Important Corporate Governance Mechanism Research Articles

THE REMUNERATION-PERFORMANCE RELATIONSHIP IN CORPORATE GOVERNANCE: EVIDENCE FROM BOARD MEMBERS’ REMUNERATION AND FIRM PERFORMANCE

The board of directors is an important corporate governance mechanism as it is responsible for the operation of a firm and protects the value of the investment made by investors in the firm. Therefore, board members should be supplied with an appropriate incentive to properly discharge their duties. One of the most important incentive mechanisms is remuneration. This study aims to reveal the effect of board members’ remuneration on the firm performance. Regression analysis was performed to test the hypotheses. 210 firm-year observations obtained from 76 non-financial firms traded in the BIST 100 between the 2018-2020 period were used. The indicators of firm performance return on assets, return on equity, and earnings per share. As a consequence of the study, the relationship between board members' remuneration and firm performance was found to be positive and statistically significant. These results show that the board members' remuneration is a strong incentive used to increase the firm performance and that a suitable remuneration policy should be established for directors.

International culture and audit deficiencies: Evidence from inspection reports of non-US companies listed in the US

We investigate an important corporate governance mechanism that provides a monitoring function to facilitate the growth and development of international capital markets. Specifically, we investigate the relationship between Hofstede’s cultural values and the audit deficiencies of non-US companies listed on US equity markets, as measured by the number of audit deficiencies found by the Public Company Accounting Oversight Board (PCAOB) from 2005 to 2017. We find evidence supporting a conclusion that audit deficiencies are lower in countries with lower Uncertainty Avoidance scores, higher Individualism scores, and lower Power Distance scores. We conclude that countries with cultures more accepting of ambiguity and uncertainty, having more flexible business practices, and being more tolerant of individual contributions are associated with higher quality audits, as measured by fewer audit deficiencies.

Directors' and officers' liability insurance, environmental regulation and firms' envi ronmental responsibility

This study examines the relationship among directors' and officers' liability insurance (D&O Insurance), environmental regulation, and firms' environmental responsibility-taking. Using the data on firms' green innovation achievement and environmental protection investment from China, where the information of D&O Insurance purchases was disclosed, we find robust evidence that insured firms significantly promote firms' environmental responsibility-taking, evident in more green innovation achievement and environmental protection investment. This positive association is more pronounced for firms exposed to stronger environmental regulation. In addition, we document that the moderating effect of environmental regulation is stronger for SOEs, firms with better corporate governance, operating in heavy-polluting industries, and exposed to a stronger institutional environment. Further mechanism analysis shows that public supervision is the underlying channel through which D&O Insurance affects firms' environmental responsibility. Overall, our findings imply that D&O Insurance, one of the important corporate governance mechanisms, motivates directors and officers to actively practice firms' environmental responsibility, and environmental regulation exerts a positive influence over this governance effect.

Board Structure and Stock Market Liquidity: Evidence from Saudi's Banking Industry

This paper aims to explore the impact of corporate governance on banks’ stock market liquidity. Specifically, we examine the influence of one of the most important corporate governance mechanisms, board structure, on the stock market liquidity of listed banks in Saudi Arabia. We mainly concentrate on four characteristics of board structure: board size, board independence, board meetings and board busyness, and their impact on bid–ask spread, trading volume, turnover ratio and number of trades (employed as proxies of stock liquidity). This study employs a pooled ordinary least squares (OLS) model to investigate this relationship. Furthermore, we use a lag approach and the generalized method of moments (GMM) estimation to test for endogeneity issues. The findings of the two models are the same as the main estimation model of the OLS. Using a sample of 108 observations representing all banks listed on the Saudi Stock Market (TASI) from 2010 to 2020, we find a positive and significant association between board size and board independence with stock liquidity. However, board busyness is negatively associated with stock liquidity. Furthermore, we examine the relationship between board structure and agency problems. The results show that board size and board independence reduce agency problems, whereas board busyness increases agency problems. The findings of this paper provide implications for Saudi regulators, banks’ board of directors and banks’ shareholders.

The impact of subscribing to directors' and officers' liability insurance on corporate financialization: Evidence from China.

As an important corporate governance mechanism, directors’ and officers’ liability insurance is theoretically associated with corporate financialization because it directly affects incentive constraints and risk preference of enterprise managers. However, whether there is a causal relationship in fact has not been sufficiently empirically investigated. Using a sample of Chinese non-financial listed companies in Shanghai and Shenzhen A-shares from 2008 to 2020, this paper empirically analyzes how corporate subscription to directors’ and officers’ liability (D&O) insurance affects corporate financialization and examines the mediating role played by risk-taking, financing constraints, and audit quality. The study finds that corporate subscription to D&O insurance increases corporate financialization. In terms of the influential mechanism, subscription to D&O insurance promotes financialization by increasing risk-taking, alleviating financing constraints, and improving audit quality. In addition, the results in the heterogeneity analysis suggest that the promotion of financialization by subscribing to D&O insurance is more significant in state-owned enterprises, growth and decline stage enterprises, and non-dual-employment enterprises.

Corporate Governance in Romania: The Board Structure an Overview of Betplus Companies

AbstractCorporate governance is a relatively new concept that emerged after the middle of the last century in response to financial scandals and bankruptcies of large companies in the 1990s and has become increasingly important, mainly in the present-day context of globalization and the growth of international competition, of the continuous changes of the market, of the economic and political environment, of the rapidity of the technological changes, which make that the maintenance of the balance and success of companies cannot be achieved without paying increasing attention to the way management and control is performed. The concept of corporate governance is based on internal and external mechanisms, designed to align the interests of all those involved in the company’s activity, so as to increase the value of the company and to achieve the highest possible performance, and to increase investors’ confidence through transparency, accountability and honesty. The Board of Directors is one of the most important corporate governance mechanisms, its main role is to elect and monitor the activity of managers, to ensure that they run the company in accordance with the interests of those who elected them (the shareholders), while pursuing the company’s strategy and objectives. This study presents an analysis of the Board of Directors of the companies that are part of BETPlus index of BSE, in terms of compliance with the provisions of Bucharest Stock Exchange Corporate Governance Code, but also a brief review of the main corporate regulations in Romania, highlighting the requirements related to the size and composition of the boards, requirements that the listed companies must comply with.

Corporate governance, board connections and remuneration

AbstractGood corporate governance underpins good corporate social responsibility (CSR) through value‐creating stakeholder relationships. When properly composed and compensated, the board of directors, an important corporate governance mechanism, plays an efficient monitoring role, reducing agency cost. Exploring board connections and remuneration of the top 100 listed firms in the Stock Exchange of Thailand as a case study, we find evidence supporting agency cost of board connections such that politically connected board members are paid higher. However, politically connected board members play an effective monitoring role in setting top management pay, supporting stewardship and resource dependency theories. Our case study highlights the importance of balancing boards of directors' compositions and remunerations to achieve CSR outcomes and value creation among stakeholders.

The influence of audit committee characteristics on investment in internal audit: the moderating role of family ownership

This paper examines the influence of audit committee (AC) characteristics on investment in internal audit function (IAF) in Malaysia. Furthermore, the moderating role of family ownership on the relationship between investment in IAF and AC characteristics was examined in this study. A balanced panel data was employed. The data was obtained from the annual reports of the top 150 public listed companies in Bursa Malaysia from 2011 to 2019. The findings shows that investment in IAF is positively related to the frequency of AC meetings, but negatively related to the presence of accounting expert, percentage of independent directors and the average tenure of AC members. Also, the findings show that family ownership moderates the relationship between the characteristics of AC and investment in IAF. This result has implications for policymakers as the study suggest that IAF and AC are important corporate governance mechanism in ensuring quality of financial reporting.

The impact of audit committee financial expertise on corporate financial decisions

Audit committee (AC) financial experts is considered one of the important corporate governance mechanisms due to their vital role in overseeing companies’ financial reporting procedures and enhancing corporate financial decisions. Regulators and policymakers require Omani firms to have at least one director with financial expertise sitting on ACs. Therefore, we aim to investigate the effect of AC financial expertise on corporate financial decisions (capital structure, dividend payment and cash holdings). We use a data set of all Omani financial institutions (36 firms) listed on the Muscat Stock Exchange (MSX) over the period from 2014 to 2019, consisting of 216 firm-year observations. The paper contributes to the growing body of the literature by being the first study to examine the impact of AC financial expertise on financial decisions. The study also contributes to the literature by integrating multiple theories: agency, resource dependence and signalling, to enlighten the effect of the unique power of financial expertise on making financial decisions. We find that AC members with financial expertise are positively related to the level of cash holdings, leverage and dividend payment in financial companies. The findings provide empirical evidence to regulators to encourage companies to exceedingly appoint financial experts as AC members due to their unique resources, which improve their monitoring role and constraining management opportunistic behaviour

Business Strategy, Accounting Conservatism and Performance

This research consists with prior business strategy typology and accounting conservatism theories. It investigates the joint effect of business strategy and accounting conservatism on the firm’s financial performance. The paper finds that accounting conservatism as a prudent accounting reporting principle plays an important corporate governance mechanism. The conservatism can mitigate the negative effect of the aggressive business strategy. The joint effect between business strategy and accounting conservatism is positively related with financial performance. The result is robustness when the different measurements of the strategy and the conservatism are applied. When the firm has weak internal control quality, the joint effect on financial performance also exists significantly.

Ownership Concentration and Firm Performance in India

Ownership concentration (OC) is considered an important corporate governance mechanism because owners with concentrated shareholding influence the operations and management of a company. The ownership structure in developing countries is quite different from that in the developed markets; thus, we provide empirical evidence from an important emerging market like India. This study used panel data models and instrumental variables (IV) techniques using generalised method of moments (GMM) on a large sample of 11,136 firm-year observations to get efficient and reliable results. The endogeneity of OC has not been examined in India before. In this article, OC is measured by Herfindahl’s index as suggested by Demsetz and Lehn (1985) and Leech and Leahy (1991) . Other Indian studies in this area have used promoter shareholding as a proxy of OC. After controlling for endogeneity, we find that OC affects both market and accounting performance of a company, positively. The results suggest that concentrated ownership reduces agency costs as blockholders actively monitor the management of the company, thereby leading to better firm performance.

Shareholder litigation risk and real earnings management: a causal inference

PurposeThe authors study how shareholder litigation risk impacts a firm’s decision of real earnings management (REM). This paper aims to shed light on how shareholder litigation risk impacts REM. The authors further explore how the intensifying effect varies systematically conditioning on the degree of information asymmetry and the strength of internal corporate governance.Design/methodology/approachIn this study, the authors use the 1999 Ninth Circuit Court ruling as a quasi-experiment that reduces shareholder litigation risk to address endogeneity and establish a causal inference.FindingsThe difference-in-difference tests suggest lower shareholder litigation risk intensifies REM. In other words, higher litigation risk mitigates REM. Cross-sectional test results suggest the negative effect of decreased shareholder litigation is more pronounced when monitoring difficulty is higher, when information environment is more impoverished and when internal corporate governance is weaker. The negative effect is also stronger in firms with higher sensitivity to legal threats.Originality/valueProtection of investors’ interest is the focus of corporate governance. Designed as an important corporate governance mechanism, shareholder litigation enables investors to pursue legal actions to recover their losses in the event of corporate misbehaviors. However, whether shareholder litigation is an effective corporate governance tool and beneficial to shareholders and firms is not without controversy. The authors contribute to the debate by providing evidence that supports the argument that shareholder litigation threat significantly disciplines REM, a form of costlier earnings management technique and myopic investment behavior.

Ownership Concentration, Identity and Firm Performance: Evidence from China’s Listed Firms

ABSTRACT Ownership concentration and ownership identity are important corporate governance mechanisms. This paper seeks to understand how ownership concentration and identity affect firm performance in an important emerging economy-China. It hypothesizes that differences in firm performance are a result of various ownership structures and ownership identity. Using data of Chinese listed companies from 2007–2017, it tests those hypotheses and finds that ownership concentration has a positive effect in firm performance and corporate ownership leads to higher firm performance than financial ownership. The study shows that firms in China benefit more from foreign ownership than firms with only domestic ownership.

Competition in Industries, Corporate Governance; and Financial Reporting Quality

The present study aimed to investigate the impact of product market competition; corporate governance accounting restatements of the firms listed on TSE. This study applies accounting restatement criterion for identification of low quality of reported accounting information in past financial statements of the firms listed on TSE. For this purpose, according to literature and institutional environment we select a set of most important corporate governance mechanisms include ownership concentration, board of directors independence and audit firm size associated with some control variable include corporation size and liquidity ratio that can be related to FRQ, and then considered to relation with earnings restatements. This study applies the financial statements information of firms listed on TSE during 2007 to 2013. The results of logistic regression analysis based on 846 year-firm observations indicate that according to past research corporate governance have a positive effect and competition has a negative effect on financial reporting quality (FRQ), however their interaction effect indicate that accounting information quality is increased. Therefore, evidence of this paper supports this opinion that competition and corporate governance mechanisms are complementary.

Short-selling and corporate innovation: evidence from the Chinese market

ABSTRACTShort selling has been demonstrated as an important external corporate governance mechanism, which can discipline managerial behaviours and mitigate principle-agent conflicts in developed markets. With a data set of Chinese public companies, we examine the governance effect of short selling on corporate innovation in China. We find that short selling has a significantly positive effect on corporate innovation regarding both innovation quantity and quality. Our cross-sectional tests show that the positive effect of short-selling is more pronounced for firms with weaker internal and external corporate governance. Lastly, we document that short-selling improves corporate innovation through lowering firms’ information asymmetry and improving the efficiency of managerial contract. Our results indicate that short-selling is a necessary complementary mechanism of firms’ corporate governance system in China.

A study of the interactions between internal audit function and external auditors in Italy.

This paper shows the results of a research study whose main objectives have been to understand the way and the extent of dependence and consideration which the directors of internal audit departments and the partners in external audit firms have of each other. We relied on the exploratory research methods that examine the level of operative co-operation and activity co-ordination between Internal audit functions and auditing firms through questionnaires and interviews. The findings suggest that mutual collaboration increases the reliability of controls and that, at least in part, avoids duplication of work, although there is no full agreement on the usefulness of the internal audit outcome for the external auditor activities. These findings are particularly relevant given the growing emphasis on the role of Internal Audit as an important corporate governance mechanism and on the new challenges faced by external auditors in the form of greater audit requirements. Overall, our findings have practical implications for both (i) external auditors who are evaluating the role of internal audit functions and its usefulness and (ii) CAEs who could on their turn increase the efficiency and effectiveness of internal audit functions. This article also provides a contribution to the literature examining public companies internal and external audit interrelationships as well as the literature on audit effectiveness and performance.

Corporate Governance and Ethnicity

The extant literature suggests that corporate governance responds to a broad array of institutional influences. In extending the literature, this paper examines a largely overlooked concept (ethnicity) in corporate governance scholarship. In doing this, we employ the notion of institutional logics to understand the effects of ethnicity on corporate governance. This paper adopts a qualitative methodology, including semi-structured interviews and a content analysis technique. Relying on insights generated from the Nigerian multi-ethnic institutional environment, our findings show that ethnicity affects two important corporate governance mechanisms, namely board composition, and whistleblowing. Furthermore, our findings challenge the primordialist perspective on ethnicity by showing how social agents manipulate ethnicity to advance their interests in corporate governance.

Mitigating Earnings Management: Adoption of IFRS and Corporate Governance Practices in Malaysia

This study examines the effects of IFRS adoption and corporate governance practices on the qualities of financial reporting in Malaysia. The sample comprises a balanced panel of 360 firmyear observations of Construction firms under the Main Board of Bursa Malaysia from 2013 to 2016. This study accesses the effectiveness of effort by the Malaysian Accounting Standard Board (MASB) to improve the financial reporting by the revision process of the standard and their mandatory application. In addition, this study measures the relationship between of board of directors and the level of earnings management. The composition of board of directors is an important corporate governance mechanism in mitigating earnings management. The Malaysian Code of Corporate Governance (MCCG) has been issued in year 2000 and was revised in 2007 and the latest revision is in 2012 in order to enhance good governance by corporation. Besides MCCG, the year witnessed the full convergence of IFRS effective starting from 1st January 2012. One of the standards of MFRS 111 Construction Contracts focuses on construction companies. Therefore, this study is to examine the impact of IFRS adoption and corporate governance practices on the level of earnings management of Malaysian Construction companies. The results show that there is a significant relationship between the characteristics of board of directors with the level of earnings management during the years after the adoption of IFRS in Malaysia. This suggests the adoption of IFRS and corporate governance practices by that Malaysian construction companies contribute to higher accounting qualities. Thus, the results of this study are expected to provide early evidence of the impact of adopting IFRS and corporate governance practices and give further direction for the regulatory bodies regarding the accounting standards and financial reporting practices in Malaysia. Future research perhaps could analyze the relationship of the characteristics of audit oversight board in mitigating earnings management.

Effective association between audit committees and the internal audit function and its impact on financial reporting quality: Empirical evidence from Omani listed firms

The role of the audit committee in oversight of the internal control and internal audit function has grown in the last decades as corporate governance mechanisms after the dramatic scandals and failures. This paper examines the impact of the audit committee and the presence of internal audit function on a company's financial reporting quality. Moreover, this study focus on the association between the audit committee and internal audit function and company's financial reporting quality measured as accruals quality and absolute discretionary accruals. It is hypothesized that the financial reporting quality is related to the strength of internal corporate governance mechanisms, including audit committee and internal audit and its association. Different mechanisms are being examined: audit committee size and independence, frequency of meeting, financial literacy, existence of internal audit function and its meeting independently. To test our hypothesis, we employ panel data analysis for 71 nonfinancial firms through 139 observations listed on the Muscat Securities Market during the period of 2013 and 2014. The data used in the analysis were collected from the companies' annual reports published by the Muscat Securities Market. Ordinary least squares is used to regress financial reporting quality linear variables on audit committee and internal audit. The findings suggest that audit committee meetings frequency and the presence of internal audit function positively affect a company's financial reporting quality. Hence, an audit committee that meets more frequently provides effective monitoring of financial reporting and increases the likelihood of discussing and following up any problems and findings in the financial statements and audit reports. Thus, frequent audit committee meetings provide better oversight of the annual accounts. Likewise, the internal audit function is considered an important corporate governance mechanism to safeguard the quality of financial reporting by monitoring organizational risks, assessing internal controls and detecting possible manipulation because the internal auditor evaluates financial procedures. However, results suggest that the relationship between other corporate governance mechanisms and financial reporting quality is not significant.

The relationship between ownership structure and firm financial performance

PurposePrevious studies that dealt with corporate governance have witnessed gradually significant growth that created some new trends. The purpose of this paper is to be involved in such trends through examining the link between ownership structure as one of the important corporate governance mechanisms and firm performance in Jordan as one of emerging economies.Design/methodology/approachThe current study used the multiple regression method to analyze available data for non-financial firms listed in the Amman Stock Exchange for the fiscal year 2012.FindingsThe findings revealed that managerial ownership has a positive impact on performance. On the other hand, the findings surprisingly showed no evidence to support the impact of foreign ownership on performance. Moreover, there is a significant evidence to support the fact that company size has no impact on firm performance. The findings also revealed that industry type has no impact on firm performance.Practical implicationsThe practical implications of the current study demonstrated that good corporate governance is imperative to all organizations and must be encouraged for the interest of all stakeholders. Unlike the majority of the previous studies, the current study unexpectedly found that foreign ownership is not significantly contributing to the firm performance. Thus, Jordanian Government and other related/responsible parties should formulate policies for the foreign investors.Originality/valueInterestingly, from developed and developing countries perspective, the study is the first of its kind that exclusively chose the mechanisms of ownership structure in its relationship with firm performance represented by market share, where no previous study has tested foreign ownership in such relationship. In that, this study is the first study in emerging economies to investigate such a link. Such new insights on this relationship by current study provide helpful information that is of great value to the government, academics, policy makers, and other stakeholders.