Strong Legal Regime Research Articles

A Historical Study of Law in Precolonial Asante (1700–1896)

The use of regulations, rules, norms, taboos, tradition and the like to regulate human behaviour and the relationship between humans and their society has been in existence since time immemorial. The dominant narrative in the legal history of Africa is that precolonial African societies lacked organised legal systems as there was no organised law and order in most precolonial African societies. This study challenges this dominant narrative by historically examining the nature of law and the legal regime in precolonial Asante from 1700–1896. The study contributes to the existing body of knowledge by unravelling the existence and nature of a strong legal system in the form of customary law in precolonial Asante within the period specified. This qualitative study adopted a desktop review approach and a historical research design to trace the nature of law and the legal regime in precolonial Asante. The study traces the formation of the Asante kingdom to 1700 and how law was administered until the kingdom was annexed by the British colonial authorities in 1896. The study argues strongly that, despite its shortcomings, there existed a very strong legal regime in Asante which made good use of customary law in almost every aspect of life years before the introduction of colonialism by the British.

COMBATING CORRUPTION THROUGH INTERNATIONAL INVESTMENT TREATY LAW

Corruption plays an important role in investment arbitration. Parties to arbitral proceedings make allegations of bribery with increasing frequency. However, the lack of unambiguous guidelines on how to treat such allegations arguably has contributed to a shortage of affirmative decisions, even where further evidence might have been available to the arbitral tribunal. This is problematic, as the inflow of illicit moneys through investment projects can severely undermine anti-corruption efforts in the host state. This paper investigates options for integrating the strong legal regime of investment arbitration — which brings together foreign investors and host states as principal actors in transnational corruption — further into the fight against corruption. It is based upon an analysis of investment treaties, investment arbitration awards, subject literature and expert interviews. It is submitted that states should press for explicit anti-corruption provisions in investment treaties. The aim of these provisions must be to exclude corruption-tainted assets from the protections afforded by investment treaties. An anti-corruption Model Clause is proposed as a reference for drafters and negotiators of future investment treaties. The Model Clause makes access to arbitral procedures subject to the investor’s compliance with international anti-corruption law.

Earnings management and underperformance after seasoned equity offerings: a cross-country study

PurposeThis purpose of this study is to examine the association between earnings management (accruals earnings management (AEM) and/or real activities manipulation (RAM)) and firm underperformance following seasoned equity offerings (SEOs) using cross-country data.Design/methodology/approachThe study applies ordinary least squares regression analyses to a sample of 11,764 observations on firms from 22 countries over the period from 2005 to 2017. The methods include weighted least squares regression, sub-sampling approach and alternative measures of firm performance, earnings management and legal regime for robustness tests as well as a two-stage least squares instrumental variable (IV) approach to address endogeneity concerns.FindingsThe results suggest that RAM has a greater negative impact on post-SEO performance than AEM. The result is economically significant for RAM only. The results also reveal that the negative impact of earnings management, in particular RAM, on post-SEO performance is greater in countries with a strong legal regime than in other countries.Practical implicationsEarnings management around SEOs has important implications for investors, regulators and policymakers. The study suggests that policymakers should improve the current legal conditions to promote fairness in the equity market.Originality/valueThe results from the cross-country data support earlier results from single-country studies on the impact of earnings management on post-SEO performance. The study also provides new evidence on the variation in the impact of earnings management according to the strength of the legal regime operating in a country.

Gender-based Violence in Ghanaian Parliamentary Discourse: A Corpus-assisted Discourse Analysis

Studying gender-based violence (GBV) in country-specific parliamentary discourses can provide legislative perspectives and global understanding of the experience of GBV and the fight against it. In Ghana, for instance, men are mostly seen as the default perpetrators of GBV, even though research shows that men also suffer from GBV. Thus, using a corpusassisted discourse studies (CADS) approach, this study investigates the discursive construction of GBV in parliamentary debates in Ghana, a leading democracy in West Africa. The study uses parliamentary debates as primary data and legislation on domestic violence and other related instruments as secondary data. Through concordances and collocation, we identify and examine how GBV is constructed in the parliamentary debates and how such GBV constructions relate to the expression of domestic violence in legislation. The study shows that the discourse around GBV centres on three main issues, namely: the forms of GBV, victims and perpetrators of GBV, and the fight against it. The analysis indicates that when MPs talk about GBV, they refer predominantly to violence against women and children, including domestic violence, wife beating, sexual violence, defilement, rape, physical assault, teenage pregnancy, child prostitution, child marriage and violence against women in politics; they are silent on violence against men. The MPs think that collective activism, education, achieving gender parity and a strong legal regime that severely punishes offenders are critical antidotes to GBV.

Payout policy and the interaction of firm-level and country-level governance

For a panel of 1880 firms across 21 countries from 2004 to 2008, the impact of firm-level and country-level governance on payout policy is consistent with the La Porta et al. (J Finance 60(1):1–33, 2000) outcome model. In weak legal regimes, dividends increase in firm-level governance. In strong legal regimes, dividends decrease in firm-level governance while share repurchases increase, substituting tax-efficient, flexible share repurchases for rigid dividends. Consistent with the outcome model, payout decreases in growth opportunities when firm-level and country-level governance are high. These results are robust to an instrumental variable approach and alternative firm-level and country-level governance measures.

The differential effect of accrual-based and real earnings management on audit fees: international evidence

This study investigates the relative importance of accrual-based earnings management (AEM) and real earnings management (REM) as reflected in audit fees. Auditors charge not only for AEM, but also for REM, because it increases the litigation risks and audit complexity they face by dampening firms’ long-term fundamentals; however, whether auditors charge more for AEM or for REM is relatively unexplored. Using data from 24 countries, we find that auditors, on average, charge a higher premium for REM than for AEM. We also find that a strong legal regime increases the audit fee premium charged on both AEM and REM, where the premium for REM increases to a greater extent than it does for AEM. Overall, our results provide novel evidence of the relative importance of the different types of earnings management under different legal regimes to auditors.

The Joint Effect of Audit Quality and Legal Regimes on the Use of Real Earnings Management: International Evidence

ABSTRACTThis study investigates whether and how a firm's real earnings management (REM) is influenced by the strength of a country's legal regime and the presence of a Big 4 auditor. In a cross‐country examination using data from 22 countries, we find that REM increases in countries with stronger legal regimes as firms switch from accrual‐based earnings management (AEM) to REM. The presence of a Big 4 auditor reduces REM (as well as AEM) and attenuates the positive relation between legal regime strength and REM. Our results suggest that higher‐quality auditors limit client firms’ use of REM, especially in countries with a strong legal regime.

Antitrust and Intellectual Property in the United States and the European Union

The United States and the European Union each have a strong legal regime designed both to protect competition and to foster innovation. Because the competition and intellectual property (IP) laws are occasionally in some tension, each jurisdiction has developed detailed legal rules that govern when and how competition law restrictions apply to IP rights. Recognizing that innovation benefits consumers, each regime presumes a patentee may lawfully use, license, and sell its IP rights freely unless that activity would impair competition on the merits by (i) coordinating with other entities to restrain trade unreasonably; (ii) unilaterally acquiring (in the U.S.) or exercising (in the EU) market power; or (iii) transferring IP through an anticompetitive merger or acquisition. This chapter summarizes and briefly compares the applicable law in the U.S. and the EU, and then identifies the most prominent differences between the two regimes. Note that, because most of the applications discussed herein concern patents, the term patents is used throughout to refer to all kinds of IP unless the difference matters.

Institutions and Innovation

We study the design of institutions as a framework for regulating innovative activity in the private sector given the informational constraints faced by the social planner. Innovation in the private sector by financial institutions and manufacturing firms imposes important positive and negative externalities; the social impact of these private firms depends on the sharing rule between their owners and the society at large, which in turn, is governed by laws, regulations, and institutions in place. We propose a framework where the social planner puts in place a system of laws, organizational forms, and taxation within which firms optimize without invasive regulation. Since the legal regime affects the extent to which the owners of firms are held responsible for the negative externalities they impose, unlimited liability may discourage innovation in strong legal regimes. Limited liability, however, might be accompanied by excessive innovation. In this framework we consider an optimally designed structure of taxation, a menu of organizational forms, and the legal system. In this structure, firms choose their organizational forms and level of innovation consistent with private optimality, and we show that these private choices are aligned with social optimality. Optimally designed corporate tax rates are a decreasing function of legal effectiveness in the embedding economy. We highlight some stylized facts from cross-country data that support our results.

Audit Market Concentration and Audit Fees: An International Investigation

Following large-scale auditor consolidations in the late 1980s and early 1990s, along with Arthur Andersen’s collapse in 2001, the global audit market has become highly concentrated during the past 30 years. Many interested parties, including regulators, researchers, and practitioners, disagree on whether concentration would benefit or harm the audit market. To address this unresolved issue, we consider the role of legal regime in shaping the auditors’ incentives. Specifically, we first develop a model in which legal regime plays a significant role in explaining the effect of audit market concentration on audit fees. Our model predicts that, as the audit market becomes more concentrated, auditors charge higher audit fees in countries with a weak legal regime, but charge lower fees in countries with a strong legal regime. The empirical results with data from 27 countries support the model’s predictions. These findings provide regulators and other stakeholders with important insights into the consequences of audit market structure.

Payout Policy and the Interaction of Firm- and Country-Level Governance

For a panel of 1900 firms across 21 countries over 2004 to 2008, the impact of firm- and country-level governance on payout policy is consistent with La Porta, Lopez-de-Silanes, Shleifer, and Vishny (2000). In weak legal regimes, dividend and repurchase payout ratios increase in firm-level governance. In strong legal regimes, dividend payout ratios decrease in firm-level governance while repurchase payout ratios increase, suggesting a substitution from rigid dividends to flexible repurchases. These results are robust to an instrumental variable (IV) approach and an alternative firm-level governance measure in a larger panel of 9461 firms over 2002 to 2011.

Monitor objectivity with important clients: Evidence from auditor opinions around the world

We examine whether monitors are likely to compromise their monitoring objectivity in the face of economically important clients in international business settings. In the context of external auditing and assurance services, we measure monitor objectivity by whether auditors are more (or less) likely to issue to their important clients modified audit opinions, that is, audit opinions provided to outside investors about the firm that demotes explicit areas of concern. Using a large cross-country sample, we document that auditors are more likely to issue modified opinions to their economically important clients relative to other clients. Furthermore, we find that this association is stronger (1) for Big N auditors, (2) for multinational audit clients, and (3) in countries with stronger legal regimes. These results suggest that monitors prioritize the protection of their reputation over lucrative economic relationships, and such information certification function is more pronounced for international auditors, multinational client firms, and in strong legal regimes.

Voluntary Disclosure, Legal Institutions, and Firm Valuation: Evidence from U.S. Cross-Listed Foreign Firms

ABSTRACTBuilding on the bonding hypothesis, this paper examines the economic consequences of voluntary management earnings forecasts (MFs) made by foreign firms cross-listed in the U.S. market. Our work reveals the following. First, cross-listed firms that voluntarily issue MFs exhibit higher firm valuation (Tobin's Q) than those that do not issue MFs, with forecast precision and frequency further enhancing valuation premiums. Additionally, the valuation premium of MFs is more pronounced for cross-listed firms than for a matched sample of U.S. domestic firms. Second, cross-listed firms from countries with weaker legal regimes are valued more for their voluntary forecasts relative to those from stronger legal regimes. Third, further sensitivity analyses suggest that valuation implications from MFs are more consistent with reputational bonding than with a signaling perspective. Finally, our mediation analysis suggests that voluntary disclosures of MFs are an important channel through which the information environment positively influences firm valuation. Overall, our study contributes to both the voluntary disclosure and cross-listing literatures.JEL Classifications: G14; G15; G32; G34; M41.

Protecting a Moveable and Immoveable Feast: Legal Safeguards for Yemen’s Cultural Heritage

This paper surveys the current imperfect legal protections afforded to Yemen’s immense cultural heritage. It focuses on recent positive legislative developments, including a new law to protect historic cities, while highlighting ongoing challenges, especially smuggling. Legal efforts to protect heritage are a requirement for retaining Zabid on the UNESCO List of World Heritage and are also crucial to continued conservation of the Old City of Sana’a. Political changes resulting from Yemen’s Arab Spring have recently drawn attention to these and other heritage issues. The paper argues that the political, economic, and security crises necessitate particular and urgent attention to protection of cultural heritage in the country, including a strong legal regime to encourage positive activity and to combat the neglect and criminality that presently threaten conservation.

Asset Liquidity and Stock Liquidity: International Evidence

AbstractThis study examines the relationship between asset liquidity and stock liquidity across 47 countries. In support of thevaluation uncertaintyhypothesis, we find that firms with greater asset liquidity on average have higher stock liquidity. More importantly, our study shows that asset liquidity plays a more significant role in resolvingvaluation uncertaintyin countries with poor information environment. For example, we find that the asset–stock liquidity relationship is stronger in countries with poor accounting standards. We further find evidence that after the adoption of IFRS, the improved accounting information environment results in a weaker asset–stock liquidity relation, but only in countries with a strong legal regime. Finally, our study shows that the positive asset–stock liquidity relationship may be attributed to transparency and/or liquidity reasons.

The Impact of Mandatory IFRS Adoption on Audit Fees: Theory and Evidence

ABSTRACT: This study examines the impact of International Financial Reporting Standards (IFRS) adoption on audit fees. We first build an analytical audit fee model to analyze the impact on audit fees for the change in both audit complexity and financial reporting quality brought about by IFRS adoption. We then test the model's predictions using audit fee data from European Union countries that mandated IFRS adoption in 2005. We find that mandatory IFRS adoption has led to an increase in audit fees. We also find that the IFRS-related audit fee premium increases with the increase in audit complexity brought about by IFRS adoption, and decreases with the improvement in financial reporting quality arising from IFRS adoption. Finally, we find some evidence that the IFRS-related audit fee premium is lower in countries with stronger legal regimes. Our results are robust to a variety of sensitivity checks. Data availability: Data are available from public sources identified in the paper.

Consulting revenue sharing, auditor effort and independence, and the regulation of auditor compensation

The joint provision of audit and non-audit services by audit firms to their audit clients has posed a threat to auditor independence. To mitigate the independence problem, the US Securities and Exchange Commission (SEC) issued a regulation (SEC, 2003) that prohibits audit partners from receiving compensation for the sale of non-audit services to their audit clients. This study examines the effects of this regulatory change on the effort and reporting decisions of audit partners. We show that partners in an audit firm strategically change the firm’s liability-sharing rule. As a consequence, the regulation restores truthful reporting but has an undesirable negative effect on audit effort. The effect of the regulation on the welfare of the economy (defined as the total payoff to both audit firms and their clients) hinges on the tradeoff between the benefit of the regulation, which is derived from the inducement of truthful reporting, and the cost of the regulation, which results from less diligent audit work. We show that the regulation is more likely to increase the welfare in a strong legal regime (where the legal liability cost of auditor litigation is high) than in a weak legal regime.

The Impact of Mandatory IFRS Adoption on Audit Fees: Theory and Evidence

This study examines the impact of International Financial Reporting Standards (IFRS) adoption on audit fees. We first build an analytical audit fee model to analyze the impact on audit fees of the change in both audit complexity and financial reporting quality brought about by IFRS adoption. We then test the model’s predictions using audit fee data from European Union countries that mandated IFRS adoption in 2005. We find that mandatory IFRS adoption has led to an increase in audit fees. We also find that the IFRS-related audit fee premium increases with the increase in audit complexity brought about by IFRS adoption, and decreases with the improvement in financial reporting quality arising from IFRS adoption. Finally, we find some evidence that the IFRS-related audit fee premium is lower in countries with stronger legal regimes. Our results are robust to a variety of sensitivity checks.

Cross-Listing Audit Fee Premiums: Theory and Evidence

ABSTRACT: We study the effects of cross-listings on audit fees. We first develop a model in which legal environments play a crucial role in determining the auditor's legal liability. Our model and analysis predict that auditors charge higher fees for firms that are cross-listed in countries with stronger legal regimes than they do for non-cross-listed firms and that the cross-listing audit fee premium increases with the difference in the strength of legal regimes between the cross-listed foreign country and the home country. We then empirically test these predictions. The results of our cross-country regressions strongly support our predictions. In addition, we find no significant cross-listing fee premium for firms that are cross-listed in countries whose legal regimes are. no stronger than those of their home countries. This suggests that cross-listing audit fee premiums are associated with increased legal liability and not with increased audit complexity per se. Our findings help explain why cross-listing premiums occur and what determines their magnitude.

Do Business Groups Use Dividends to Fund Investments?

In this paper we offer a theory of dividends in business groups. We hypothesize that business groups operate a type of internal capital market and use dividends as a transparent means of transferring cash across group firms. The intuition, formalized in a simple model, is that insiders use their share of dividends to finance investment in member firms, thereby limiting the dilution of their equity stake when firms raise outside capital. The correlation between dividends and investments is predicted to be stronger for smaller and more profitable investments and when the legal regime is more protective of shareholder rights. We test our predictions using firm level data from 23 countries from Asia and Europe. Our evidence is consistent with the predictions. Changes in group firm dividends are positively associated with changes in both contemporaneous and subsequent equity-financed investments in other member firms. The association is stronger for smaller and more profitable investments and in firms located in countries with strong legal regimes. Aggregate dividends paid by group firms in a year finance upto 10% of insider equity investment in the next year. Consistent with our model, insider holding in group firms is positively related to dividend distribution from the other member firms.