Investor Protection Environments Research Articles

Managers’ forecast guidance of analysts: International evidence

We consider forecast guidance as a mechanism that managers use to avoid negative earnings surprises. Modeling forecast guidance using methods by Matsumoto, [Accounting Review 77 (3) (2002) 483–514] and Bartov et al. [Journal of Accounting and Economics 33 (2) (2002) 173–204], we show that managers in strong-investor-protection countries are more likely to utilize forecast guidance to avoid negative earnings surprises than managers in weak-investor-protection countries. We also show that US managers are more prone to use forecast guidance to avoid negative earnings surprises than managers in other countries. Our results provide insight into the information dissemination process and how managers behave in response to weak regulation of informal disclosures in different investor protection environments.

Corporate Governance and Managerial Risk-Taking: Theory and Evidence

We study how the investor protection environment affects corporate managers’ incentives to take value-enhancing risks. In our model, the manager chooses higher perk consumption when investor protection is low. Since perks represent a priority claim held by the manager, lower investor protection leads the manager to implement a sub-optimally conservative investment policy, effectively aligning her risk-taking incentives with those of the debt holders. By the same token, higher investor protection is associated with riskier investment policy and faster firm growth. We test these predictions in a large Global Vantage panel. We find strong empirical confirmation that corporate risk-taking and firm growth rates are positively related to the quality of investor protection.

Earnings Quality and Cross Listing: Are Reconciled Earnings Comparable to US Earnings?

We compare the characteristics of US GAAP earnings for US firms with reconciled earnings for non-US firms cross listing on US markets. We find that the reconciled earnings for non-US firms differ systematically from US GAAP earnings for US firms, and are characterized by more evidence of smoothing, a greater tendency to manage earnings towards a target, a lower association with share price and less timely recognition of losses. Further, splitting by country of domicile, earnings for firms from countries with relatively weak local investor protection environments show more evidence of earnings management, suggesting that institutional features of the local environment find their way into US GAAP-reported earnings. Our evidence suggests that, even though cross-listed firms operate under the regulatory authority of the SEC and follow nominally similar accounting standards, their reconciled accounting data show more evidence of earnings management than data prepared by US firms.

The Effect of Investor Protection on the Information Asymmetry
 of Stock Market

This paper tests the hypotheses that poor investor-protection environments lead to higher information asymmetry in security markets. We compare China-based stocks, which operate in a relatively unprotected environment, to Hong Kong-based stocks. The information component in the market friction of China stocks is shown to be up to 20% larger than that of Hong Kong-based stocks. The effect is robust and remains so even controlling for trading variables and market capitalization. By empirically validating the assumption made in Brockman and Chung (2002), we contribute to the literature on the economic importance of investor protection, as well as that on cross-sectional determinants of asymmetric information.

Investor Protection and Firm Liquidity

ABSTRACTThe purpose of this study is to investigate the relation between investor protection and firm liquidity. We posit that less protective environments lead to wider bid‐ask spreads and thinner depths because they fail to minimize information asymmetries. The Hong Kong equity market provides a unique opportunity to compare liquidity costs across distinct investor protection environments, but still within a common trading mechanism and currency. Our empirical findings verify that firm liquidity is significantly affected by investor protection. Regression and matched‐sample results show that Hong Kong‐based equities exhibit narrower spreads and thicker depths than their China‐based counterparts.

Establishing a New Stock Market for Shareholder Value Oriented Firms in Korea

We propose introducing more competition into the design and implementation of investor protection in Korea. Our proposal in Korea is to start small. We focus on the possibility of giving firms in Korea greater choice within the existing regulatory regime. As an initial (and obtainable) goal we propose taking an approach similar to that pursued by the Brazilian Stock Exchange (Bovespa) to establish a new voluntary section for firms satisfying global corporate governance standards on the Korean Stock Exchange (KSE). Another option would be to go the seemingly opposite direction and allow some firms to opt out of any domestic regulation and instead to follow the regulatory regime of a foreign country (putting these firms in their own section of the stock market and enhancing the level of enforcement of foreign regulators through the assistance of Korean regulators). Such an approach would allow firms the ability to choose for themselves - within limits - the level of investor protections they desire (through a listing on a foreign exchange). Firms already with large and entrenched controlling shareholders or managers and a dispersed pool of minority investors will probably not take advantage of the ability to opt into a higher level of corporate governance. Instead, our suggested reforms will assist primarily newer companies seeking to raise funds from the public capital markets for the first time. Also, even among more established firms, a small, yet growing, number of firms under professional management may be interested in moving into a more advanced section of the KSE. Indirectly, we predict that feedback effects through the creation of a new investor-protection environment (with accompanying norms and institutions) will affect the rest of Korea's capital markets.

Managers' Guidance of Analysts: International Evidence

We consider forecast guidance as a mechanism that managers use to avoid negative earnings surprises. Modeling forecast guidance using methods by Matsumoto, [Accounting Review 77 (3) (2002) 483-514] and Bartov et al. [Journal of Accounting and Economics 33 (2) (2002) 173-204], we show that managers in strong-investor-protection countries are more likely to utilize forecast guidance to avoid negative earnings surprises than managers in weak-investor-protection countries. We also show that US managers are more prone to use forecast guidance to avoid negative earnings surprises than managers in other countries. Our results provide insight into the information dissemination process and how managers behave in response to weak regulation of informal disclosures in different investor protection environments.