Strength Of Shareholder Rights Research Articles

Shareholder Rights and Non-Price Loan Contract Terms

This paper analyzes the impact of shareholder rights on non-price loan contract terms. Using a large sample of syndicated loans borrowed by U.S. firms between 1991 and 2006, I find that stronger shareholder rights significantly enhance the stringency of loan contract design. The likelihood of having collateral significantly increases with the strength of shareholder rights. Loan maturity of firms with the strongest shareholder rights is 13.1% shorter. The loan size of the same borrowing firms is 8.4% smaller. These results are robust to different proxies of shareholder rights and are robust to the instrumental variable approach controlling for simultaneous determination of loan contract terms, such as collateral and maturity. This study complements the existing literature on the impact of shareholder rights on loan pricing and has important implications for understanding the impact of companies’ governance structure on loan contract design.

Auditor Pricing of Excess Cash Holdings

We examine auditor business risk by analyzing the relation between excess cash holdings and auditor pricing behavior. Prior research links excess cash holdings to risks associated with manager opportunism and external monitoring. Our analyses provide evidence of a positive relationship between excess cash and audit fees. The economic magnitude of the increase in total audit fees due to an increase in excess cash holdings is approximately 5% greater for firms in the top quartile of excess cash holdings versus those in the bottom quartile. We also find that the strength of shareholder rights reduces the positive relationship between excess cash and audit fees, and excess cash holdings are assigned lower audit fees among firms that follow an investment-intensive strategy than those that tend to hold on to their cash. Our article contributes to the literature by examining auditor pricing of excess cash holdings, including factors that affect auditors’ risk perceptions, and ultimately provides unique insights into how auditors view agency conflicts indicated by excess cash holdings.

The relationship between dividend payout and corporate governance along the corporate life-cycle

This study explores the relationship between the quality of corporate governance and corporate dividend payout at different stages of the corporate life-cycle. In a sample of 220 firms from 21 emerging market countries, I show that the outcome model of dividends, which predicts that dividend payout increases in the strength of shareholder rights, prevails all along the corporate life-cycle. In a final series of tests, I show that this relationship holds only in instances where corporate governance and creditor rights are strong. Hence, the agency cost of equity and debt version of the outcome model of dividends holds at all stages of the corporate life-cycle. Finally, I find no evidence in support of the equity-only version of the substitution model of dividends.

Shareholder rights, corporate governance and earnings quality

Purpose – The purpose of this paper is to examine the effect of shareholder rights on the quality of reported earnings using a proxy for strength of shareholder rights. In the analysis, the influence of institutional investors on shareholder rights is incorporated and their joint impact on earnings quality is studied.

Regulation, shareholder rights and corporate governance: an empirical note

We investigate the impact of regulation on shareholder rights and corporate governance. We gauge the strength of shareholder rights by measuring the number of restrictive governance provisions that suppress shareholder rights – the more restrictive the governance, the weaker the shareholder rights. We find that financial firms have less restrictive corporate governance, suggesting that financial regulations promote shareholder rights. On the other hand, regulation does not seem to impact shareholder rights in the utility industry.

Governance quality and privately negotiated stock repurchases: Evidence of agency conflict

This study examines the impact of shareholder rights on the wealth effects of privately negotiated stock repurchases. Our results show that wealth gains are lower when shareholder rights are more suppressed. We also find that the premium paid for shares is inversely related to the strength of shareholder rights, and this suggests that managers pay higher premiums when shareholder rights are more restricted. These findings imply that managers use shareholders’ funds to eliminate blockholders who are more likely to monitor them when shareholder rights are relatively weak, thereby entrench themselves. Consistent with this view, we further show that significant positive abnormal long-run returns after private stock repurchases are limited to firms with stronger shareholder protection. Overall, the evidence is consistent with the predictions of agency theory.

Regulation, Shareholder Rights, and Corporate Governance: An Empirical Note

We investigate the impact of regulation on shareholder rights and corporate governance. We gauge the strength of shareholder rights by measuring the number of restrictive governance provisions that suppress shareholder rights, the more restrictive the governance, the weaker the shareholder rights. We find that financial firms have less restrictive corporate governance, suggesting that financial regulations promote shareholder rights. On the other hand, regulation does not seem to impact shareholder rights in the utility industry.

Do analyst recommendations reflect shareholder rights?

We examine whether sell-side analyst recommendations reflect shareholder rights. Our rationale is that analysts should be influenced by external governance only if market participants do not efficiently price its value. We find that stronger shareholder rights are associated with more favorable recommendations. Further analysis reveals that analysts favor firms with strong shareholder rights only when strong rights appear to be warranted, but do not penalize firms for having strong rights when not needed. These findings occupy middle ground in the debate on the pricing efficiency of shareholder rights. Moreover, we find that firm value is positively associated with the strength of shareholder rights regardless of the expected external governance structure. The latter result is consistent with a “one-size-fits-all” interpretation, and implies that firms across the board could increase share value by reducing their number of anti-takeover provisions.

Do Analyst Recommendations Reflect Shareholder Rights?

We examine whether sell-side analyst recommendations reflect shareholder rights. Our rationale is that analysts should be influenced by external governance only if market participants do not efficiently price its value. We find that stronger shareholder rights are associated with more favorable recommendations. Further analysis reveals that analysts favor firms with strong shareholder rights only when strong rights appear to be warranted, but do not penalize firms for having strong rights when not needed. These findings occupy middle ground in the debate on the pricing efficiency of shareholder rights. Moreover, we find that firm value is positively associated with the strength of shareholder rights regardless of the expected external governance structure. The latter result is consistent with a one-size-fits-all interpretation, and implies that firms across the board should reduce their number of anti-takeover provisions.

Debt Maturity Structure, Shareholder Rights, and Corporate Governance

This study investigates how debt maturity structure is influenced by the strength of shareholder rights. The empirical evidence reveals an inverse relation between the strength of shareholder rights and debt maturity. We contend that managers of firms with weak shareholder rights eschew choosing short-term debt to minimize frequent external monitoring. There is also evidence that regulation is a substitute for debt maturity in controlling agency costs. The effect of managerial entrenchment through classified boards is examined on debt maturity structure but is found to be insignificant. Finally, we demonstrate that weak shareholder rights likely bring about, and do not merely reflect, the use of longer-maturity debt.

CAPITAL STRUCTURE, SHAREHOLDER RIGHTS, AND CORPORATE GOVERNANCE

AbstractWe show how capital structure is influenced by the strength of shareholder rights. Our empirical evidence shows an inverse relation between leverage and shareholder rights, suggesting that firms adopt higher debt ratios where shareholder rights are more restricted. This is consistent with agency theory, which predicts that leverage helps alleviate agency problems. This negative relation, however, is not found in regulated firms (i.e., utilities). We contend that this is because regulation already helps alleviate agency conflicts and, hence, mitigates the role of leverage in controlling agency costs.

Corporate governance and the quality of accounting earnings: a Canadian perspective

PurposeThe paper seeks to examine the association between corporate governance mechanisms and the quality of accounting earnings.Design/methodology/approachQuality of earnings is measured in two ways: the accounting‐based measure of earnings management and the market‐based measure of earnings informativeness. Using firm‐level corporate governance data for a sample of Canadian firms in the years 2001‐2004, regression analysis explores the relation between corporate governance (including board composition, management shareholding, shareholders' rights and the extent of disclosure of governance practices), and the quality of earnings.FindingsEmpirical tests demonstrate that overall governance quality is negatively related to the level of abnormal accruals and positively influences the return‐earnings association. In addition, the magnitude of abnormal accruals is negatively associated with the level of independence of board composition, the extent of alignment of management compensation with interests of shareholders and the strength of shareholder rights. The results from the returns and earnings analysis are consistent with these findings.Research limitations/implicationsThe tests in this study are association tests. Future research may use qualitative research approaches to examine the link between quality of financial reporting and governance effectiveness.Originality/valueThis study provides evidence that supports Canadian regulators' initiatives that stronger corporate governance mechanisms provide greater monitoring of the financial accounting process and may be important factors in improving the integrity of financial reporting.

Dividend Policy, Shareholder Rights, and Corporate Governance

Grounded in agency theory, this study explores agency costs as a determinant of dividend policy. Specifically, we examine how dividends are related to the strength of shareholder rights. The evidence reveals an inverse association between dividend payouts and shareholder rights, indicating that firms pay higher dividends where shareholder rights are more suppressed. This evidence is consistent with the substitution hypothesis (La Porta et al., 2000), which contends that firms with weak shareholder rights need to establish a reputation for not exploiting shareholders. As a result, these firms pay dividends more generously than do firms with strong shareholder rights. In other words, dividends substitute for shareholder rights. Finally, there is evidence that regulation influences the association between dividends and shareholder rights.

Shareholder Rights, Corporate Governance, and Auditor Selection: Evidence from Arthur Andersen

Grounded in agency theory, this study seeks to ascertain whether the severity of agency costs influences auditor selection among the Big Six auditors. Specifically, this article examines the association between the strength of shareholder rights and auditor choice. The evidence shows that firms where shareholder rights are weak have a tendency to select Arthur Andersen vis-a-vis the other Big Six. To the extent that Arthur Andersen represents lower audit quality, weaker shareholder rights are associated with poorer audit quality. This inclination to choose Andersen for firms with weak shareholder rights is not present, however, in regulated firms. I argue that this is because regulatory monitoring substitutes for external auditing and, hence, influences the association between shareholder rights and auditor choice.

CEO Compensation, Shareholder Rights, and Corporate Governance: An Empirical Investigation

We investigate whether CEO compensation is influenced by the strength of shareholder rights. Agency theory suggests that CEOs may exploit shareholders when shareholder rights are weak, placing their own private benefits ahead of those of the stockholders. Our evidence reveals that CEOs of firms where shareholder rights are weak obtain more favorable compensation. Higher CEO pay is associated with a higher degree of potential managerial entrenchment. We also examine the change in CEO compensation relative to the change in shareholders' wealth. The evidence shows that when there is an increase in shareholders' wealth, the CEO is able to obtain higher incremental compensation if shareholder rights are weak. On the contrary, when shareholders' wealth falls, there is no corresponding decline in CEO compensation if shareholder rights are weak. Given the empirical evidence, we argue that CEO compensation practices reflect rent expropriation rather than optimal contracting.

Corporate governance, shareholder rights and firm diversification: An empirical analysis

Grounded in agency theory, this study investigates how the strength of shareholder rights influences the extent of firm diversification and the excess value attributable to diversification. The empirical evidence reveals that the strength of shareholder rights is inversely related to the probability to diversify. Furthermore, firms where shareholder rights are more suppressed by restrictive corporate governance suffer a deeper diversification discount. Specifically, we document a 1.1–1.4% decline in firm value for each additional governance provision imposed on shareholders. An explicit distinction is made between global and industrial diversification. Our results support agency theory as an explanation for the value reduction in diversified firms. The evidence in favor of agency theory appears to be more pronounced for industrial diversification than for global diversification.

Capital Structure, Shareholder Rights, and Corporate Governance

We show how capital structure is influenced by the strength of shareholder rights. The empirical evidence shows an inverse relationship between leverage and shareholder rights, suggesting that firms adopt higher debt ratios where shareholder rights are more restricted. This is consistent with agency theory, which predicts that leverage helps alleviate agency problems. This negative relationship, however, is not found in regulated firms (i.e., utilities). We contend that this is because regulation already helps alleviate agency conflicts, and hence, mitigates the role of leverage in controlling agency costs.

CEO compensation, shareholder rights, and corporate governance: An empirical investigation

We investigate whether CEO compensation is influenced by the strength of shareholder rights. Our evidence reveals that CEOs of firms where shareholder rights are weak obtain more favorable compensation. It is also found that higher CEO pay is associated with a higher degree of potential managerial entrenchment. Additionally, CEOs of firms with governance provisions that offer them protection from takeovers enjoy more generous pay. We also examine the change in CEO compensation relative to the change in shareholders' wealth. The evidence shows that when there is an increase in shareholders' wealth, the CEO is able to obtain higher incremental compensation when shareholder rights are weak. On the contrary, when shareholders' wealth falls, there is no corresponding decline in CEO compensation when shareholder rights are weak. Given the empirical evidence, we argue that CEO compensation practices reflect rent expropriation rather than optimal contracting.

Share repurchases, shareholder rights, and corporate governance provisions

Grounded in agency theory, this study seeks to explore how repurchase activity is influenced by the strength of shareholder rights. The empirical evidence shows that firms where shareholder rights are weaker tend to repurchase less stock. I argue that this is because managers of firms with weak shareholder rights are better able to exploit the weak shareholder rights and retain more cash within the firm, potentially to extract private benefits as alleged by the free cash flow hypothesis. Managers of firms with strong shareholder rights, on the contrary, are forced to disgorge cash to stockholders in the form of repurchases. In addition, I test the dividend-substitution hypothesis and find no evidence that repurchases substitute for dividends.