Firm-level Corporate Governance Research Articles

The value effect of sustainability: evidence from Latin American ESG bond market

ABSTRACT We use the event study methodology to examine the effect of 115 environmental, social, and governance (ESG) bond issuances on the stock price of Latin American listed firms over the period 2016–2022. Consistent with the signaling theory, firms sending a signal of commitment to sustainability obtain a positive and significant average Cumulative Abnormal Return (CAR) of 1.97% during an event window of 18 days. The CAR is higher for first-time issuers, reaching 2.28%. Firms with smaller and more diverse boards are associated with higher CARs. However, ownership concentration reduces the CARs due to the potential misbehavior and expropriation risk from controlling shareholders. These results suggest that firm-level corporate governance mechanisms are critical to the ESG bonds signaling effect. Overall, our findings indicate that investors in Latin American capital markets positively value the reduction of information asymmetries regarding firms’ sustainability efforts, especially in a firm that mitigates potential agency conflicts.

Stretch or Suppress: Role of Owners and Nominee Directors in Financial Distress

This study investigates the effect of various firm-level corporate governance mechanisms on the likelihood of financial distress in India. We analyze the competing hypotheses of interest alignment and agency theory, examining how controlling shareholders affect the probability of financial distress. Additionally, we assess the potential impact of institutional investor shareholding and bank-appointed directors on the likelihood of financial distress. Our findings suggest that increasing controlling shareholder ownership decreases the probability of distress. However, the effects of institutional investors and bank-appointed directors vary and also depend on the quantum of shareholding of institutional investors and affiliation with business groups. Our results offer insights into improving governance in economies with higher ownership concentration, weaker institutional frameworks, and greater bank participation in credit facilitation. JEL Codes: G32, G33, G34

How useful are commercial corporate governance ratings? Evidence from emerging markets

A central issue in evaluating the effects of firm-level corporate governance (FLCG) is how to measure it. We focus here on emerging markets (EMs). One common approach to measuring FLCG uses country-specific (CSIs), tailored to each country's laws and institutions. Several studies report that CSIs can predict firm outcomes in a panel data framework with two-way (firm and time) fixed effects (TWFE). An alternate approach uses commercial CG ratings (CCGRs) that apply the same or similar elements across many countries. We assess the three best available CCGRs covering EMs (Asset4, Thomson Reuters, and MSCI), and find that they do not predict firm outcomes with TWFE in EMs. We also provide evidence that the likely cause for CCGRs' lack of performance is their poor construction rather than the inability of FLCG measures to predict outcomes. CSI-based studies suggest that disclosure (beyond country-mandated minimums) is the FLCG aspect that most consistently predicts firm outcomes in EMs. Yet, these CCGRs have no or minimal measures of disclosure. Other important limitations of the CCGRs include the use of elements that are U.S.-centric; reflect firm outcomes rather than CG; are implausible measures of good FLCG, or are vaguely or subjectively defined. We also attempt, but fail, to use element-level information from CCGRs to construct sound measures of FLCG.

CORPORATE GOVERNANCE INDICATORS AND FIRM VALUE: THE CASE OF ZIMBABWEAN COMMERCIAL BANKS

The financial crisis that occurred between the period 2008-2009 left many banks collapsed and thus this raised more questions than answers about relation with corporate governance and firms value. In Zimbabwe more than 20 banks were closed during the period of 1980 to 2017. This dissertation investigated the relation between firm-level corporate governance and firm value based on a large and previously use questions measuring corporate governance from Laporta which comprise 24 questions. However, the researcher used on a set of 17 individual questions as they suit the Zimbabwean commercial banks to come up with three corporate governance indices. The researcher employed explanatory research methodology. For all three indices the researcher found a strong and positive relation between firm-level corporate governance and firm valuation. In addition, disclosure of information was found to be improving the TobinQ by 0.7% and a strong causation was found on the board composition and performance as indicated by an increase of 26% on Tobins Q of banks. However, ethics and conflict of interest was found to be reducing firms value by 0.2%. Regardless of whether these attributes are considered individually or aggregated into indices, and even when “standard” corporate governance attributes are controlled for, they exhibit a positive and significant effect on firm value. The findings are robust to alternative calculation procedures for the corporate governance indices and to alternative estimation techniques. The study found out that firm value was driven by information disclosure and board composition and thus the researcher recommends that banks should continue improving their information disclosure and keep abiding by IFRS and IAS in doing so. The board composition was found to be contributing more to firm valuation, thus the researcher recommends that the shareholders should chose the appropriate board members and any member who will be underperforming must be thereof be removed from the board. The ethics and conflict of interest was found to be reducing the firm valuation implying that banks should revisit their ethical standards and what constitute conflict of interest. By so doing the banks can improve their firm valuation. The financial crisis that occurred between the period 2008-2009 left many banks collapsed and thus this raised more questions than answers about relation with corporate governance and firms value. In Zimbabwe more than 20 banks were closed during the period of 1980 to 2017. This dissertation investigated the relation between firm-level corporate governance and firm value based on a large and previously use questions measuring corporate governance from Laporta which comprise 24 questions. However, the researcher used on a set of 17 individual questions as they suit the Zimbabwean commercial banks to come up with three corporate governance indices. The researcher employed explanatory research methodology. For all three indices the researcher found a strong and positive relation between firm-level corporate governance and firm valuation. In addition, disclosure of information was found to be improving the TobinQ by 0.7% and a strong causation was found on the board composition and performance as indicated by an increase of 26% on Tobins Q of banks. However, ethics and conflict of interest was found to be reducing firms value by 0.2%. Regardless of whether these attributes are considered individually or aggregated into indices, and even when “standard” corporate governance attributes are controlled for, they exhibit a positive and significant effect on firm value. The findings are robust to alternative calculation procedures for the corporate governance indices and to alternative estimation techniques. The study found out that firm value was driven by information disclosure and board composition and thus the researcher recommends that banks should continue improving their information disclosure and keep abiding by IFRS and IAS in doing so. The board composition was found to be contributing more to firm valuation, thus the researcher recommends that the shareholders should chose the appropriate board members and any member who will be underperforming must be thereof be removed from the board. The ethics and conflict of interest was found to be reducing the firm valuation implying that banks should revisit their ethical standards and what constitute conflict of interest. By so doing the banks can improve their firm valuation.

Corporate governance and investment decisions of retail investors in equity: do group affiliation and firm age matter?

PurposeThe purpose of this study is to examine the impact of corporate governance (CG) on the shareholding level of retail investors in Indian listed firms.Design/methodology/approachPrimarily, a broad CG-index was constructed based on the Indian Companies Act, 2013; Clause 49 listing agreement; and Securities Contracts (Regulation) Act, 1956. Thereafter, a panel data approach has been used to examine the association between CG attributes and retail shareholdings (RSs) during 2014–2015 and 2018–2019.FindingsAuthors find that the firm-level CG quality positively affects retail investors’ shareholding level. The results explain that among various attributes of CG, retail investors pay more attention to firms’ audit and board information while making investment decisions. The results also reveal that the influence of CG attributes on RSs is lesser for group-affiliated, mature and large-sized firms than for stand-alone, young and small-sized firms.Practical implicationsFirst, the study provides new insight to the firms for increasing retail-shareholding levels and complying with India’s ongoing minimum public shareholding norms by improving CG practices concerning specific CG mechanisms. Second, it illuminates the regulators and policymakers to monitor and strengthen firms’ governance quality in light of ongoing regulatory reforms.Originality/valueThis study is a new investigation that explores the impact of CG on investment decisions of retail investors from the perspective of an emerging economy.

Malaysian Chinese CEOs and Firm Performance

This paper investigates whether Malaysian Chinese CEOs produce higher firm performance, in particular, the effect of ethnicity on financial performance from cultural dimensions. While the cultural dimension receives widespread attention in economics and sociology research, it has received much less attention in finance studies. The data covered were hand collected information on CEOs and board characteristics of firms listed in Bursa Malaysia over the 2009-2015 period. Using panel regression, the study documented empirical evidence that Malaysian Chinese CEOs deliver higher firm performance, especially if they graduated from overseas. Results are consistent even after controlling for firm level corporate governance characteristics. The findings suggest that Malaysian Chinese CEOs possess some quality traits that enable them to deliver higher firm performance. This is not only due to their cultural beliefs, but education profile as well. These findings contribute practical implications for CEO selection in corporations.

Legal protection systems, corporate governance and firm performance: a cross-country comparison

PurposeThis paper builds on the “Law and Finance” theory and aims to examine the effect of the legal and institutional environment on the governance–performance relationship in the context of non-US firms. More precisely, it examines whether and how the country’s legal system and the level of investor protection interact with the firm-level corporate governance and affect firm performance.Design/methodology/approachThe authors used the “G-Index” governance score developed by the Governance Metrics International rating for a sample of 12,728 firm-year observations from 23 countries over the 2009–2016 period.FindingsThe results show that the interaction between the country-level institutions and corporate governance system significantly affect the firm performance. In particular, the findings indicate that firms operating in common law countries tend to exhibit a positive valuation effect and higher performance than firms with a comparable corporate governance level operating in civil law countries. More precisely, the authors find that in common law countries, higher investor protection with enhanced corporate governance is associated with better firm performance. However, firms operating in civil law countries with weaker investor protection and a comparable corporate governance level tend to experience a negative valuation effect.Originality/valueThe findings suggest that the institutional and legal environment is crucial and important in determining the value-maximizing level of good governance practices. Managers and regulators should carefully analyze the cost of these initiatives and should coordinate it with the needs of the country’s legal system. The challenge for the company will be how to adjust its corporate governance strategy according to the needs and demands of the country’s legal system in which the company operates to improve its performance. The regulators should ensure a fit between the specifics of the national legal and institutional environment and corporate governance standards and practices.

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

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

Corporate Governance and Mena Banks´ Performance

We analyze the effect of corporate governance on banks’ performance in the MENA countries using an index comprised of seven widely used governance measures, as a measure of firm-level corporate governance. In addition, we have also considered country governance as an important determinant of performance. The data at the firm level has been obtained from the Bankscope Database and we also hand-collect the corporate governance data from the annual reports over the period 2005-2012, covering the period of the financial crisis. At the country level we obtain the data from different sources. Our paper shows that corporate governance is relevant explaining performance in a way consistent with the segmentation of the corporate governance at both country level and bank level. It highlights the need for internal governance mechanisms but also the importance of country governance in emerging markets. The best governance at the country level has a positive effect under favorable conditions but not in crisis situations.

Legal Perception and IPOs: An Investigation into the Impact of Legal Signaling on Firm Valuation

In this paper, we contribute to the literature on institutional determinants of IPO valuation. We introduce the concept of “legal signaling,” which focuses on the perception of law and thus complements the existing institutional approaches to IPO valuation which consider the quality of the positive law (“standard view”) and firm-level corporate governance practices (“firm signaling view”). Our approach explicitly models the difference between the effect of the positive law and the effect of the perception of law on IPO value. Based on a world-wide longitudinal dataset of IPO performance across a large number of countries, we find strong support for the claim that the perception of quality of law, operationalized as a country’s legal shareholder protection, is more important than its actual quality to explain post-IPO firm value. We also uncover that the effect of perception on IPO value is stronger when the law’s quality is correctly perceived than when it is misperceived. Overall, our findings underscore the need for a more sophisticated theorization of the ways in which law affects entrepreneurial finance.

Role of Corporate Governance and Lifecycle in Determining Payout Precommitment in an Emerging Economy

We analyze the role of firm-level corporate governance in determining the precommitment payout policy of emerging market firms and investigate if there is a precommitment lifecycle effect. Unlike previous studies for the U.S. firms, we only find evidence of precommitment among relatively well-governed firms, who combine good governance with large dividend payouts to shareholders and large debt-related repayments to creditors. We also document a strong precommitment lifecycle effect. Firms in the growth and mature stages of their lifecycle tend to use both debt and dividends to precommit to investors, with an increasing proportion of dividends in total payout measures. Our results are robust to an array of control variables, alternate payout proxies and market setting, firm-level corporate governance and addresses any potential endogeneity concerns in the sample.

Legal Perception and Finance: The Case of IPO Firm Value

In this paper, we contribute to the literature on institutional determinants of IPO valuation. We introduce the concept of ‘legal signaling,’ which focuses on the perception of the quality of law and thus complements the existing institutional approaches to IPO valuation which consider the quality of the positive law (‘standard view’) and firm-level corporate governance practices (‘firm signaling view’). Our approach explicitly models the difference between the effect of the positive law and the effect of the perception of law on IPO value. Based on a worldwide longitudinal dataset of IPO performance across a large number of countries, we find strong support for the claim that the perception of the quality of law is more important than its actual quality to explain post-IPO firm value. This effect holds regardless of whether the law’s quality is correctly perceived or misperceived. Overall, our findings underscore the need for a more sophisticated theorization of the ways in which law affects entrepreneurial finance.

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

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

Corporate Governance and Cost of Capital: Evidence from Emerging Market

This study used a researcher self-constructed corporate governance index as a proxy to measure the firm-level corporate governance compliance and disclosure with the 2002 Pakistani Code of Corporate Governance, to examine the relationship between corporate governance and cost of capital. We found a negative and significant association between the Pakistani Corporate Governance Index (PCGI) and block ownership with the firm-level cost of capital. On average, better-governed Pakistani listed firms tend to be associated with a lower cost of capital than their poorly governed counterparts are. As an emerging market, good corporate governance practices are mainly related to minimise corporate failure and assist firms in attracting capital at a lower cost.

Comprehensive dataset for corporate governance in Oman: Data for a three-level quality assessment of corporate governance.

This article describes a dataset on firm-level corporate governance (CG) mechanisms in the Sultanate of Oman. It incorporates, in cross-sectional time series (pooled panel) data, eleven variables: corporate governance quality, board of directors’ quality, audit committee quality, board independence, board expertise, board size, board meetings, audit committee independence, audit committee expertise, audit committee size, and audit committee meetings. The dataset is derived from 1540 firm-year observations for the period 2005 to 2017, excluding financial firms (482) and firms with missing data (29), resulting in a final sample of 1029 firm-year observations. The data were extracted from six sources: OSIRIS database, CG reports, Google, firm's website, directors’ websites, and Bloomberg. Scholarly researchers can readily use this dataset as two data types were created to allow individual and composite measurements of corporate governance mechanisms. The individual determinants are: board independence, board expertise, board size, board meetings, audit committee independence, audit committee expertise, audit committee size, and audit committee meetings. The composite measurements are: corporate governance quality, board of directors’ quality, and audit committee quality. This dataset could be used for investigating corporate governance mechanisms in different business and market issues.

Auditor Independence and Value Relevance in the European Banking Sector: Do Investor Protection Environment and Corporate Governance Matter?

Our study explores the effects of statutory auditor’s independence on value relevance, measuring the different impact against the quality of country-level investor’s protection and firm-level corporate governance. A sample of 98 European financial entities listed on the stock markets of 15 countries in the period from 2009 to 2014 is used to measure statutory auditor independence by taking into account audit firm tenure, partner tenure, and the percentage of nonaudit fees. Findings demonstrate that in different investor protection environments or in the presence of differences in corporate governance quality, phenomena that could be interpreted as a deterioration of the auditor independence do not necessarily determine a decrease in the value relevance of accounting numbers. Rather, they may determine a possible increase if the knowledge spillover effects prevail over the perception that independence has deteriorated. These findings add to the literature and provide regulators with insights by suggesting that not only accounting and auditing practices but also country features or firm-level corporate governance quality might influence the outcome of reforms on the independence of the statutory auditor as well as value relevance judgments.

Corporate governance and stock liquidity: evidence from a speculative market

PurposeGrounded in lemon market theory, this paper aims to examine the influence of corporate governance (CG) on stock market liquidity in Bangladesh, where stock market manipulation because of speculative trading is a common concern.Design/methodology/approachThis study is based on a sample of 2,420 firm-year observations covering all non-financial firms in Bangladesh from 1996 to 2011.FindingsThis study’s results show a significant relationship between governance and liquidity within firms over time. In particular, within firms, when governance quality increases, liquidity significantly improves. For instance, a rise in the governance quality by one standard deviation decreases the illiquidity ratio by 55.97%. The results are unlikely to be confounded by endogeneity.Practical implicationsThe results have important policy implications for security regulators, investors, traders and managers. The results support the current regulatory trend of strengthening CG practices in the listed firms in Bangladesh.Originality/valueThis study contributes to the understanding of the role of effective firm-level CG on stock liquidity in the context of an emerging country. Consistent with prior research mostly conducted in the advanced economies, it provides further empirical support that higher CG quality reduces the information asymmetry problem and enhances stock liquidity even in a speculative market.

Principal–principal agency conflicts, product market competition and corporate payout policy in China

PurposeThe purpose of this paper is to examine the interaction between competition and corporate payout policy and more specifically to answer the question that whether competition mitigates the principal–principal agency conflicts and influences firms to distribute dividends to shareholders in Chinese corporations.Design/methodology/approachThis research models measures of competition with scaled measures of dividends and analyzes a sample of 16,730 firm-year observations from Chinese-listed manufacturing firms for the period spanning 2003 to 2016. Further, this research uses the Tobit model (a censored regression) to empirically test the proposed hypotheses.FindingsThis research finds that intense competition not only mitigates agency problems and forces firms to disgorge cash but also increases a firm’s likelihood to pay dividends and weakens the negative association between agency conflicts and dividends.Practical implicationsThe results show an important policy implication for the industry. As the principal–principal agency conflict restrains the dividends, the regulatory authorities could encourage a competitive environment and a more diverse ownership structure to induce a higher dividend rate and protect the minority shareholders. In addition, this study also has implications for other emerging markets characterized by concentrated ownership and principal–principal agency problems.Originality/valueThis study adds to the literature related to the disciplinary role of competition and identifies competition as a significant determinant of corporate payout policy. Furthermore, this research extends earlier research on corporate payout decisions that besides firm-level corporate governance and country-level legal system, industry-level competition also influences corporate payout decisions, significantly.

On the Role of Internationalization of Firm-Level Corporate Governance – The Case of Audit Committees

Motivated by agency theory and arguments from linguistic studies, we argue in this paper the internationalization of a firm’s audit committee to be associated with weaker firm-level corporate governance. Based on 2,015 publicly traded European firms from 16 countries over 2000-2018, we find the presence of foreign directors on audit committees to have a significant negative impact on financial reporting quality (FRQ). The effect is found to be weaker in countries with strong investor protection. We find linguistic differences within audit committees an important explanation for the negative influence of foreign directors on FRQ. The results are robust to alternative FRQ measures and model specifications, including difference-in-differences and propensity score matching. While foreign directors on a corporate board may create value for the firm by boosting the advisory capacity of that board, recruiting a foreign director to that firm’s audit committee may compromise the board’s monitoring function and the firm’s FRQ.

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

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