Investor Protection Environments Research Articles

Dividend signalling and investor protection: An international comparison

This study examines whether dividend changes signal future earnings growth in non-US markets following the Ham et al. (2020) methodology and whether the strength of the earnings signal varies with the level of investor protection. Based on the notion that weak investor protection reduces the cost of cutting dividends and as such increases managers’ discretion to change dividends, we expect that the strength of the earnings signal in dividend increases becomes weaker as investor protection decreases. In a sample drawn from 38 different markets, our results indicate while dividends can signal future earnings in non-US markets, the strength of the signal is weaker than that in the US. In line with our predictions, we find that for firms in a strong investor protection environment, dividend changes are correlated more strongly with subsequent earning changes than is the case for firms in weak investor protection environments.

Does the presence of executives with a marketing background affect stock price crash risk?

AbstractThis paper investigates how marketing executives influence stock price (SP) crash risk from a corporate governance perspective. We find that firms with a higher percentage of marketing executives tend to experience SP crashes. Our mechanism analysis reveals that marketing executives contribute to this risk by exacerbating agency costs and lowering the quality of information disclosure. Furthermore, the impact of marketing executive influence is particularly prominent when the firm's analyst coverage is extensive, industry market competition is low, and the legal and investor protection environment is weak. These findings highlight the significant impact of marketing executive power on a company's stock market performance. They provide valuable insights for improving corporate governance of Chinese listed companies and strengthening investor protection in China's capital market.

Global-Level Auditor Industry Specialization and the Cost of Equity Capital

SYNOPSIS We examine (1) the association between global-level and joint global-, national-, and city-level auditor industry specialization and audit clients’ cost of equity capital and (2) how the national investor protection environment impacts the preceding association. Our results indicate that cost of equity capital is negatively associated with global-level and joint global-, national-, and city-level auditor industry specialization. This relation is incrementally more negative when the auditor is a joint global-, national-, and city-level industry specialist than when the auditor is not a global-level industry specialist. We also find the negative relation between cost of equity capital and joint global-, national-, and city-level auditor industry specialization holds only in countries with strong investor protection. We further show investors perceive potential accentuation of accruals quality and ownership concentration on cost of equity is mitigated by joint global-, national-, and city-level specialist auditors. JEL Classifications: M42; G32; K49.

Corporate Cash Holdings and Share Buyback: Evidence from Emerging Markets

This study evaluates corporate cash holdings (CCHs) as a determinant of share buyback for three emerging economies, India, Malaysia, and South Korea, from 2002 to 2020. We find CCH as a significant determinant of share buyback for our sample nations. Our results suggest that share buyback is a flexible way for firms to distribute excess cash across our sample nations. Our study also documents the impact of different country-level investor protection frameworks on buybacks. A favorable relationship between a strong investor protection environment (good governance) and buyback explains the effective role of buyback in resolving agency conflicts compared to dividends. JEL Codes: C5, F3, G3

Economic policy uncertainty, investor protection, and the value of excess cash: A cross-country comparison

This paper provides new evidence on the effect of economic policy uncertainty (EPU) on the value of excess cash. We find that EPU decreases the value of excess cash holdings. Thus, investors discount the value of excess cash held by firms that are highly exposed to uncertainty due to related agency and information asymmetry issues. We also investigate whether the value of excess cash holding in uncertain periods depends on the degree of investor protection. The findings reveal that investors penalize firms that hold excess cash during economic and politic shortfalls only in countries with strong investor protection environments.

Board directors' foreign experience and firm dividend payouts

We find that Chinese-listed firms are more likely to pay dividends and implement larger payout ratios when their directors have foreign experience. This finding remains after using various methods to address potential endogeneity concerns. The positive association is stronger for low-growth firms, non-state-owned firms, and when directors obtain foreign experience in countries with stronger investor protection. The effect of directors' foreign experience on dividend payouts is also more pronounced for independent directors than for executive directors. Directors with foreign experience appear to overcome the weak investor protection environment as the effects are more pronounced among poorly governed firms and before the regulatory dividend reforms in 2013. Overall, our findings identify a mechanism through which better governance practices are propagated.

Does the presence of executives with a legal background affect stock price crash risk?

AbstractResearch Question/IssueExecutives with a legal background have superior knowledge of the law compared with executives who do not have such a background. This study investigates how executives who are well informed of the law can reduce stock price crash risk and how this is significant from a corporate governance perspective.Research Findings/InsightsWe collected and evaluated 23,031 firm‐year observations from 2008 to 2018, which resulted in the following findings: (1) Executives with a legal background can effectively reduce stock price crash risk. (2) When the company's external or internal supervision is weak, the effect of executives with a legal background in reducing stock price crash risk is particularly prominent. (3) The executives' ability to reduce stock price crash risk is particularly conspicuous when the company's intention to hide bad news is low or when there is a high risk of the bad news being leaked.Theoretical/Academic ImplicationsStock price crash risk is a critical problem to address in the Chinese capital market. The prevailing explanation for crash risk emphasizes executives' concealment of bad news as a primary factor. Since the suppression of bad news by company executives is the main reason for stock price crash risk, observing the influence of executives on this risk is a viable direct approach. Executives with a legal background, in particular, have a critical influence on companies. They possess a superior understanding of the law compared with those who do not have such a background and are more willing to respect and abide by the law. As a result, they have a lower tolerance for inappropriate acts by the executive team, namely, concealing bad news, which reduces the risk of stock price crash.Practitioner/Policy ImplicationsIn China, the world's largest transitional economy, investor protection and information environments are still developing. Countries with less developed regulations can adopt substitutive mechanisms, such as making the employment of executives with a legal background mandatory, to facilitate the healthy development of their capitalist markets. Given the capacity of these executives to reduce stock price crash risk, thereby supporting continuous and stable development of the capital market, regulatory authorities should encourage listed companies to hire executives with a legal background. Furthermore, they should also start in‐depth promotion of and education on the rule of law among employees to improve their legal competence.

Local corruption and dividend policy: Evidence from China

In this study, we first predict that local corruption increases the risk of expropriation by governments, thus encouraging appropriation of minority shareholders by controlling shareholders, and consequently reducing dividend payouts. Then, using a sample of Chinese A-share listed companies from 1998 to 2017, we empirically identify that local corruption negatively affects corporate dividend payouts. Further study shows that this effect is more pronounced in state-owned enterprises and enterprises within secure investor protection environments. Finally mechanism analysis supports our theoretical prediction that local corruption can reduce dividend payouts through the expropriation by controlling shareholders.

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.

Multiple directorships and earnings quality: Does investor protection matter?

Purpose This study aims to investigate whether higher earnings quality is related to the existence of multiple directorships among corporate boards and whether this relationship varies with the quality of investor protection. Design/methodology/approach This paper used a dynamic panel data modelling on the sample of 2,090 firm-year observations over the period from 2007 to 2016 in Malaysia. The generalized method of moments estimators were used to deal with endogeneity and other econometric problems. Findings This study finds that the accumulation of several outside directorships is negatively associated with the firm's earnings quality, as measured by the magnitude of discretionary accruals. More importantly, the findings provide evidence that multiple directors are more efficient in improving earnings quality in healthy investor protection environment. Practical implications The appointment of directors should be based on market-based and not on a relationship (i.e. financial and industry professionals). Originality/value The results highlight the importance of interaction between internal and external governance mechanisms to improve the firm's financial performance, investment and market efficiency. High-quality investor protection and law enforcement are significant for enhancing the monitoring role of multiple directorships in improving earnings quality.

Does cross‐border acquisition reduce earnings management of emerging market acquirers? Evidence from India

AbstractCross‐border acquisitions by emerging market firms have been increasing at an accelerated pace. The present study examines the impact of cross‐border acquisition on the earnings manipulation of emerging market firms by analyzing the cross‐border deals from India during the period 2000–2015. Using two proxies for earnings management, we find that cross‐border acquisition reduces the incentive to manipulate earnings by way of accruals, but not via real economic transactions. Further, cross‐sectional tests reveal that the incentive to reduce accrual earnings manipulation is more pronounced when the acquisition is made in countries with a strong corporate governance structure. Additional analysis indicates that acquisition results in increased earnings response coefficient for the acquirer firms relative to the control firms. Our finding is robust even after controlling for cross‐listing and endogeneity associated with cross‐border acquisition decision. The results have implications for the literature on the spillover of financial reporting practices across countries due to cross‐border business activities, especially in the context of emerging markets, which are known for their weak investor protection and underdeveloped institutional environment.

Nexus between Investor Protection Environment and Financial Reporting Quality in the Sub-Saharan Africa (SSA)

Nexus between Investor Protection Environment and Financial Reporting Quality in the Sub-Saharan Africa (SSA)

International M&A Laws, the Market for Corporate Control and Risk-taking

In this study, we examine the effect of the market for corporate control (MCC) on firm risk-taking exploiting the staggered enactment of country-level merger and acquisition (M&A) laws of thirty-four countries as a plausibly exogenous source of variation in MCC. Consistent with the theoretical argument of temporal traps, our empirical study shows that MCC brings unintended consequences by discouraging value-relevant corporate risk-taking. Further examination of the heterogeneous effect of enabling institutions, our investigation reveals that country-level investor protection and transparency environment positively moderates the effect of MCC. Our study highlights the complementary role played by institutions to translate the effect of MCC towards discouraging value-destroying investment conservatism.

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.

Stock liquidity and default risk around the world

We document the negative effect of stock liquidity on default risk for a sample of 46 countries. We further find that default risk declines following the introduction of the Directive on Markets in Financial Instruments (MiFID)—an exogenous shock that increases liquidity. The effect of liquidity on default risk is more pronounced in countries with poorer investor protection and information environments. Further, this effect is attenuated (strengthened) for firms with greater information efficiency (governance monitoring). Overall, our findings highlight the important role of regulatory settings in shaping the impact of stock liquidity on default risk in international markets.

Does takeover activity affect stock price crash risk? Evidence from international M&A laws

We exploit the staggered initiation of merger and acquisition (M&A) laws across countries as a plausibly exogenous shock to the threat of takeover to examine whether the market for corporate control has a real effect on firm-level stock price crash risk. Using a difference-in-differences regression on a large sample of firms from 32 countries, we find that stock price crash risk significantly decreases following the passage of M&A laws. This effect is stronger for firms domiciled in countries with poorer investor protection and information environments and for firms with weaker firm-level governance. Further, financial reporting opacity and overinvestment significantly decrease in the post-M&A law periods. Our study suggests that an active takeover market has a disciplining effect on managerial bad news hoarding and leads to lower future crash risk.

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.

Intention to Acquire and M&As: Evidence from European IPOs

In this study, we examine whether an IPO’s voluntary disclosure on the intention to engage in future M&A activity affects the market reaction to a subsequent acquisition and whether it is related to the acquisition’s long-run performance. Using a dataset of European IPOs during the period 2001–2017, we first document that disclosers are more likely to engage in future M&A activity than non-disclosers, thus supporting that such costless disclosures are credible. Secondly, we document a less positive market reaction around the announcement of an acquisition for disclosers than for non-disclosers, consistent with the anticipation hypothesis. Additional analyses suggest, however, that the market reaction is stronger and positive for target firms in countries with weak shareholder protection and legal environment and lower information quality. This suggests that when the acquisition is deemed more uncertain, the market perceives the disclosure of the intention to acquire as capturing a more diligent acquisition plan, consistent with the preparation hypothesis. Finally, results show that the long-run performance of the combined entity is more negative for disclosers than for non-disclosers. However, consistent with the market reaction results, this relation is reversed when the acquired company operates in a poor investor protection environment, suggesting that these acquisitions are associated with better long-term performance consistent with the conjecture that these acquisitions are also more carefully planned.

Intensive Board Monitoring, Investor Protection and Segment Disclosure Quality: Evidence from EU

This study examined the association between intensive board monitoring (IBM) and segment disclosure quality (SDQ). It also investigated whether this association can be moderated by firm's home country investor protection (IP) level. Based on a panel of 271 non-financial European Union (EU) listed corporations covering the 2007–2012 period, this study estimated two multiple regression models including industry and year fixed effects. We found evidence that the segment disclosure quality is higher when a majority of outside directors serve on monitoring committees. We, also, found that the positive association between IBM and SDQ is more pronounced for firms in a weak IP environment and less pronounced for firms in a strong IP environment. Thus, we provided evidence in favor of a substitutive relationship between IBM and IP level with respect to their association with SDQ. Our findings are evidenced by several robustness tests.

Labor protection, ownership concentration, and cost of equity capital: international evidence

In this study, we investigate how labor protection institutions and the presence of controlling shareholders interact to determine a firm’s cost of equity capital in an international setting. Our firm- and country-level analyses reveal that firms in countries with greater labor rights have a higher cost of equity, over and above the differences explained by investor protection environments and firm- and country-level risk factors. We find that operating leverage and information asymmetry serve as channels through which labor protection increases the cost of equity capital. More interestingly, the detrimental effect of labor protection on the cost of equity is mitigated in the presence of controlling shareholders, especially in the case of a family controlling owner, indicating the effectiveness of controlling owners at coping with difficult labor relations. The economic significance of this advantage is non-trivial: a one-unit increase in the labor market regulation index increases the annual cost of equity by 0.776% in widely held firms, whereas it increases by only 0.415% in firms with controlling shareholders. Our study identifies better labor relations as a potential channel through which concentered ownership affects the interaction of labor power and the cost of equity capital.