Role Of Corporate Governance Mechanisms Research Articles

Corporate tax planning, the use of SPV, board independence, and firm value

Although many studies discuss the significant role of special purpose vehicles (SPVs) in the corporate tax planning context, no prior empirical research exists on the value relevance of such use. Our study fills the gap by investigating the impact of the use of SPVs in corporate tax planning on firm value. Since tax planning is a risky endeavor, of particular interest is the role of corporate governance mechanisms in ensuring that firms select optimal levels of corporate tax planning activities and preventing managerial diversion of tax-saving related cash flows. Using moderated regression analysis on a sample of 119 listed non-financial firms from 2013 to 2017, we find that the use of SPVs in corporate tax planning enhances firm value and that corporate tax planning moderated by board independence also increases firm value.

The role of corporate governance mechanisms on equity overvaluation

This study investigates how corporate governance mechanisms, particularly board characteristics, influence equity overvaluation. We use secondary data of 4,185 firm-year observations spanning 2009 to 2015 across 1,351 publicly listed U.S. firms to estimate a logistic regression model. We focus on governance metrics such as gender diversity, Chief Executive Officer (CEO) duality, independent board members, and board size in relation to overvaluation, primarily measured using the price-to-intrinsic-value ratio. We test Jensen’s (2005) proposition that the solution to overvaluation lies in the board of directors or the governance system of firms. In line with our hypothesis, our results present evidence to show that the governance system, specifically board gender diversity, has a significant and negative relationship with the overvaluation of equity. We do not find any significant association between other governance metrics and overvaluation. Equity overvaluation misinforms investors (Eisdorfer et al., 2019), prompting further examination of firm value factors. This study underscores the significance of governance mechanisms, particularly gender diversity, for equity value. Future research should expand governance metrics and explore diverse contexts to enhance the results’ robustness and applicability across industries and contexts.

Corporate governance systems and financial risks: A developing country evidence

Banks are one of the essential pillars of the financial sector (Alzuod & Alqhaiwi, 2022), however, banking is a high-risk industry (de Andres & Vallelado, 2008). The aim of this paper is to investigate the impact of the board’s structure and ownership structure on the financial risks of Jordanian commercial banks. Data was gathered manually from the financial reports. Notably, the study addressed two types of financial risks: liquidity risk and credit risk. The study sample included commercial banks listed on the Amman Stock Exchange (ASE) to cover the period 2014–2019. To achieve the study’s objectives, multiple regression analysis was run to test the hypotheses. The results reveal a negative, statistically significant impact of the board size, institutional ownership, and bank size on liquidity risk. The results also demonstrated a negative effect of board independence, ownership concentration, bank size, and CEO duality on credit risk. In sum, the results support previous studies that found a statistically significant role of corporate governance mechanisms in reducing financial risks. The study recommended the need to enhance foreign investment and institutional ownership.

Business Students Expectations of Brazilian Corporate Governance: Insights for a Sustainable Path in an Emerging Business Environment

This paper aimed to better understand business students’ expectations of Brazilian corporate governance after recent scandals, focusing on capturing their perceptions after the Lava Jato (Car Wash) police investigation. Adapting a prior survey applied to business students, data were collected from three colleges in São Paulo, the largest city in Latin America, with a total of 328 responses. The data were initially submitted to confirmatory factor analysis (CFA), after which we employed a structural equation model (SEM). Our main finding indicates that students are skeptical of an increase in Brazilian corporate governance after this police operation. This result is supported by the prior literature and denotes student consciousness of the need for deep reforms in the business environment and compliance rules. Furthermore, strategic human resources management is the most prominent corporate governance tool today, and the survey revealed disbelief that the Board of Directors and internal audits will act as potential inhibitors of fraud and corruption. These findings are associated with a broad view related to sustainability which denotes that future firm leaders, who are currently business students, comprehend that an ethical business environment needs to be built by professionals who are able to understand the role of corporate governance mechanisms. This paper contributes to the literature by offering a holistic assessment of business student perceptions and encourages a discussion of current models and instruments of Brazilian corporate governance. The scarcity of studies involving education and governance can be considered a constraint to building sustainable companies from a long-term perspective. Comprehending business students’ perceptions about corporate governance mechanisms can be considered a path to increasing the number of business courses with topics aligned with practical effects on environmental, social, and governance subjects, mainly when these mechanisms are evaluated from an integrated perspective.

How Does Financial Technology Affect the Credit and Risk of Commercial Banks in China?

Purpose - Fintech integrates the characteristics of “finance + technology”, applying emerging technologies such as big data, cloud computing, artificial intelligence, and blockchain, leading to a great challenge to existing financial service providers. With the rise in development of financial technology, Chinese fintech firms and online payments including third-party and mobile payments systems have attracted worldwide attention. Therefore, this paper aims to study the potential impact of financial technology on the traditional credit business of the banking sector from the perspectives of credit expansion and risk-sharing. Moreover, this study also explores how fintech influences Chinese commercial banks with the moderating effect of corporate governance. Design/Methodology/Approach - The study used a firm-level panel data of 34 Chinese banks over a period of 10 years from 2011 to 2020. The study applies a fixed regression method for hypotheses examining the relationship between fintech development and the credit supply and risk-taking of commercial banks. Findings - The results indicate that the development of fintech has significant impacts on the scale of credit loan and the level of risk bearing. Further research finds that board independence as a moderator positively and significantly influences fintech and bank credit loan scales, while board independence positively but insignificantly affects fintech and risk control in the banking sector. Research Implications - This paper enriches our understanding of the impacts of fintech on traditional financial institutions, and provides a new method for the operations of the banking sector. In addition, this paper provides a new research perspective for managers, especially in Chinese banking, to expand credit business under the moderating role of corporate governance mechanism.

Audit committee composition and earnings management in a specific institutional environment: the case of Russia

PurposeThe purpose of this paper is to investigate the specifics of the relationship between audit committee characteristics and earnings management in Russian listed companies. This research is driven by the possibility of placing this relationship within the context of a specific institutional environment for company performance.Design/methodology/approachThe authors apply a panel study of 184 Russian listed companies for the period 2014–2018. In addition to the standard fixed effects model, the authors test the results for potential endogeneity with two-stage least squares (2SLS) analysis.FindingsThe results show that audit committee representation on the board of directors results in some mitigation of earnings management. Results reveal that a higher level of audit committee independence and the presence of financial expertise on the committee are associated with lower earnings management. However, companies with relatively busy directors on audit committees are more inclined to practice earnings management. The study’s findings hold after testing for endogeneity of audit committee independence. The authors also reveal that some audit committee characteristics (for example, audit committee independence; its level of expertise) alleviate earnings management in listed state-owned companies (SOEs) more strongly than in listed non-SOEs.Originality/valueThe results add to the ongoing debate on the role of corporate governance mechanisms in mitigating earnings management in emerging markets by taking into account the type of ownership (state-owned vs private) as a moderating variable. This study reveals, in particular, that the effect of certain audit committee characteristics on earnings management is more prominent in listed SOEs than in listed non-SOEs.

The Role of Corporate Governance Mechanism on Disclosure of Enterprise Risk Management in Indonesian Banking Industry

This research aims to determine the role of the corporate governance mechanism, which includes the board of commissioners, board of directors, audit committee, institutional ownership, and ownership concentration on enterprise risk management (ERM). The population in this study are banking companies listed on the Indonesia Stock Exchange from 2015 to 2019. Using purposive sampling resulted in 28 companies as the final sample during the 5-year observation period. This study uses multiple linear regression analysis techniques. The results showed that the board of directors, audit committee, institutional ownership, and ownership concentration positively and significantly affected ERM. In contrast, the board of commissioners was not proven.

The effect of IFRS 8 on segments disclosure practices in South East Asia

Purpose This paper analyzes and compares segments disclosure practices of listed companies of Pakistan and Bangladesh under International Financial Reporting Standard (IFRS) 8 with companies from India under Accounting Standard 17 over three-year period from 2013 to 2015. Furthermore, the purpose of this paper was to investigate that how the selection of chief operating decision-maker (CODM) by management, industry type, governance and firm characteristics affects segments disclosure practices in South East Asia. Finally, how the relationship among segment disclosure, firm characteristics and corporate governance is moderated through the big 4 audit firm. Design/methodology/approach To achieve these objectives, data were collected from annual reports of the top 100 companies of each country and selected based on market capitalization for three years period 2013–2015. Findings Results state that majority of companies in South East Asia are using business class for defining operating/primary segments. Regarding reporting of operating/primary segments and geographic/secondary segments along with geographic fineness score, Indian companies are continuously on the lower side as compared to companies from Pakistan and Bangladesh. Furthermore, it was found that industry type and selection of CODM have a highly significant effect on segments disclosure practices. Finally, results of regression analysis found that the application of IFRS 8 in Pakistan and Bangladesh has a significant positive effect on disclosure of operating/primary as well as geographic/secondary segments as compared to India. Further, the role of corporate governance mechanism in influencing segments disclosure was found as least in South East Asia. Further appointment of big 4 audit firm as external auditor has only significant positive effect on disclosure of segments items. Finally, based on additional analysis, it was found that big 4 auditor moderates the relationship only in the case of reporting of operating/primary segments. Research limitations/implications Based on these results, the performance of Indian companies regarding disclosure of operating/primary segments, geographic/secondary segments along geographic fineness score is quite low despite the fastest growing economy in the world. This raises concerns about the quality of segment reporting in India, the world’s fastest expanding economy. Originality/value These results imply that there is a need of an effective role by the external auditor to improve the quality of segment reporting in developing countries, which is principle based.

The effect of financial and non-financial performance on investors’ reactions: The role of corporate governance mechanisms as moderating

The purpose of this study is to examine the effect of financial and non-financial performance on investor reactions and the role of corporate governance mechanisms as moderating. The analysis technique used is the moderated regression analysis (MRA). The research population is manufacturing sector companies listed on the Indonesia Stock Exchange (IDX). Based on the purposive sampling method, 78 companies were selected as the samples (390 firm-year observations). The results of this study provide empirical evidence that the existence of financial and non-financial performance in a company can increase investor reactions. Institutional ownership plays a role in the relationship between financial performance and investor reactions. Meanwhile, independent commissioners, boards of directors, and audit committees have no role in the relationship between financial performance and investor reactions. And independent commissioners and institutional ownership can moderate the influence of non-financial performance on investor reactions. Meanwhile, the board of directors and audit committee cannot moderate the influence of non-financial performance on investor reactions.

Can corporate governance mechanisms reduce earnings-management practices in Islamic banks?

PurposeThis study aims to provide empirical evidence on the role of corporate governance mechanisms in reducing earnings-management practices in Islamic banks in Asia.Design/methodology/approachThis study used 28 Islamic banks in Asia, which were listed on the stock exchange from 2013–2017. The research method used quantitative regression with data on the characteristics of Islamic banks taken from the websites of each bank. This study used discretionary loan loss provision as a proxy for measuring earnings management.FindingsThe results show that only the audit committee size has a significantly negative effect on earnings management. An independent audit committee has a negative, but not significant, effect. The difference expectation signs cannot be interpreted further.Research limitations/implicationsOnly a few components of corporate governance were tested in this study. Therefore, it is expected that future studies will include more components.Practical implicationsIn general, the components of corporate governance that include the characteristics of the board of directors and the audit committee have a varied effect on reducing the earnings-management practices in Islamic banks, except audit committee size. In practice, audit committee size should have an important role in earning management reduces.Originality/valueThis may be the first paper that studies the effect of corporate governance on earnings management in Islamic banks in Asia.

The use of corporate derivatives: Effects on firm value in the Italian market

It is an empirical question whether the use of derivatives hedging among firms actually contributes to enhancing firm performances. Despite the increasing use of derivatives by non-financial firms, existing literature still debates about their effect, especially in countries with peculiar corporate governance mechanisms. By using a sample of non-financial Italian firms listed from 2007 to 2018, this paper investigates if the use of several types (currency, interest rate, and commodity) of financial derivatives can affect the value of a company. For measuring the impact of the derivatives and in order to address any possible endogeneity problem, besides using the conventional methodologies applied by previous literature (fixed-effect regression models and system GMM estimators), we run a random forest model, a machine learning technique not yet applied before in this field, and calculate the relative importance of each independent and control variable. Differently from other European countries, findings show that the use of derivatives does not affect the firm value in the Italian market. Therefore, our results confirm the role of corporate governance mechanisms on the relationship between firm value and the use of derivatives and that their impact is country-specific.

The Effect of Corporate Governance Mechanism and Submission Quality of Financial Report on the Financial report Integrity Moderated with Political Connection

This study aims to determine the role of corporate governance mechanisms and the quality of financial report submission on financial report integrity by placing political connections as a moderating variable. The research method used is a quantitative method, with the unit of analysis being the company. The sample selection technique is purposive sampling, the selected sample is 43 manufacturing companies listed on the Indonesia Stock Exchange for the 2015-2019 period, so the number of observation data is 215 annual data. The data analysis used is panel data regression. The results of the study indicate that the corporate governance mechanism is not entirely able to provide a positive correlation to improving the integrity of financial statements, one of which is that independent commissioners may not be able to balance the decision-making process and to protect the rights of stakeholders, especially minority shareholders. Political connections are also very important to be a concern because they can influence existing governance, to improve reports with high integrity. This finding is very useful for investors to be careful in understanding the information contained in the financial statements because the corporate governance mechanism and the existence of political connections can affect its integrity. This political connection is often considered to weaken the mechanism of good corporate governance and the quality of the submission of financial reports which in turn can reduce the existence of the high financial report integrity.

Chief Executive Officers’ monitoring, board effectiveness, managerial ownership, and cash holdings: evidence from ASEAN

This study examines the role of corporate governance mechanisms in the handling of cash reserves among firms in the ASEAN region. A panel regression was employed along with the Generalized Method of Moments approach on a sample of 648 listed firms from the ASEAN markets for 2005–2015. We documented that strong governance mechanisms, including a lower managerial ownership, a higher proportion of board independence and founder-Chief Executive Officer (CEO), positively impact cash holdings (CH), indicating lower agency cost and supporting the interest alignment hypothesis. In contrast, higher level of managerial and board ownership, bigger board and dual leadership structure negatively affect CH, supporting the entrenchment hypothesis. The negative effect of managerial entrenchment on CH is mitigated with a higher proportion of independent board and founder-CEO. Robustness tests show that CEO-duality becomes more important while founder-CEO becomes less important in countries with weak investors’ protection. These findings support the idea that a strong governance mechanism plays an important disciplinary role to mitigate the effect of agency conflicts on the cash management policy.

Corporate governance, foreign direct investment, and bank income smoothing in African countries

PurposeThe purpose of this paper is to investigate the role of corporate governance mechanisms and foreign direct investment (FDI) to restrain or stimulate the use of loan loss provisions (LLPs) by managers to smooth earnings in African banks.Design/methodology/approachThis study uses a sample of 112 listed and non-listed banks from 20 African countries, covering the period 2011–2017. Models are estimated using the pooled ordinary least squares regression, as well as Blundell and Bond (1998) system GMM.FindingsThe results suggest that bank managers use LLPs to reduce income volatility and that ownership concentration increases income smoothing. The findings also show that FDI plays a fundamental role to restrain managerial discretion in developing countries, increasing corporate governance practices in the host country.Practical implicationsThese findings are relevant for banking regulators and supervisors in order to determine which corporate governance mechanisms can be used in developing countries to increase the quality of financial reporting. A policy model that promotes FDI boosts financial reporting transparency, contributing to greater financial markets development.Originality/valueThe authors extend the existing literature on the influence of corporate governance mechanisms in limiting managerial discretion by focusing on the role that foreign shareholders may have in disciplining banks financial reporting quality in countries with weak institutional quality.

The Role Of Corporate Governance Mechanism On Voluntary Disclosure

Basically, the purpose of this research is to examine empirically whether the Corporate Governance is the proportion of independent commissioners, the commissioners who have accounting capabilities, and the proportion of independent auditors can influence disclosure voluntarily. Voluntary disclosure is measured through the complete disclosure of voluntary index (IPS). This index contains 37 items in disclosure in the annual report. The sample is a manufacturing company listed on the Indonesia Stock Exchange, where the data analysis technique that will use the Multiple Regression Analysis using SPSS 23.

Determinants of alliance partner choice: Network distance, managerial incentives, and board monitoring

Research Summary: We ask if managerial opportunism is a significant problem in alliance partner choice and examine the role of corporate governance mechanisms in explaining this choice. Using a sample of 313 alliances of U.S. firms from the pharmaceutical and biotechnology industries from 1992 to 2010, we find that managerial incentives lead to managerial preference for relationally risky distant partners over existing and new close partners. Further, board monitoring encourages managers to pursue existing and distant partners over new close ones, choices aligned with shareholder interests. In addition, we find that board monitoring substitutes for managerial incentives in alliance partner choice. We contribute to the literature on alliance partner choice to identify an important, and hitherto, unexplored perspective.Managerial Summary: This article examines whether managers and shareholders view alliance‐related risks differently, and how the divergent interests between managers and shareholders affect alliance partner choice. We argue that managers’ concern about their loss of employment and compensation from alliance failure impedes the choice of relationally risky alliance partners that may increase shareholder value. We also argue that managerial stock ownership and board monitoring mitigate this managerial propensity. Our findings suggest that stock ownership owned by managers and strong board monitoring are effective governance mechanisms to align managers’ interests with those of shareholders. Our study offers a novel perspective to understand alliance partner choice by viewing the firm as an entity comprised of fragmented interests.

Do talented managers invest more efficiently? The moderating role of corporate governance mechanisms

AbstractManuscript typeEmpiricalResearch question/issueThe main objective of this paper is to examine the influence of managerial ability on investment efficiency. Using a sample of 2185 firms from 24 countries for the period 2006–2015, we hypothesize a positive association between investment efficiency and managerial ability and suggest that able managers make fewer over‐ and underinvestment decisions. As a unique and helpful feature of this study, we also employ a model to capture the different interactions between internal and external corporate governance mechanisms and managerial ability.Research findings/insightsOur results show that managerial ability is an economically relevant determinant of investment efficiency, resulting in lower levels of underinvestment and overinvestment. Additionally, our findings note that the benefits of able managers for investment efficiency are reinforced when companies are located in countries with better board effectiveness, superior investor protection, and better legal enforcement, suggesting that governance mechanisms are effective complementary measures to constrain inefficient investment decisions. The results also indicate that the advantages of having able managers are especially noticeable during a financial crisis and under conditions of greater information asymmetry.Theoretical/academic implicationsOur findings suggest that governance mechanisms are effective complementary measures to constrain inefficient investment decisions. Specifically, our results highlight the relevance of the monitoring role of the board, noting that the efficiency of this internal control mechanism complements the effect that able managers have on investment efficiency.Practitioner/policy implicationsThe paper has relevant implications. First, boards of directors must be aware that, although the access to financial resources is a determinant of firms' financial success, the individual ability to manage them is essential in making efficient investment decisions, which should be considered when recruiting new managers and establishing compensation schemes. Second, the paper shows that managerial ability is reinforced when the company is in a country with strong corporate governance mechanisms, implying that regulators should be aware of the relevance of investor protection, legal enforcement, and board effectiveness to improve the benefits of managerial attributes and therefore the financial efficiency of firms.

The relation between corporate governance mechanisms, executive compensation and audit fees

PurposeThis paper aims to investigate the effects of some corporate governance mechanisms and executive compensation on audit fees in an emerging market.Design/methodology/approachThe study population consists of 540 observations and 90 listed companies on the Tehran Stock Exchange during the years 2009-2014. The statistical model used in this study is a multivariate regression model; besides, the statistical technique used to test the hypotheses proposed in this research is panel data.FindingsThe changes in the value of a CEO’s own firm stock option portfolio, in thousands of rials (Iran’s currency), for a 0.01 change in stock return volatility and stock price are defined as Vega and Delta, respectively. The results demonstrated that there is a positive association between audit fees and delta, but not Vega; this means that a fee premium is linked to CEO Delta incentives. The findings show that Iranian companies pay more audit fees when they give managers more rewards. In addition, the results show that there is not a significant relationship between fees resulting from audit risk and Delta and Vega incentives of the board. Inconsistent with agency theory, the authors found that the independence of board members did not have any effect on audit fees. As a final point, the outcomes of the paper demonstrate that managers who invest in companies under their own management do not have any impact on the amount of audit fee. To put it another way, there is not any significant connection between the board ownership and audit fees.Practical implicationsThis is one of the most important studies that simultaneously surveys the impacts of corporate governance mechanisms and executive compensation in the Iranian audit market. The results of this study will reveal more than the role of corporate governance mechanisms for society and users of financial statements because as tools on the CEO actions, they always have to pay attention to the implementation of corporate principles in the economic entity’ operation.Originality/valueThe present study has examined the relationship between two cases of corporate governance mechanisms named the board independence and the board ownership with audit fees in a country where, to the authors’ knowledge as in most other developing markets, such a relationship has not been a subject of empirical research. Moreover, the use of a two-dimensional measure of executive compensation, namely, Delta and Vega incentives, primarily considering research undertaken in an emerging market, as a valuable contribution may be observed.

The effect of characteristics of audit committee and board on corporate profitability in Iran

PurposeThe purpose of this paper is to evaluate the relationship between the characteristics of the audit committee and the board and profitability among the companies listed on the Tehran Stock Exchange (TSE) in Iran.Design/methodology/approachIn this study, the companies listed on the TSE during the period from 2010 to 2015 are investigated. The Linear panel regression method is employed for this purpose. The independent variables of the study are composed of some corporate governance mechanisms including audit committee size, audit committee expertise, board size, board independence, chief executive officer (CEO) duality, and institutional ownership.FindingsIn spite of the fact that there does not exist any significant association between audit committee size and corporate financial performance, the results indicate that there is a positive and significant relationship between audit committee financial expertise and profitability. The authors found that the number of board members cannot affect corporate performance; moreover, duality of CEO role in Iranian companies does not affect company performance. However, the outcomes showed a positive and significant association between the proportion of outside directors on the board (board independence) and profitability at 99 percent confidence level. This implies that the role of non-executive directors in Iran is inconsistent with the stewardship theory. This is due to the fact that independent directors understand the status of business and market better than the board’s executive members. Finally, the results indicated that there is no significant association between institutional owners and Iranian companies’ performance.Practical implicationsThe findings of this study will reveal more than ever the role of corporate governance mechanisms for society and users of financial statements because as tools on the CEO actions, they always have to pay attention to the implementation of corporate principles in the economic entity’ operation.Originality/valueThis is one of the most important studies that simultaneously examine the impacts of characteristics of the audit committee and the board on profitability in an emerging market, and the results of the study may give strength to Iranian as well other developing countries.

The Role of Corporate Governance Mechanisms on Earnings Management for Tax Avoidance in Response to the Corporate Tax Rate Changes

The Role of Corporate Governance Mechanisms on Earnings Management for Tax Avoidance in Response to the Corporate Tax Rate Changes