Corporate Governance Problems Research Articles

Ownership structure and corporate governance in China: some current issues

PurposeThis paper seeks to investigate some current issues of ownership structure and corporate governance in China.Design/methodology/approachThe methodology is a review, analysing issues of ownership structure and reviewing problems in corporate governance, followed by some suggestions for improvement.FindingsIt is found that the heavily concentrated equity ownership in the hands of large state‐owned shareholders mainly decides the status quo of the corporate governance system in China. In order to improve the effectiveness of corporate governance of Chinese‐listed companies, it is imperative to restructure roles of the government, restrict hands of controlling shareholders, enhance independence of the board of directors, reform the supervisory board, set up independent directors‐dominated sub‐committees and align the interests of managers with those of the shareholders.Research limitations/implicationsThis paper only investigates Chinese‐listed companies because of data availability.Practical implicationsIt has implications for policy makers in China insofar as it offers evidence concerning ownership structure and corporate governance of Chinese‐listed companies. It also helps investors and trading partners (especially foreign ones) understand corporate governance and the investment environment in China.Originality/valueThis study contributes to the literature by extending the mainly US‐based board literature to China where there are important institutional differences in ownership structure and corporate governance system.

CORRUPTION AND CORPORATE FINANCE PATTERNS: AN INTERNATIONAL PERSPECTIVE

Abstract. This study demonstrates the importance of government corruption in shaping corporate finance patterns across countries. Corruption contributes to a more prevalent and higher degree of corporate equity ownership concentration and more reliance on bank financing in raising external finance. It argues that corporate governance under corrupt governments is particularly poor. Firm management, taking advantage of political capital acquired through bribery, is especially powerful in expropriating from outside investors. Ownership concentration and reliance on bank financing are means of mitigating the corporate governance problem under a corrupt government.

Proximity and Rationalisation: The Limits of a Levinasian Ethics in the Context of Corporate Governance and Regulation

In this article, I explore how the ideas of French philosopher Emmanuel Levinas offer insights into a debate often held today in the field of corporate governance, concerning the relative merits of statutory and voluntary approaches to the regulation of business. The philosophical position outlined by Levinas questions whether any rule-based systematisation of ethical responsibility, either statutory or voluntary, can ever equate to a genuine responsibility for the other person. I reflect on how various authors have adapted Levinas’s philosophy to form a critique of bureaucracy and rule following in business, and the lack of ethical authenticity in corporate codes. However, this article also considers the question of whether a theoretical separation can be made between an ethical responsibility based on sensibility (as is suggested by Levinas) and a rational conceptualisation of how one is required to act. Considering the difficulty of disentangling these notions of ethics, I return to the problem of corporate governance and suggest an approach to stakeholder conflict based on mediation and dialogue, which rules out neither principles of conduct nor an openness of responsibility to the Other.

Corporate ownership, control and the informativeness of disclosed earnings in Russian listed firms

Many problems of corporate governance in Russia are beyond the scope of classical agency theory because of highly concentrated ownership structures. Using ownership and financial dataset from UBS Brunswick, we show that the use of accrual based accounting in Russia has resulted in lower in formativeness of earnings. Opportunistic earnings management hypothesis holds where majority shareholders (controllers) enjoy short-term benefits of manipulating accounting. Interestingly, the returns (net of market) increase when use of discretionary accruals to manage earnings increases in firms controlled by either state or oligarchs. However, such relationship does not exist when ownership is accumulated without control. We also found that state-owned companies use less discretionary accruals than other control groups. We do not find any evidence supporting performance measure hypothesis where firms manage earnings by discretionary accruals to offset the over or under reaction of economic shock. Highly leveraged firms tend to have positive relationship between earnings management and returns, whereas, both size and growth reflect negative informativeness of earnings. The results describe the concentrated ownership structure in Russia where controlling owners not only, achieve personal targets by over or under-statement of disclosed earnings but also get positive response from the market. This market benefit however, can only be achieved with effective control.

The effects of corporate governance on capital structure in Taiwanese corporations after controlling for the heterogeneity of industries and firm size

Since the MM theory, scholars have discussed capital structure issues from the perspectives of agency problems in corporate governance. Corporate governance has been seen as the means to reducing the agency costs produced by aligning the interests of management and shareholders, and the incentive for the management to engage in opportunistic behavior has been influenced by the firm’s ownership and board of director structures. Previous studies, however, focus on traditional financial factors and neglect the debt and equity agency problems triggered by corporate governance and their possible influences on capital structure decisions. The sample used in this study consists of 317 firms listed on the Taiwan Stock Exchange from 1998 to 2007. By controlling for the heterogeneity of industries and firm size, our models incorporate the cash flow rights-voting rights-seat control divergence, the ownership structure, and the structure of the board of directors to examine the effects of corporate governance on the firm’s capital structure. The results show that, when the divergence between cash flow rights and seat control is lower or when the divergence between voting rights and seat control is higher, the controlling shareholders can either control the board of directors to better monitor the firm or exhibit a preference for debt financing based on entrenchment motives. Further analysis indicates that blockholders prefer lower debt financing and do not expropriate minority shareholders. Financial institutional shareholders function through their provision of monitoring and the certification of debt for technological firms and can decrease the firms’ debts. The management in the technological industry firms prefers debt financing in order to obtain agency-related benefits. While directors in traditional industries or large firms might use personal or firm debt to tunnel the firm’s assets, the function of independent directors in technological firms or large firms of lowering debts in order to reduce the firm’s bankruptcy risks is more evident

Corporate governance problem and its implications for transition economies

This paper examines the corporate governance problem in Central and Eastern European (CEE) countries and the major implications of highly concentrated ownership in these countries on their economic development. Our main message is that ownership and control in transition economies will remain highly concentrated in short-term aspect, and regulatory intervention should focus on protecting minority shareholder interests while maintaining the incentives for entrepreneurship and large shareholder monitoring. We also argue that the corporate governance system in transition economies will have to rely on active involvement and monitoring by large shareholders, even after the emergence of a class of professional managers. Moreover, our empirical results support Berglöf and Pajuste (2003) findings that controlling shareholders (strategic investors) are critical to the successful restructuring of privatized firms; minority protection is also important to attract outside capital, but it may reduce the disciplinary role of the market for corporate control

Corporate governance in Estonia

The corporate governance problems as known in a market economy arose in CEE countries in connection with the privatisation of large enterprises at the beginning of the 1990s, and to a large degree even afterwards. The emerging pattern of CG is quite difficult to interpret according to the traditional Western models and varied greatly from country to country, because in the case of transition countries various institutions and the environment as a whole do not work or at least do not work fully (Tafel et al, 2006). Therefore CEE-countries represent a very good testing ground for Corporate Governance (CG) related research. This paper studies forms of corporate governance in foreign owned companies situating in Estonia: cooperation between the owners, council and board in Estonian enterprises. The paper starts with the theoretical part followed by methodology and results of empirical study in Estonian companies

Dividends and institutional investors activism: Pressure resistant or pressure sensitive?

This paper provides new international evidence on the relationship between dividend policy and institutional ownership by analysing a sample of US and UK and Irish firms characterised by an Anglo-Saxon tradition and a matching sample of other EU companies from Civil Law legal systems. We hypothesize that, due to the different characteristics of both the legal system and the nature of agency conflicts in firms from those countries, the type of institutional investors and their role in corporate governance is different and so the use of dividend policy to solve the conflict of corporate governance problem differs in each legal system. We find that while in firms from Anglo-Saxon tradition the relation between dividends and institutional investors, pension and investment funds, is possitive, in Civil Law countries the relation is negative where investors are banks or insurance companies with other private interest inside the firm. These results are consistent with our hypotheses and breed new insights into the role of dividend policy as a disciplining mechanism in firms from different legal system with an important presence of institutional investors.

Dividendos, estructura de propiedad y endeudamiento de las empresas desde una perspectiva institucional. Evidencia empírica internacional

The objective of this paper consists of determining the explaining factors of dividend policy for a sample of 931 firms from different institutional environments during the period 1996–2000. The investors protection and dividends taxation are instituional aspects that determine the ownership and financial structure and have an influence on corporate governance problems. And so, dividends decission are influenced by these aspects that determine the agency problem of corporate governance. So, we set hypotheses to contrast, using the methodology of GMM stimation of panel data, the relationship among each factor and dividends adopted by firms in each particular legal system. We obtain results that evidence that the Law&Finance perspective from the agency problems allows us to fit more accurate the dividend puzzle into the corporate governance problem.

Can institutional investors fix the corporate governance problem? Some Danish evidence

It has been advocated within corporate governance that institutional investors may discipline management in listed firms and thereby alleviate the free rider problem associated with dispersed ownership. This article tests this hypothesis using a sample of Danish listed firms during 1998–2001 determining, whether ownership by institutional investors impacts performance, measured by Tobin’s q. Using three stage least squares, it is shown that aggregate ownership by institutional investors does not influence firm performance. However, when decomposing the results, it is found that joint ownership by the largest two Danish institutional investors, has a significant negative impact firm performance. Ownership by banks and to a lesser extent insurance companies significantly influences firm performance positively. The results somehow challenge the conventional wisdom, arguing that the black box view of institutional investors should be abandon. Therefore it is suggested that a more careful analysis should be devoted to each institutional investors own legal environment.

Incoming Editorial

Incoming Editorial

Taxation and Corporate Governance: An Economic Approach

How do the tax system and corporate governance arrangements interact? This chapter begins by reviewing an emerging literature that explores how agency problems create such interactions and provides evidence on their importance. This literature has neglected how taxation can interact with the various mechanisms that have arisen to ameliorate the corporate governance problem, such as concentrated ownership, accounting and information systems, high-powered incentives, financing choices, payout policy, and the market for corporate control. The remainder of the chapter outlines potentially fruitful areas for future research into how these mechanisms may respond to the tax system.

Modelling an Effective Corporate Governance System for China's Listed State-Owned Enterprises: Issues and Challenges in a Transitional Economy

The purpose of this paper is to construct a suitable model of corporate governance for China's listed companies that were formerly state-owned enterprises (ie listed SOEs). The paper first identifies the corporate governance problems in China's listed SOEs. This is followed by an examination of the suitability of the insider/outsider systems of corporate governance as a model for China's listed SOEs in light of China's current political, economic and social conditions. Drawing on Singapore's model of corporate governance for its government-linked companies, the paper concludes with a proposal to adopt the Singapore's “Temasek” model as a system of corporate governance for China's listed SOEs.

Long-Run Effect of Taxes, Prices, and the Interest Rate on the Capital Stock

This paper is the first paper to break user cost into its natural pieces - the risk-adjusted market interest rate, tax variables, and the price of capital goods - and estimate the long-run effect of each on the capital stock. Why is the separation of user cost into interest rate, tax, and capital goods price components an interesting question? Finance constraints, for example, can lead to a wedge between the market interest rate and the shadow cost of finance. As a result, the estimated elasticity of the capital stock with respect to the interest rate might be close to zero. Similar issues arise when corporate governance problems (in the sense of Jensen 1986) cause empire-building managers to put weight not only on profitability but also on the size of their firm. Finance constraints can also affect the estimated elasticity of the tax component of user cost. With perfect capital markets, the marginal tax rate influences investment decisions, but the average tax rate is also relevant when firms face potentially binding finance constraints. To obtain estimates of the long-run effect of the interest rate, taxes, and capital goods prices on the capital stock, the paper is careful to use long-run econometric techniques (specifically, DOLS estimation of the relevant cointegrating relationship). The empirical results show that the price of capital goods has an economically and statistically significant effect on equipment capital. The estimated long-run elasticity is about -0.9, precisely estimated, and robust to variation in the econometric specification. The elasticity of equipment capital with respect to the real interest rate is close to zero (and, in most cases, precisely estimated). This result is robust to a variety of econometric specifications. The preferred estimate of the long-run elasticity of equipment capital with respect to tax variables is -0.9. The estimated elasticities have an unusually rich set of implications - for finance constraints, corporate governance, the operation of capital markets, economic growth, and monetary policy.

Governing the Governors: A Clinical Study of Central Banks

We study the specific corporate governance problems of central banks in their complex role of inflation guardians, bankers' banks, financial industry regulators/supervisors and, in some cases, competition authorities and deposit insurance agencies. We review the current institutional arrangements of a number of central banks, e.g. formal objectives, ownership, board and governor appointment rules, term limits and compensation, using both existing surveys and newly collected information. Research on central bank governance appears to have focused almost only on their monetary policy task. As shown by the sub-prime loan market turmoil, central banks play a crucial role in financial markets not only in setting monetary policy, but also in ensuring their stability. In this paper, we contrast the current governance practices at central banks with the structures suggested in the corporate governance literature. Our analysis highlights a number of specific issues that appear to have been unsatisfactorily addressed by existing research, such as the incentive structure for governors and board members, the balance between central banks' multiple objectives and the need for term limits.

The ethical and theoretical context of corporate governance

The paper investigates the foundations of corporate governance. It traces the current practical problems of corporate governance to the epistemological and ethical problems of the current mainstream management theory. Management theory has gradually been subverted by economism, an ideological and extreme version of mainstream economics. The paper isolates and discusses the three axioms of economism which are deemed to be especially problematic for management/corporate governance theory. The three axioms are: the assumptions that humans always follow the rational principle, that value-free research and application of management tools is possible, and that theory takes primacy over reality. These axioms plus what has been called the “gloomy vision” create a theory of management which is amoral and which in turns leads to immoral and dysfunctional corporate governance.

Corporate Governance Reforms in Continental Europe

The fundamental problem of corporate governance in the United States is to alleviate the conflict of interest between dispersed small shareowners and powerful controlling managers. The fundamental corporate governance in continental Europe and in most of the rest of the world is different. There, few listed companies are widely held. Instead, the typical firm in stock exchanges around the world has a dominant shareholder, usually an individual or a family, who controls the majority of the votes. In this essay, we begin by describing the differences in the ownership structure of companies in the three main economies of continental Europe—Germany, France, and Italy—with comparisons to the United States and the United Kingdom. We next summarize the corporate governance issues that arise in firms with a dominant shareholder. We take a look at a major European corporate scandal, Parmalat, as an extreme example of investor expropriation in a family-controlled corporation. We outline the legal tools that can be used to tackle abuses by controlling shareholders. Finally, we describe the corporate governance reforms enacted by France, Germany, and Italy between 1991 and 2005 and assess the way in which investor protection in the three countries has changed.

Corporate Governance and Economic Performance

What is the best corporate governance system? Is the Germanic corporate governance system the best? The Japanese? The Anglo‐Saxon? This article reviews some of the relevant literature for answering this question. Particular attention is devoted to corporate governance problems in developing countries. It emphasizes that the nature of problems that corporate governance systems must deal with can be expected to vary with the state of development of a country. Central to any discussion of corporate governance is the question of how well a particular set of institutions mitigates the various principal/agent problems that arise in a firm. The article thus reviews the basic principal/agent problem and discusses its relevance for countries in different stages of development. It examines the advantages and disadvantages of each type of corporate governance system in mitigating principal/agent problems, and reviews the relevant empirical evidence for assessing their performance.

自願設立獨立董事、關係人交易與公司價值關聯性之研究：代理理論與訊號發射理論之比較

The theories used to explain the corporate governance problem make use of agency theory and signaling theory, but prior research has only explored one of these theories and the empirical results have not been consistent. This paper uses the simultaneous equation model to investigate the cause-effect relationship among independent directors, related party transactions and firm value. The data consists of 145 companies from those firms listed on TSE and OTC in Taiwan which voluntarily engaged independent directors from 2001 to 2003, and, as a control sample, an additional group of 145 companies which did not set up independent directors. The empirical results are summarized as follows. First, the proportion of the related party transactions has a negative effect on the firm value. Second, the higher the proportion of the related party transactions, the lower the proportion of independent directors to all directors. Third, the set-up of the independent directors can significantly reduce the related party transactions. Fourth, the firm value does not have a significant effect on the amount of the related party transactions. Fifth, the companies voluntarily establishing independent directors do not have a significant relation with the firm value.

Social Security Reform and Corporate Governance

This paper considers implementation issues arising from potential reforms to the United States Social Security system. Many reform proposals involve individually invested accounts, but the corporate governance implications of such accounts have not been fully explored. Existing reform plans will result in a large fraction of votes being concentrated at one private fund manager. The implications for corporate governance and debt management under alternative fund management strategies are evaluated. The use of futures to construct synthetic investments could alleviate corporate governance and debt management problems.