Poor Investor Protection Research Articles

Monetary policy impact on sustainability: Analyzing interest rates and corporate carbon emissions

This study aims to investigate the impact of monetary policy on firms’ carbon emissions. The primary focus is on the effect of increasing interest rates on the carbon footprint of companies, both prior to and following the implementation of the Paris Agreement in 2015. The results show that there is a positive relationship between interest rates and carbon emissions indicating that in the face of increasing interest rates, companies are more likely to choose short-term financial stability above long-term sustainability objectives. This positive relationship is less prevalent following the Paris Agreement suggesting that policymakers should continue to strengthen global climate initiatives as a pressure for companies to invest in green activities. Additional evidence suggests that the impact of interest rates on carbon emissions is particularly noticeable in situations characterized by elevated levels of economic and policy uncertainty, weak corporate governance quality, and poor investor protection. These results are robust to endogeneity concerns, alternative measures of interest rates, carbon emission, and alternative samples.

Global board reforms and corporate acquisition performance

This paper examines the effect of board reforms on corporate acquisition performance using data from 31 countries. Using a difference-in-differences design, we find that the implementation of board reforms in the acquirer's country significantly increases acquirer returns. The increase is driven by reforms involving board independence, but not reforms involving audit committee independence nor the separation of CEO and board chair roles. Further analysis shows that the uplift in acquisition performance following improvements in board independence is strongest in acquirers with more agency problems. The ‘Board reform strengthening’ effect is concentrated in larger acquirers, with more free cash flows, executing large and public-target deals and operating in countries with ex-ante poor investor protection. The empirical evidence indicates that reforming board independence effectively alleviates agency problems between managers and shareholders and improves corporate acquisition performance.

African Continental Free Trade Area Agreement investor protection and capital market in Africa

Purpose The purpose of this paper is to explore the modalities for the curtailment of expropriation of investment in the course of implementation of the African Continental Free Trade Area (AfCFTA) Agreement and to ensure that the African capital markets contribute robustly to economic growth. Design/methodology/approach The paper relies on the doctrinal approach to assess the state of play and the prospects for the future. Findings The paper found that African capital markets are fragmented and continue to suffer from poor investor protection which lowers market confidence. Originality/value The paper offers new insights on the regulatory approaches to foster investor protection in light of the emergence of the AfCFTA, regulation of executive compensation and need for harmonization of best practices across African markets.

Does ownership matter in corporate cash holdings? Evidence from an emerging market

PurposeUsing imbalanced panel data of nonfinancial Vietnamese listed firms from 2005 to 2021, this paper explores the potential effect of ownership on firms' cash levels.Design/methodology/approachTwo hypotheses are tested using different methods, including pooled ordinary least squares (POLS) and system-generalized method of moments (GMM), to investigate the ownership–cash holding relationship for various firm scenarios. Both book and market measures of the cash ratio are examined.FindingsResults show that foreign and state ownership encourages firms to increase their cash reserves. The positive relationship between ownership and cash holding is, especially, pronounced for firms in the financial deficit.Research limitations/implicationsThis research suggests that in this emerging market, outside ownership substantially accelerates cash to hedge against the unexpected issues caused by poor investor protection, low political accountability and information asymmetry.Originality/valueThe study contributes to the existing understanding of the relationship between ownership and corporate cash holdings in the context of a typical emerging market. Besides, it expands the existing knowledge to the extent of such relations in the event of a financial shortage.

Strength in numbers: Minority shareholders' participation and executives' pay-performance sensitivity

This study investigates the effects of minority shareholders' participation in annual general meetings (AGMs) on executives' pay–performance sensitivity (PPS) in a Chinese stock market. Using a novel dataset of minority shareholders' attendance of AGMs, we find that the number of attendees is significantly and positively associated with PPS. The results are robust to the instrumental variable approach, placebo tests, excluding the effect of shareholdings, and using alternative measures of attendance and PPS. We also examine two possible channels and find that the positive effect of minority shareholders' attendance on PPS is mainly driven by the compensation contracting channel, that is, by incorporating more voices from retail investors and independent directors into the compensation contract design, than by the compensation justification channel. Extended analyses show that the impact of minority shareholders' attendance is more pronounced in state-owned enterprises (SOEs) and in regions with good investor protection than in non-SOEs and regions with poor investor protection. Additional analyses also find higher minority shareholders' attendance leads to lower executive perk consumption. Overall, our findings highlight the importance of minority shareholders' participation in AGMs and their governance role in the design of executive compensation contracts.

The impact of managerial ownership on audit fees: Evidence from Portugal and Spain

This study examines the impact of managerial ownership on audit fees in a context of concentrated ownership and poor investor protection. Using samples of Portuguese and Spanish listed companies for the period 2010–2021, the results of this research suggest that there is a non-linear relationship between managerial ownership and audit fee which corresponds to a pattern of “alignment-entrenchment-alignment”. In Portugal and Spain, the convergence of interest effect dominates the entrenchment effect in the low and high ranges of managerial ownership, leading to the conclusion that a policy of providing management with amounts of equity within these ranges of managerial ownership should reduce agency costs and decrease audit fees. In contrast, in Spain, the entrenchment effect dominates the convergence of interest effect in the intermediate range of managerial ownership, which have the effect of increasing audit fees.

Competition laws, external financing and investment

We examine the effect of competition laws on external financing and investment decisions around the world. Using a large sample of 21,801 firms across 32 countries, we find a positive association between the stringency of competition laws, and external financing and investment. Our finding is robust to several sensitivity tests, including using alternative measures of external financing and investment, alternative samples and a first-difference change analysis. In cross-sectional analyses, we find that the positive association between the stringency of competition laws and external financing and investment is stronger for financially constrained firms, poorly governed firms, and firms in countries with poorer investor protection and weaker legal enforcement. Collectively, our results support the governance role of intensifying market competition in influencing external financing and investment. Using a sample that covers diverse industries and many countries, our study improves our understanding of the effects of market competition, particularly how variation in institutional settings matters for the success of competition laws and should be of value to policymakers.

Going public: evidence from stock and bond IPOs in Belgium, 1839–1935

We investigate firms' initial stock and bond issues in public capital markets and explain fluctuations in these IPOs over time. We study Belgium from 1839 to 1935, which provides a setting with poor investor protection, no tax distortions, and changing regulations. We find that economic growth induces stock and bond IPOs and that the issuers time offerings such that they coincide with favorable market conditions. Even though in 1873, regulation was abruptly relaxed, we find no evidence of increases in the number of IPOs. Finally, we show that stock and bond IPOs do not interact when controlling for the determinants of these IPOs.

Corporate Ownership Structure and Cash Holdings in the Vietnamese Market

This study examines the relationship between corporate ownership structures and cash holdings in Vietnam using panel regression. We use a sample of 646 non-financial firms listed on the Ho Chi Minh City Stock Exchange from 2010 to 2018. Our main analysis employs firms’ state and foreign ownership status as the explanatory variables and firms’ cash holdings as the response variable. Both state ownership and foreign ownership exert a statistically significant positive influence on the investee firms’ internal cash reserves. Our baseline result implies that both state and foreign investors are likely to demand high cash ratio based on precautionary motives. To address endogeneity issues, we also include a firm’s cash policy in the past three years in the analysis. Both types of ownership and cash holdings are significantly positively related, hinting that our results are robust to autocorrelation. This positive link reveals that firms are likely to accumulate large cash savings in a weak business environment characterized by poor investor protection and high levels of political uncertainty and information asymmetry. These results indicate a possibility that different management preferences of domestic and foreign shareholders may be overridden by an adverse business environment. One important policy implication is that regulatory agencies should adopt a uniform accounting standard for financial reports, preferably under the international financial reporting standards (IFRS), to improve the information transfer between outside investors and shareholders. This will enhance minor shareholders’ rights and values and induce more effective monitoring mechanisms to enter the market, thereby creating a healthier business environment.

Corporate governance and investment sensitivity to policy uncertainty in Brazil

In this study, I investigate the role of corporate governance on the relationship between investment and economic policy uncertainty (EPU). Exploring the Brazilian context of poor investor protection, high private benefits of control and premium listing segments, I provide evidence that the negative impact of EPU on investment is stronger for well-governed firms. The moderating effect of corporate governance on investment-EPU sensitivity is present in companies with different levels of financial constraints and investment irreversibility. My findings support the view that controlling owners prefer riskier investments when expropriating minority shareholders and stricter governance practices may mitigate such an opportunistic behavior.

Distress Resolution through New Block Formation: Implications for Ownership Concentration*

AbstractThis study examines distress resolution under concentrated equity ownership and concentrated bank debt. Using a large sample of Korean financially distressed firms, I find that distress resolution is more likely when private placements of new equities are accompanied by a change in control. Control transfers in which new blocks are created through equity capital injection contribute to operational efficiency and long‐term performance. These findings suggest that equity capital injection and monitoring by new blockholders are essential for distress resolution under poor investor protection, which further explains why concentrated ownership may persist under such an environment.

It's a Small World: The Importance of Social Connections with Auditors to Mutual Fund Managers’ Portfolio Decisions

ABSTRACTWe find that mutual funds whose managers are socially connected with firm auditors hold more shares of these firms and generate superior portfolio returns. Cross‐sectional results reveal that the relation between social connections and mutual fund stockholdings is more pronounced: when the social connections are stronger, when the auditor is in a better position or has stronger incentives to acquire private information, when the fund manager exercises more power, for small audit firms, for auditors in areas with poor investor protection, and for public firms with greater business opacity or private information. Other results are consistent with fund managers electing to schedule their corporate site visits to coincide with the fieldwork of their connected auditors, as would be expected if fund managers time their visits to meet with these auditors to facilitate information transfer. Additionally, we observe associations between fund trading prior to earnings surprises and audit opinions, and the presence of social connections between fund managers and firm auditors. Finally, we show that mutual funds and firms in which they invest tend to appoint connected auditors and pay them higher fees. Collectively, we document empirical patterns that would arise if socially connected auditors and mutual fund managers share information.

Equity ownership and corporate transparency: International evidence

This paper investigates the effect of insider ownership on stock price synchronicity. Specifically, for countries with poor investor protection, the managerial entrenchment effect dominates. When ownership increases, synchronicity increases at an increasing rate. However, for countries with strong investor protections, managerial entrenchment effect only dominates the incentive alignment effect when controlling ownership increases initially. As controlling ownership continues to increase, the incentive alignment effect becomes stronger and the net effect is reversed, leading to a more transparent firm. Additional tests reveal that financial reporting framework and insider trading law enforcement are crucial external governance channels affecting stock price synchronicity.

Liquidity Synchronization, Its Determinants and Outcomes under Economic Growth Volatility: Evidence from Emerging Asian Economies

This study investigates the country-level determinants of liquidity synchronization and degrees of liquidity synchronization during economic growth volatility. As a non-diversifiable risk factor, liquidity co-movement shock spreads market-wide and thus disrupts the overall functioning of the financial market. Firms in Asian markets operate in legal and regulatory environments distinct from those of firms analyzed in the previous literature. Comprehensive analyses of liquidity synchronicity in emerging markets are limited. A major knowledge gap pertaining to Asian emerging markets serves as the primary motivation for this study. Seven Asian emerging economies are selected from the MSCI emerging market index: Bangladesh, China, India, Indonesia, Malaysia, Pakistan and the Philippines for analysis from 2010 to 2019. The empirical findings show high levels of liquidity synchronicity in weaker economic and financial environments with low GDP growth, high inflation and interest rates and underdeveloped financial systems taking the form of low levels of private credit. Liquidity synchronicity is also affected by poor investor protection, political instability, weak rule of law and government ineffectiveness. Moreover, levels of liquidity synchronicity are higher in a period of economic growth volatility.

Incomplete Share Repurchase Programs in Vietnam: Completion Rates and Short-Term Returns

Stock repurchases have become a preferred method of distributing cash to stockholders. However, given the high level of information asymmetry and weak corporate governance as well as poor investor protection in Vietnam, many Vietnamese firms use stock repurchases as a tool to manipulate stock prices in the market. Using event study methodology and Tobit regression models, this study examines the stock price behaviors surrounding the event dates and the impact of earnings management activities prior to the stock repurchases on the completion of repurchase announcements in Vietnam. The results show that earnings management practices prior to stock repurchase programs, the percentage of intended buyback shares, and CEO characteristics have a significant impact on the completion of these repurchase programs. Moreover, most of the windows surrounding the event dates do not have any significant abnormal movement of the stock prices. A plausible explanation is that, due to weak corporate governance and poor investor protection, Vietnamese firms send lots of misleading signals through various corporate activities, especially stock repurchase programs. Thus, these signals have less meaning to investors.

When Do Firms Go Public? Stock and Bond IPOs in Belgium, 1839-1935

This paper investigates the timing of a firm’s first security issue in public capital markets. We explain fluctuations over time in initial public offerings of bonds and stocks. We study Belgium in the period 1839-1935, a setting with poor investor protection, no tax distortions and changing governmental regulations. We find that economic growth leads to stock and bond IPOs and that both types of issues are timed to coincide with favorable market conditions. These effects are the strongest when the securities market has reached a mature level of development. We also find that bond IPOs coincide with more stock IPOs. Finally, our results suggest that a deregulation shock in 1873, which deregulated security markets and made it much easier to set up a firm and list securities, did not directly affect the number of IPOs, but facilitated a booming securities market in later years.

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.

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.

Geographical proximity and value of corporate cash holdings

PurposeIn this paper, the authors examine the association between a firm's geographical location and the value of its cash holdings.Design/methodology/approachFollowing Loughran and Schultz (2005) and Nielsson and Wójcik (2016), the authors define firms as either geographically remote or geographically proximate based on their distance to areas that are either largely populated or concentrated in financial expertise. We also estimate the marginal value of cash using the model developed by Faulkender and Wang (2006).FindingsThe authors find that the marginal value of cash is $0.10–$0.16 lower in remotely located firms than in geographically proximate firms. The lower marginal value of cash is prominent among remotely located firms with greater severity of information asymmetry. Our findings support the view that the inability of shareholders to closely monitor how managers use of firm cash may increase the perceived conflicts of interest associated with managers' cash spending and decrease the value of cash.Originality/valuePrevious studies try to explain the cash holdings puzzle by attributing it to CEO overconfidence, external funding constraints, poor corporate governance, difference in corporate financial policy, poor investor protection, lack of firm diversification and large operating losses. This study contributes to the extant literature by offering new evidence of the role of geographic location on the value of cash holdings.