Level Of Investor Protection Research Articles

Stock market liquidity and traditional sources of bank business

AbstractWith enhanced financial liberalisation, banks’ reliance on traditional intermediary functions has gradually declined, changing the risk profile of these systemically important financial institutions. This paper examines an important channel through which these changes occur, the spillover effects from an increase in stock market liquidity on traditional bank business. This is the first paper to provide empirical evidence of a decline in the value of bank deposits and loans as aggregate stock market liquidity increases, with data from 7,297 banks in 39 countries from 1999 to 2014. We find that such effects vary with the level of financial development in the country and with the level of investor protection. These findings provide information for policy‐makers to better understand important spillover effects of policy changes designed to enhance stock market liquidity.

INTERNATIONAL FINANCIAL REPORTING STANDARDS ADOPTION, INVESTOR PROTECTION, AND FOREIGN PORTFOLIO INVESTMENT: A REVIEW

This paper aims to analyze the impacts of International Financial Reporting Standards (IFRS) adoption on foreign portfolio investment (FPI) in relation to investor protection based on existing empirical literature. This study uses a historical approach and focuses on thirty-six relevant articles published in accounting and finance journals. The author provides a theoretical groundwork of the association between IFRS adoption and FPI and summarizes the results. The findings are critically analyzed by employing developed vs. developing country lens. The review study reveals that the effects of IFRS adoption on FPI significantly differ between developed and developing countries. Although the positive impact of IFRS adoption on FPI is documented in existing literature, not all countries (particularly developing countries), firms, and users have benefited or equally benefited from IFRS adoption regarding FPI. In addition, the positive impacts of IFRS adoption on FPI are associated with the country's regulatory environment, such as level of investor protection. The findings of the study suggest that developing countries should ensure a proper regulatory environment to reap the full benefits of IFRS adoption. This review contributes to the existing literature by providing a comparative analysis of IFRS adoption effect on FPI between developed and developing countries while also suggests future research avenues.

Gender-Related Variability in Information Processing of Disclosure Documents

Disclosure is used worldwide as a tool to increase transparency and help investors to make their decisions, thus partially overcoming asymmetric information in financial markets. This research seeks to explore gender-related variability in visual attention allocation to the Key Investor Information Document, and in the evaluation of product financial attractiveness. The study exploits the eye-tracking methodology to collect neural data, responding to the call for considering new data sources. The analysis shows that men tend to dedicate more attention to the sections Objectives and Past performance while women spend more time to scan the sections Risk-reward profile and Costs and charges; When evaluating product financial attractiveness, women tend to evaluate them as poorly financially attractive more often than men. Results reveal the existence of gender-related variability in the visual search strategy for relevant information, which, in turn, can impact on the phase of product evaluation. These findings highlight the professional responsibility of regulators and supervisors to monitor sellers and marketers’ behaviours when they interact with consumers. Moreover, this study could provide support to develop financial disclosure documents considering individual differences and ensuring that adequate attention is allocated by investors to all financial information sources, thus raising the level of investor protection. Eventually, the study stimulates innovations to be embedded in the world-wide ongoing regulatory developments that aim at increasing transparency requirements.

Ethical behavior, auditing strength, and tax evasion: A worldwide perspective

Most governments attempt to fight and reduce tax evasion. A dilemma arises about whether policies should encourage the ethical behavior of firms (an informal institution) or strengthen auditing standards (a formal institution). In this study, we provide novel worldwide evidence on the effects of these two factors on tax evasion. Overall, even though strong auditing standards may mitigate tax evasion, the ethical behavior of firms has a statistically more robust effect in achieving this goal; these results hold after we control for endogeneity and different subperiods (before, during, and after the recent global financial crisis). More specifically, the ethical behavior of firms is effective for low- and middle-income countries with low and high levels of investor protection and low-efficacy corporate boards; however, ethical behavior and auditing standards are mutually effective for high-income countries and countries with middle level investor protection and middle- and high-efficacy corporate boards. Thus, this study provides useful insights for organizations and policy makers.

Institutional Investor, Economic Policy Uncertainty, and Innovation Investment: Evidence from China

As a participator in corporate investment decision-making, the institutional investor is directly related to the corporate innovation investment. However, the economic policy uncertainty is aggravated by problems, such as economic slump and trade friction. Thus, institutional investors are not optimistic about the prospects of innovation investment. To explore the influence of institutional investors on corporate innovation investment from the perspective of economic policy uncertainty, using the 2010–2018 panel data in China and the fixed effect model, the influences of institutional investors on innovation investment and the moderating effects of the economic policy uncertainty were analyzed. Results show that institutional investors facilitate corporate innovation investment. Moreover, the increasing economic policy uncertainties repress the promoting effect of institutional investors on innovation investment. Furthermore, the institutional investors boost the corporate innovation investment by improving the internal control and relieving the financing constraints. For private companies, new and high-tech companies, the promoting effect of institutional investors on the corporate innovation investment is inhibited by the economic policy uncertainty to a small extent. For the listed companies located in areas with a high level of investor protection and intellectual property protection, the economic policy uncertainty has a minimal influence on the institutional investors and corporate innovation investment. The conclusions obtained from this study provide empirical evidence for giving full play to the role played by institutional investors in corporate innovative development. The conclusions also reveal, from the macroscopic level, that the consistency and stability of governmental economic policies have important effects on corporate development.

Regulating crowdfunding in the EU – same rules, same results? case study of Croatia

Fintech embodies technological innovations in financial services. The scholarship in this area is fast-growing and correlates with a disruptive potential Fintech has for the financial ecosystem. European regulation is also keeping up with this phenomenon. A case in point is the recently adopted EU crowdfunding regulation which is part of the EU’s FinTech Action Plan and Capital Markets Union agenda. Its general goal is to promote financial development of European financial systems by enhancing alternative finance sources to bank lending and cross-border investments. On the one hand, the EU crowdfunding regulation aims to enhance scalability for crowdfunding platforms service providers across the European single market through a single EU crowdfunding licence. On the other hand, regulation intends to provide a high level of investor protection across Europe through a unified set of rules. The purpose of this paper is twofold. First, to outline the European regulatory and policy agenda in addressing disruptive impacts of FinTech and crowdfunding on capital markets. Second, to open and encourage timely policy discussions on how these regulatory trends could unfold in Croatia and the South Eastern European (SEE) region, characterised as more traditional financial markets services and developing capital markets in comparison to other member states. Thus, the methodology combines secondary data analysis with a case study. Our findings suggest that the likely effects of the EU crowdfunding regulation reflect in improved legal certainty for investors and increased potential for financial development in alternative financing, although there is significant space for improvement of the Croatian financial ecosystem.

What states want: Estimating ideal points from international investment treaty content

When negotiating investment treaties, states balance two goals: providing strong protections for investors (investor protection), which is thought to attract foreign direct investment, and maintaining the ability to regulate their economies (regulatory autonomy). In this article we argue that treaty content can tell us about the latent preferences that states have over the level of investor protection enshrined in BITs. We use an item response theory (IRT) model and a dataset of 1,144 treaties to estimate latent preferences on this scale for signatory countries. Our measure is of use to scholars interested in studying bilateral investment treaties, international law, and foreign direct investment, and our model is of use to anyone aiming to estimate latent preferences from jointly produced manifestations.

Legal Infrastructure and High-Quality Development of Capital Market: An Event Study Based on the New Securities Law

On December 28, 2019, the newly amended “Securities Law of the People’s Republic of China” was reviewed and approved. As the fundamental law of the capital market, the new Securities Law provides institutional guarantee for optimizing and perfecting the basic system of the capital market and promoting the high-quality development of the listed companies. So, how do investors in the capital market understand the new Securities Law? How will the market react to the new Securities Law? Do investors react differently towards the different types of companies? The answer to these questions determines the basic question of the effect of the formulation and implementation of the new Securities Law. This paper intends to conduct a systematic study of this.This study takes the approval of the new Securities Law as a research event to examine the impact of the improvement of the legal infrastructure.The results find that the stock market makes significant positive response upon the approval of the new Securities Law. According to the characteristics of the companies concerned in the new Securities Law, it is found that the companies with higher risk of violation of laws and regulations have poor market reaction, while those with better information environment and higher level of investor protection have more positive market reaction. Further analysis shows that the new Securities Law guides market funds to listed companies on the main board rather than GEM and SME board. A comparative analysis with the official implementation day finds that the market response brought by the introduction of the law is mainly released on the day of approval.The potential contributions of this study are as follows: First, this study contributes to the literature about security laws and market reaction, and provides evidence of Chinese capital market, which lacks private enforcement. Second, this study shows Chinese evidence about amending security laws, and contributes to the literature of “Law and Finance”. Chinese capital market started late but has developed fast, so it is important to learn about the role of security laws. Third, the conclusion has strong policy and practical implications. This paper provides important enlightenment for the implementation of the new Securities Law and the improvement of other legal infrastructures of the capital market. Also, it provides empirical evidence for how to realize the deepening of the securities market reform and ensure the high-quality development of the capital market.

The effects of institutional settings and risks on bank dividend policy in an emerging market: Evidence from Tobit model

AbstractThis study investigates specifically the effects of institutional settings and risks on dividend payout policy for banks operate in an emerging market of Nigeria. The present study measures the risk by using financial, business, credit, and default risk at the bank‐level and financial, economic, and political risk at the country level. To achieve the objective of this study, panel data random‐effects Tobit estimation methodology is employed from the period 2007–2016. Findings reveal that the weak institutional settings lead Nigerian banks to pay out fewer dividends and set their payouts corresponding to the substitution agency model of dividends. Also, results show that Nigerian banks typically pay out more dividends in cases of growth opportunity as a substitute mechanism for mitigating agency problems and for establishing a good reputation. However, by strengthening the levels of investor protection, Nigerian bank managers prefer a low payout policy and are less probable to use dividend policies as a substitute mechanism. Moreover, except for the positive effect of default risk, findings show that the risks at the bank‐level, in particular, business risk, and at the country level, particularly financial and economic risks, have a significant negative effect on dividend payouts. Results are robust to alternative estimation procedures and also document that global risk has a statistically significant negative impact on Nigerian banks' dividend payouts policy.

Investor protection and market reaction to unusual market activity replies

PurposeThis study uses the unique setting of unusual market activity (UMA) replies to examine the market reaction and the effects of disclosure and investor protection amid information uncertainty.Design/methodology/approachA total of 1527 hand-collected UMA replies from the interlinked stock exchanges of Indonesia, Malaysia, Thailand and Singapore for the period of 2015–2017 were analysed using event study and Heckman two-step methods with market and matched control firm benchmarks.FindingsThe overall results support the uncertain information hypothesis. The UMA replies with new information were also found to reduce information uncertainty, but not information asymmetry, and they are complementary to investor protection in enhancing abnormal returns. The overall finding suggests that the UMA public query system can be an effective market intervention mechanism in improving information certainty and efficiency.Research limitations/implicationsThis study provides insight on the effects of news replies and investor protection on abnormal returns, and support for the uncertain information hypothesis. The finding is useful to policymakers and stock exchanges as they seek to understand how to alleviate investors' anxiety and to create an informationally efficient market. Nevertheless, this study is limited by the extensiveness of the hand-collected UMA replies and also the potential issue of simultaneity-induced endogeneity.Originality/valueThis study uses UMA replies and cross-country data taking into account the effects of market surroundings such as information uncertainty and the level of investor protection on market reaction.

Investor Protection, Stock Liquidity, and Capital Structure

This paper investigates empirically the impact of stock liquidity and investor protection on corporate capital structure. We predict that stock liquidity has a significantly negative impact on firm leverage and this negative impact is stronger in a country where the investor protection is strong. The sample consists of 2,203 firms listed in the UK, Germany, France, and Italy over the period from 2009 to 2018. Using a firm fixed effects model, we find evidence supporting our prediction. Our results are robust when we use a random effects model model, or when we employ an alternative measure of investor protection. Additionally, we find that an exogenous event that reduced the investor protection could dampen the negative impact of stock liquidity on firm leverage. Our paper suggests that future studies should consider the effects of factors related to the level of investor protection when investigating the relationship between stock liquidity and firm characteristics, such as firms’ default risk.

Foreign Investor’s Interest and Tax Avoidance: Contingency Perspectives Depended on Country’s Protection Level and Law Systems

This study investigates differences in firms’ tax avoidances between multinational and national. Furthermore, it investigates the differences between firms’ contingent behavior because of the country’s investor protection level and law systems. This research takes into account the firms’ tax avoidance phenomenon. Besides that, it proposes novelties as follows. First, this study highlights that multinational firms tend to avoid taxes higher than national ones. Second, it induces the dividend catering theory related to the country’s investor protection. The latest, it persuades that country’s investor protection, and law systems make firms contingent on their tax avoidance behaviors. This study finds that firms where they live in high investors’ protection countries and common law did higher tax avoidance than others. The findings imply that these firms could grow higher than others. It means that this study suggests economic consequences. The consequence is that a country should increase its investors’ protection level and somehow redefine its law systems. Therefore, it could enhance its capital market and subsequently improve the national welfares.

Are Corporate Environmental Responsibility Activities an Efficient Investment or an Agency Cost? Evidence from Korea

External conditions such as capital market maturity, investor protection levels, and government control over individual firms vary among countries. We posit that such environmental differences could cause differences in corporate environmental responsibility (CER) activities between countries. However, previous studies have mainly focused on developed countries, while studies conducted in emerging countries are limited. We examine the relationship between CER activities and investment inefficiency in firms listed on the Korea Exchange. Specifically, we analyze the incentive of managers’ ex-ante behavior on CERs and further analyze the relationship between these incentives and external evaluations. Using firm-year panel data, we conducted the pooled ordinary least squares (OLS) regression analysis and found the following results. First, the relationship between CERs and investment inefficiency is significantly positive, especially those based on managers’ incentives for overinvestments. Second, the positive relationship between CERs and investment inefficiency is prominent in the subsamples with large free cash flows or low asset efficiency. Third, active CERs reduced corporate value in the overinvestment subsample. Unlike existing literature that focuses on developed countries, our results imply that CERs may have negative effects due to agency problems in emerging countries with immature capital markets. From this arises the academic implication that the evaluation of CERs should be changed according to different capital market environments.

Name and shame? Evidence from the European Union tax haven blacklist

I study publication of the European Union (EU) tax haven blacklist on December 5, 2017, to examine whether and how the use of recognized tax havens affects firm value. I find that the tax haven naming and shaming by the EU was associated with a negative stock price reaction of firms with tax haven subsidiaries. Overall, publication of the blacklist erased $56 billion in market capitalization among the implicated firms. The largest reaction was for those tax havens, for which it was not foreseeable that they would be included in the blacklist. Retail firms experienced a larger decrease in share price than firms in other industries, which is consistent with a potential consumer backlash. Also more tax-aggressive firms faced more negative returns, which suggests that investors expect firms might be audited or fined for past or overly aggressive tax avoidance. The negative reaction was less pronounced in countries with low levels of investor protection and weakly governed firms with substantial conflicts of interest between principals and shareholders. This is consistent with increased scrutiny and potential for countermeasures associated with the blacklist, which reduce opportunities for managerial wealth diversion.

Tax on name

How to tax the name? We answer this question by introducing a name market in the sense of Tadelis (1999) into an endogenous growth model in which an informational asymmetry exists between capital producing borrowers and lenders. We show a name market endogenously arises to screen the borrowers but at the cost of crowding out investment. We derive the optimal name price that trades off the screening effect and the crowding out effect and show this optimal price decreases with the investor protection level. An optimal tax scheme should tax the name to this optimal price and reimburse the tax revenue to the name buyer. When the investor protection level is low, the net worth could be lower than the optimal name price, so capital income tax shall be allowed to subsidy the name purchase to activate the name market. Overall, we show the optimal tax scheme in the presence of a name market depends crucially on the country’s investor protection level.

Is the relation between non-controlling interests and parent companies misleading?

This article investigates whether different levels of investor protection affect the equity market’s valuation of non-controlling interests (NCIs) in a consolidated corporate entity. Using a set of publicly listed European firms, our findings suggest a positive (negative) association of NCIs with parent companies’ share prices in countries with low (high) levels of investor protection. We interpret the findings as evidence that when non-controlling investors are not well-protected, parent companies have an opportunity to extract rents from non-controlling owners, leading to a positive valuation of NCIs’ equity. However, in countries where non-controlling investors are well-protected, parent companies are not able to extract rents but still must monitor and govern the related subsidiary; thus, NCIs become a net cost, and the relation inverts. JEL Classification: M41, M48

Investor Protection, Aggregate Accounting Earnings and Forecasts of Growth in GDP: International Evidence.

This study draws on the investor protection literature to examine differences in a country’s information environment that are likely to explain cross country variation in the extent to which macroeconomic forecasters take account of current earnings when forecasting future growth in GDP. Using a unique sample of analysts’ GDP forecasts from thirty countries, we find that economies with stronger levels of disclosure and enforcement regulation have a lower association between changes in aggregate earnings and errors in forecasts of GDP growth. The results are consistent with macroeconomic forecasters in countries with stronger investor protections taking greater account of changes in aggregate earnings when forecasting growth in GDP than analysts in countries with lower levels of investor protection.

The Minority investor protection and corporate governance practices

Developing countries tend to have weak institutional structures and contracting environments. More specifically, the concentration of ownership would be a response to weak investor protection (Klapper & Love, 2004; La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 2000). However, in India, despite the improved degree of investors protection, share ownership remains concentrated (Altaf & Shah, 2018). This means that the concentration of share ownership is not always dictated by the level of investor protection. The objective of this paper is to determine the effect of minority investor protection on the corporate governance practices adopted by multinationals listed on the regional stock exchange. We used dynamic panel estimator to obtain significative results. The results show that when the protection of minority investors improves, the functions of Manager and chairman of the board of directors tend to be separated; the corporate governance tends towards a bicameral type of model, share ownership tends to be less concentrated, policies and remuneration standards are put in place and compensation of the Chairman and the members of the Board of Directors published in the annual reports and CSR practices and adherence to the code of ethics and norms tend to be a reality. The results of this study plead for policies consisting in improving the level of protection of the investors, especially the level of protection of the minority investors

Corporate social responsibility and earnings quality: do institutional features matter?

PurposeThis paper aims to examine whether corporate social responsibility (CSR) is associated with firms’ earnings quality (EQ) and how this association is context-specific. The authors consider specific institutional differences in strength of corporate governance (CG) attributes, quality of law enforcement and level of investor protection found between Anglo-American, European and South-Eastern Asian CG models to test the impact of above country-level factors on this association.Design/methodology/approachTo test the association between CSR and EQ, the authors consider EIRIS (Ethical Investment Research Service) (2018) CSR issues of sustainability indicators as proxy to capture CSR. Following Rezaee and Tuo’s (2019) study, the authors classify EQ into innate earnings quality (IEQ) and discretionary earnings quality (DEQ). The authors investigate the innate (discretionary) EQ as to refer to firm’s inherent operating uncertainty (earnings management). Several dependency models for panel data applying the generalized method of moment (GMM) estimator of Arellano and Bond (1991) are ruled based on archival data of 4,206 non-financial international listed firms over the period 2012-2017.FindingsUnivariate and GMM multivariate cross-country analyses show that CSR is positively associated with EQ and that this association is more pronounced for firms within countries where good CG tools and higher investor right protection are preserved. The authors interpret the findings as evidence that the CSR-EQ association is shaped by the degree of monitoring role played by institutional features at the country level. The results are robust to a battery of robustness tests.Originality/valueThe originality of this research is twice. On the one hand, it examines whether CSR is a reflection of manager’s ethical opportunistic behavior resultant on earnings quality derived from a firm’s innate traits. On the second hand, it tests whether CSR is a reflection of discretionary earnings quality manifested by earnings management behavior. This paper is the first to support that institutional features significantly matter when investigating the association between CSR and EQ.

'What to Expect when You Are Expecting' a European Crowdfunding Regulation: The Current ‘Bermuda Triangle’ and Future Scenarios for Marketplace Lending and Investing in Europe

Marketplace lending and investing have been recently attracting increasing regulatory attention. However, regulatory responses to such phenomenon have been extremely varied, even in Europe, characterized by maximum harmonization in the field of financial regulation, continuous efforts in creating a single market and in centralizing supervision. Such fragmented framework poses the risk of different levels of investor protection in Europe, regulatory arbitrage, competition distortions, obstacles to cross-border activity and to existing EU passports. The European Commission, after an initial “wait-and-see” approach, adopted in March 2018 a proposal for a Regulation on European Crowdfunding Service Providers (ECSPs) for businesses. Such proposal, nonetheless, has undergone a number of significant revisions during the trilateral negotiations among the European Commission, the European Parliament and the Council of the European Union, underlying the ambiguous nature of crowdfunding and the complexity in reaching a common view on the same. The three European Institutions seem in fact to have divergent views of crowdfunding and different ideas on how to regulate it, this delaying the approval of the proposed Regulation. Will crowdfunding eventually escape such Bermuda Triangle receiving adequate regulation or is it destined to die in the process? The present paper, after briefly describing crowdfunding main features and regulatory trends in Member States, will critically analyze the ECSPs Regulation Proposal, with respect to all the three different versions, inferring from each text a different vision (and consequent envisioned regulation) of crowdfunding and of financial regulation in general, underlying their pros and cons and proposing adjustments to reach a functional, tiered and proportional regulation. Finally, after mentioning certain recent revisions in national crowdfunding laws (e.g. in Italy, Belgium, UK and Germany), the paper will conclude trying to forecast the future direction of the ongoing trilateral negotiations and the possible impact of the European Regulation on national crowdfunding laws and the sector.