Quality Of Investor Protection Research Articles

The impact of quality of investor protection disclosures on credit risk premium

The bond prospectus is an important source of disclosure for bond information, in which the quality of investor protection-related text conveys the issuer’s efforts on investor protection and risk management. We try to find out whether reader-friendly prospectus make investors process information more easily, which finally leads to lower credit premium. This study innovatively explores the impact of investor protection-related text quality on bond credit risk premiums, using a total of 6,025 Chinese listed corporate bonds from 2006 to 2022 as a sample for regression. The results show that the higher the Fog Index of investor protection disclosure, the higher the bond credit risk premium; the higher the boilerplate of investor protection disclosure, the lower the bond credit risk premium. Meanwhile, we further find the positive moderating effect of option-embedded bonds in the above relationships, and conclude that option-embedded bonds have stronger relationships between bond credit risk premiums and boilerplate or Fog Index than normal bonds. This study holds significant reference value for regulators to formulate policies and standardize information disclosure to ensure investors’ rights and interests.

Analysis of Crypto-assets, Blockchain Investor Protection, and U.S. Market Risks using the Mlogit Classifier Model

We present insights into novel and complex issues regarding cryptocurrency activities, the related investor protection, and blockchain market risks. Crypto digital assets embody global economic ambition with their significant growth and creativity levels. This study employs a novel research approach using multinominal logit (mlogit) classifier modeling techniques to present unique findings regarding crypto-assets. The machine learning model confirmed better accuracy compared to previous research studies. These findings could contribute to a better understanding of the impact of business consumers on cryptocurrencies and blockchain used by business experts and policymakers worldwide. The research results should help future studies develop more machine learning models to ensure more accurate findings and discussions. The mlogit method research presented here confirms that business artificial intelligence methods and human domain knowledge interpretation can help current business leaders to better understand essential business decisions and their significant role in modern business behavioral prescriptive analytics. We derive important perspectives about cryptocurrency and blockchain strategy improvements, which may produce positive policy changes by enhancing the quality of investor protection in blockchain worldwide.

The effect of investor protection on firm riskiness and performance during the COVID-19 economic crisis

ABSTRACT This paper examines whether differences in the quality of investor protection between countries affect firm riskiness and firm performance during the COVID-19 economic downturn. Using a large cross-country dataset and a broad variety of controls measured at the state and firm level, we find that jurisdictions that offer stronger investor protection experience significantly lower volatility and better performance during the pandemic. This effect is amplified in countries strongly affected by COVID-19. Our results contribute to the ongoing debate in the finance literature about the impact of the quality of investor protection on corporate behaviour and performance.

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.

Do minority acquisitions transfer better corporate governance practices? An analysis of UK's cross-border minority investments

This study examines the influence of minority shareholders on the transfer of corporate governance practices into companies in other countries where they invest. By analysing UK firms that acquired a minority ownership in foreign firms between 1993 and 2014, we find evidence of better corporate governance in the board structure of target foreign firms following UK firms taking a minority shareholding, the extent and nature of the changes varying depending on the quality of investor protection in the country the foreign target firm is located. Our findings contribute to the on-going debates on the spillover effect of better corporate governance practices via cross-border mergers and acquisitions as well as relationship between internal (board of directors) and external (country's quality of investor protection) corporate governance mechanisms.

Sovereign Wealth Funds, Institutional Environments, and Corporate Governance

We investigate whether and how sovereign wealth funds’ (SWFs) investment affects target firms’ corporate governance. Using a sample of 2,082 unique firms across 43 countries from 2002 through 2015, and applying a difference-in-differences (DiD) approach, we find that corporate governance of target firms decreases after equity purchases by SWFs. This evidence holds when we use propensity score matching, instrumental variable regressions, placebo tests, dynamic effects analyses, and alternative control samples and measures of corporate governance. Reinforcing our main evidence, we also show that SWFs’ equity investment is positively associated with target firms’ earnings management and corporate investment, but negatively associated with investment efficiency. Moreover, the negative effect of SWFs on target firms’ corporate governance is more pronounced when SWF home countries have a lower quality of investor protection, corruption control, governmental effectiveness, and law enforcement than the host countries. Target firm value is also found to decrease after SWF equity investment. Overall, these results are consistent with the view that SWFs, as passive investors, do not provide the same monitoring benefits as other institutional investors.

Financial integration, investor protection and imbalanced optimistically biased information timeliness in emerging markets

Principal-principal conflicts in many emerging markets can lead to an optimistically biased information environment. Using 24 emerging markets during the period 1996–2016, this paper examines how market-level, firm-level financial integration and investor protection quality jointly affect Imbalanced Optimistically Biased Information Timeliness (IOBIT). Results show that financial integration and investor protection quality affect good and bad information timeliness asymmetrically. Market-level financial integration augments IOBIT while firm-level financial integration and investor protection mitigate IOBIT. The effect of firm-level financial integration in mitigating IOBIT is reduced when market-level financial integration increases and/or investor protection becomes stronger. Our analysis enhances our understanding of the benefit-cost trade-off associated with financial integration in affecting information timeliness and the conditional factors in altering this benefit-cost trade-off in emerging markets.

Protection of Retail Investors

Mis-selling is a serious problem disrupting trust of investors in financial markets. As behavioural research gradually exposed, mis-selling is inextricably linked to mental weakness(es) in the decision-making process that have not been sufficiently reflected in the European financial service legislation. The recent set of legislation indicates a change in the regulatory approach to financial product distribution (FPD) and introduces new legal instruments poised to cope with mental weaknesses through a more robust and elaborate investor protection regime. This paper offers a critical review of the selected legislative amendments and surveys whether they improve the quality of investor protection; finally, it analyzes implications of Brexit for FPD.

Ownership concentration and firm performance in Indian firms: does investor protection quality matter?

PurposeThe purpose of this paper is twofold: first, to investigate the relationship between ownership concentration and firm performance and, second, to determine the moderating role of investor protection quality on the ownership concentration-performance relationship from a dynamic perspective.Design/methodology/approachThe study is based on secondary financial data of 236 Indian manufacturing firms obtained from CAPITALINE database, pertaining to a period of five years. This study uses ordinary least squares, fixed effects and two-step generalized method of moments (GMM) techniques to arrive at results.FindingsResults of the study confirm the inverted U-shaped relationship between ownership concentration and firm performance and a significant positive effect of investor protection quality on firm performance. With regard to moderating role of investor protection quality on ownership concentration–performance relationship, results show that investor protection quality would significantly moderate the ownership concentration–performance relationship.Originality/valueThe study is a pioneer in proving that an inverted U-shaped relationship exists between ownership concentration and firm performance in an emerging market in general and India in particular. This study extends the corporate governance literature by examining ownership concentration–performance relationship in a dynamic perspective and in an unexplored market.

Value relevance of fair values in different investor protection environments

This paper examines whether the value relevance of fair values varies across investor protection environments. By analyzing financial firms from 34 countries this study finds evidence that fair values, irrespective of the level in the fair value hierarchy, are value relevant in countries with a strong or medium investor protection environment. In a weak investor protection environment, only market prices (level 1) are relevant to investors. In addition, the results indicate that the difference in value relevance between market prices (level 1) and fair value estimates (level 3) decreases with the quality of investor protection.

The Impact of Capital on Lending in Economic Downturns and Investor Protection The Case of Large EU Banks

This paper attempts to find out whether better quality of investor protection matters for the effect of capital ratio on loan growth of large EU banks in 1996-2011. We focus on several measures of the quality of investor protection with a proven track record in the banking literature, i.e.: anti-self-dealing index, ex-ante-control and ex-post-control of anti-self-dealing indices, and creditor protection rights index. Our results show that better investor protection increases the procyclical impact of capital on lending in the sample of banks reporting unconsolidated data. This is consistent with the view that better shareholders rights protection induces bank borrowers to take more loans and to engage in more risk-taking, in particular during economic booms, which results in greater sensitivity of bank lending to capital ratios in economic downturns. The opposite effect is found in the sample of banks reporting consolidated data. This effect is consistent with the view that better minority shareholders protection may reduce risk-taking incentives of large banks and result in better risk management of credit portfolio (and other investments of such banks).

Does the Quality of Investment Protection Affect FDI Flows to Developing Countries? Evidence from Latin America

AbstractStudies on the impact of international investment agreements (IIAs), including bilateral investment treaties (BITs), on foreign direct investment (FDI) inflows have been inconclusive. This paper contributes to the debate about the effectiveness of IIAs using an original database that differentiates between investment agreements according to the quality of investor protection, and which covers a wide variety of trade and investment agreements signed and ratified in the Americas. We find evidence that in the least likely case of south–south FDI flows, high‐quality international investment treaties have a demonstrable effect on foreign direct investment inflows. Moreover, international investment agreements appear to be most effective in a context of deeper economic integration. That is, they work better when they provide higher quality protection to investors and when they are combined with other preferential economic integration agreements, such as trade agreements.

To liberalize or not to liberalize: Political and economic determinants of financial liberalization

Using a sample of 70 emerging market and developing countries, we examine the political and economic factors which affect the government's decision to liberalize the domestic equity markets. We document that the levels of industrialization and financial development, the quality of investor protection, and the level of the government's involvement in the economy are closely associated with the stock market liberalization decision. Furthermore, we find a positive and significant relation between the amount of foreign financial aid received by the governments in emerging market countries and the probability of stock market liberalization.

Determinants of start-up firm external financing worldwide

The typical new start-up firm acquires external financing in stages through its development. Researchers have frequently examined the later stages of financing; however, they have rarely analyzed the early stages of financing. This study examines the determinants of the initial start-up financing of entrepreneurial firms in 27 countries. There are information asymmetries and moral hazard problems inherent in the funding of an initial start-up firm. Empirical results show that institutional investors rely on the experience of entrepreneurs in managing start-ups and the quality of investor protection to reduce moral hazard. On the other hand, informal investors are also common in initial start-up funding. They tend to be attracted to the type of products in the new firm. In comparison, informal investors are likely to have a social relationship with the entrepreneur, and thus have information about that person’s skill and character, which renders entrepreneurial experience less important.

What Determines the Location of Equity Trading? Evidence from Stocks Cross-Listed in Various Markets

We analyse the distribution of foreign trading volume of European stocks cross-listed on various stock exchanges and examine the factors that affect the distribution. We focus on the role of two sets of determinants: the stock exchange characteristics and the stock-specific factors. We find that a stock exchange’s ability to attract order flow of foreign equity is positively associated with its organizational efficiency, market liquidity, the regulations pertinent to the quality of investor protection and insider trading. Regulated stock exchanges are found to be more successful in attracting order flow of foreign stocks than non-regulated markets, such as OTC and alternative markets and trading platforms. Among the stock-level factors, the share of trading on a foreign exchange is higher for companies that are smaller, riskier and have low return correlation with the host market returns. It is also evident that the share of foreign trading volume of stock is higher when the currencies of host and home markets are the same and the share increases with the duration of a listing.

To Liberalize or Not to Liberalize: Political and Economic Factors Affecting the Government’s Decision to Liberalize the Domestic Equity Markets

The paper investigates the political and economic factors which affect the government’s decision to allow foreign investors to purchase domestic equity securities. The levels of industrialization and financial development, the quality of investor protection, and the level of the government’s involvement in the economy are closely associated with the stock market liberalization decision. Additionally, the amount of foreign financial aid received by the governments in the emerging market countries is significantly and positively related to the probability of a stock market liberalization. The latter result contributes to the debate about the effectiveness of foreign aid by illustrating that foreign financial aid may indirectly affect economic growth through its influence on the government’s decision to liberalize the national equity markets.

Corporate Governance and Risk‐Taking

ABSTRACTBetter investor protection could lead corporations to undertake riskier but value‐enhancing investments. For example, better investor protection mitigates the taking of private benefits leading to excess risk‐avoidance. Further, in better investor protection environments, stakeholders like creditors, labor groups, and the government are less effective in reducing corporate risk‐taking for their self‐interest. However, arguments can also be made for a negative relationship between investor protection and risk‐taking. Using a cross‐country panel and a U.S.‐only sample, we find that corporate risk‐taking and firm growth rates are positively related to the quality of investor protection.

Investor protection, adverse selection, and the probability of informed trading

The purpose of this study is to investigate the relation between investor protection, adverse selection, and the probability of informed trading. Previous research has established a direct relation between investor protection and firm liquidity, measured by bid-ask spreads and depths. In this study, we test the hypothesis that adverse selection is the mechanism through which poor investor protection leads to higher costs of liquidity. The Hong Kong equity market provides a unique opportunity to compare adverse selection differences across distinct investor protection environments, holding constant the trading platform and currency. Using various bid-ask spread decomposition models and probability of informed trading estimates, we confirm the hypothesized relation between investor protection quality and adverse selection costs. These findings contribute to the literature by establishing one of the links in the chain connecting investor protection to firm valuation.

Corporate Governance and Risk Taking

This paper examines the relationship between investor protection and corporate insiders' incentive to take value-enhancing risks. In a poor investor protection environment corporations are often run by entrenched insiders who appropriate considerable corporate resources as personal benefits. When these private benefits are large, insiders may undertake sub-optimally conservative investment decisions to preserve them. Better investor protection reduces these private benefits and may therefore induce riskier but value enhancing investment policy. Such a relationship can also result from risk-averse behavior on the part of dominant shareholders with undiversified exposure in their own firms, which is again more prevalent in countries with poorer investor protection. If prominent non-equity stakeholders such as banks, labor unions or the government can influence corporate investment, and their influence is decreasing in investor protection, that can also give rise to a positive relationship between investor protection and investment risk. We test these predictions using a large cross-country panel. We find empirical confirmation that corporate risk-taking and firm growth rates are positively related to the quality of investor protection. On the other hand, the data do not lead to consistent evidence for the alternative channels.

Corporate Governance and Corporate Risk Taking: Theory and Evidence

This paper examines the relationship between investor protection and corporate insiders' incentive to take value-enhancing risks. In a poor investor protection environment corporations are often run by entrenched insiders who appropriate considerable corporate resources as personal benefits. When these private benefits are large, insiders may undertake sub-optimally conservative investment decisions to preserve them. Better investor protection reduces these private benefits and may therefore induce riskier but value enhancing investment policy. Such a relationship can also result from risk-averse behavior on the part of dominant shareholders with undiversified exposure in their own firms, which is again more prevalent in countries with poorer investor protection. If prominent non-equity stakeholders such as banks, labor unions or the government can influence corporate investment, and their influence is decreasing in investor protection, that can also give rise to a positive relationship between investor protection and investment risk. We test these predictions using a large cross-country panel. We find strong empirical confirmation that corporate risk-taking and firm growth rates are positively related to the quality of investor protection. On the other hand, the data do not lead to consistent evidence for the alternative channels.