance controversies urge enterprises to improve their environmental and social performance and reduce inefficient investment respectively, and these effects are more pronounced in the corporate governance group with high level. However, governance controversies have no impact on accounting information quality. These findings have important policy implications for managers and practitioners by supporting the idea of companies adopting appropriate corporate governance practices that can effectively mitigate the negative effects of corporate controversies.

Green finance pilot reform and corporate green innovation

This study investigates the impact of the green finance pilot reform on corporate green innovation using the formation of the China Green Finance Pilot Reform in 2017 as a quasi-natural experiment. It shows that the green finance pilot reform increases corporate green innovation. Furthermore, by highlighting the differences between green enterprises and heavily polluting enterprises, it also shows that the positive relationship between the green finance pilot reform and corporate green innovation is more pronounced in green enterprises than in heavily polluting enterprises. The mechanism analysis shows that the green finance pilot reform mainly affects corporate green innovation by easing financing constraints and reducing financing costs. The heterogeneity analysis indicates that the positive relationship between the green finance pilot reform and corporate green innovation is more pronounced in non-state-owned enterprises and large-scale enterprises. As a result, the effect of the green finance pilot reform on corporate green innovation gives rise to certain green innovation incentives. It is thus necessary to optimise the external corporate governance environment by promoting the green finance pilot reform and further offers practical implications for corporate green innovation decision-making.

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.

Short selling and corporate financial fraud: Empirical evidence from China

This study employs a difference-in-differences model to examine the impact of short selling on corporate financial fraud by utilizing China's relaxation of short selling regulation as a quasi-natural experiment. The results suggest that short selling can restrain the tendency of companies to commit financial fraud and reduce the severity of such fraud. This effect is more pronounced in privately-owned enterprises. Moreover, short selling can exert regulatory influence on corporate financial fraud through two distinct mechanisms: by elevating the litigation risk faced by auditors and by bolstering the vigilance of external shareholders. Furthermore, our extended investigation reveals that a favorable external corporate governance environment is more conducive to the effectiveness of short selling in regulating corporate financial fraud. However, the regulatory impact of short selling on corporate financial fraud remains unaffected by the quality of the internal corporate governance environment. Our study contributes to the theoretical research on the economic consequences of relaxing short-selling regulations and provides empirical insights into the governance of financial fraud in Chinese companies.

Proxy favors: Confidential proxy voting with institutional dual holders

AbstractResearch Question/IssueFor firms with institutional dual holders, is proxy voting affected by whether the vote is confidential? Does confidential voting affect firms' cost of debt?Research Findings/InsightsConsistent with social exchange theory and reciprocity norms, we find that, in the absence of confidential voting, firms with institutional dual holders gain more favorable votes for proposals and, in particular, for management‐sponsored compensation proposals. Further, these firms pay a higher cost of borrowing. This reciprocity relation does not exist if the firm has confidential voting in place.Theoretical/Academic ImplicationsThe results are consistent with reciprocity norms creating a psychological obligation to repay valuable favors between firm managers and institutional dual holders when proxy votes are not confidential.Practitioner/Policy ImplicationsThe findings support the popular position that confidential voting is in the best interests of shareholders and rigorous external corporate governance.

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.

Do sustainability ethics explain the impact of country-level corporate governance on financial stability in developing economies?

ABSTRACT The study presents an empirical evidence on how sustainability ethics affect the relationship between country-level corporate governance and financial stability in developing countries. Employing the dynamic system Generalized Method of Moments on a panel dataset of 137 developing countries over the period, 2006–2019, the study found that the positive effect of country-level corporate governance framework on financial stability is not instantaneous. We find that internal and external corporate governance frameworks have a strong positive synergistic effect on financial stability. We confirm that corporate governance measures substitute sustainability ethics to yield a desirable outcome of financial stability. Finally, the study finds evidence to support that sustainability ethics reduce the negative impact of country-level corporate governance on financial stability. The study recommends that the build-up of quality sustainability ethics can help tame the reductive effect of the country-level corporate governance framework on financial stability in developing countries.

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.

Competition laws and corporate risk-taking around the world

Using a new dataset on international competition laws, we examine the relationship between country-level competition laws and corporate risk-taking in 58 countries from 1990 to 2010. Consistent with the disciplinary effect hypothesis, we document robust evidence of a negative relation between corporate risk-taking and the stringency of competition laws. The negative relation between competition laws and corporate risk-taking is more pronounced among financially constrained firms and less pronounced among firms situated in high-trust jurisdictions. Further analysis shows that competition laws affect corporate risk-taking by mitigating agency problems and enhancing information transparency. Overall, these findings are consistent with the view that competition plays a critical external corporate governance role in shaping corporate behaviors.

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.

Trust and corporate social responsibility: Evidence from CEO’s early experience

While previous literature has paid much attention on the effects of trust as an informal institution on economic growth and corporate behavior, it is unclear whether and how the trust affects the corporate social responsibility (CSR). In this study, we use CEOs’ early experiences on trust to assess the effect of CEO’s personal trust on CSR based on a difference-in-differences design. We find that CEOs with low trust levels are more inclined to be socially responsible. Mechanistically, CEOs are willing to take the initiative to fulfill their social responsibility due to risk aversion and concern for corporate development brought about by poor trust. After excluding competing explanations for the effects of early experience on human capital accumulation and health endowment, the results on the impact of trust on CSR remain robust. The inhibitory effect of trust on CSR is more pronounced in conditions of higher levels of external corporate governance, low financing constraints, and low analyst attention and among state-owned enterprises. The findings of this paper emphasize the important role of informal institutions in CSR performance.

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.