Strong Investor Protection Research Articles

The Globalised Board of Directors and Corporate Environmental Performance: Evidence from China

ABSTRACT This study examines the association between the globalised board of directors and corporate environmental performance, and then investigates the moderating effect of regional green development on the above association. Using a sample from the Chinese stock market during the period of 2008–2016, the findings reveal that the globalised board of directors is significantly positively associated with corporate environmental performance, suggesting that the globalised board of directors can play an important role in strengthening the moral and strategic motivations of corporate environmental responsibility, and enhance corporate environmental performance. Further, regional green development attenuates the positive relation between the globalised board of directors and corporate environmental performance. Above findings are robust to a variety of sensitivity tests and our main conclusions are still valid after controlling for the potential endogeneity between the globalised board of directors and corporate environmental performance. Interestingly, additional tests reveal that the positive effect of foreign directors on corporate environmental performance is more pronounced for those from the countries (regions) with shorter time zone difference, stronger investor protection and better performance in environmental responsibilities.

The Importance of Director External Social Networks to Stock Price Crash Risk

Prior research documents that information transmitted via director networks affects firms’ policies and real economic activities. Given a manager’s potential monopoly over firm information, it is important to analyze whether information transmission through director social networks undermines the manager’s control. Specifically, we explore whether information flow through director networks influences managers’ ability to hoard bad news. We predict and find that the extent of external connections of the board of directors is negatively associated with future stock price crash risk. Additional analysis implies that this evidence is driven by firms with more powerful executives, with weaker auditor monitoring, or subject to strong investor protection, and by directors with greater monitoring incentives or responsibilities and directors with less firm-specific knowledge. Collectively, our research lends empirical support for the monitoring view under which better informed directors narrow the scope for bad news hoarding evident in stock price crash risk. In another series of tests, we fail to find evidence consistent with the information leakage view under which directors pass sensitive firm-specific information to connections who trade on the information before its public release. Other analysis helps dispel the concern that the endogenous match between directors and companies is spuriously responsible for our core results. Our empirical findings have important implications on how social networks affect the proper functioning of capital markets.

The market reaction to analyst stock recommendation and earnings forecast consistency: International evidence

Using a large international sample from 81 counties, this paper examines the incremental effects of recommendation–forecast consistency on the market reactions to revisions in stock recommendations and earnings forecasts. We define analysts’ stock recommendations and earnings forecasts as consistent if both are above or below their respective consensus, and inconsistent otherwise. We hypothesize and find that recommendation-forecast consistency adds incremental positive effects to the market reaction to analysts’ stock recommendation revisions and their earnings forecast revisions for our international sample. Moreover, the incremental positive effects exist in both strong and weak investor protection countries, with the effects being greater in strong-investor protection countries than in weak-investor protection countries. Finally, International Financial Reporting Standards (IFRS) adoption significantly enhances these incremental positive effects.

THE IMPACT OF TRANSPARENCY AND DISCLOSURE ON STOCK MARKET CAPITALIZATION THROUGH THE DIVIDEND YIELD EIDOLON

Purpose: The paper aims to access the impact of financial transparency and disclosure on stock market capitalization. The financial transparency and disclosure measure the extent to which the firms have open firm-specific information for the investors. More transparency leads to strong investor protection.
 Design/methodology: The study has been conducted on the Pakistan Stock Exchange from period 2008 to 2017. Descriptive Statistics, Correlation, and Regression Analysis have been used to find out the impact of the above-mentioned variables on the Stock market Capitalization.
 Findings: The results support our hypothesis that information disclosure and strength of investor protection has a positive significant impact on market capitalization. Research Limitation: While our study focuses on the significance of information disclosure and transparency, it does not measure the quality and accuracy of the information disclosed.
 Practical Implication: The results might be of interest to potential investors who will be able to diversify their investment in a way that minimizes risks based on the disclosure practices of the firms.
 Originality/value: The research contributes to the finance literature by finding out the impact of information disclosure on stock market capitalization in the Pakistan Stock Exchange on recent data.

On the Role of Internationalization of Firm-Level Corporate Governance – The Case of Audit Committees

Motivated by agency theory and arguments from linguistic studies, we argue in this paper the internationalization of a firm’s audit committee to be associated with weaker firm-level corporate governance. Based on 2,015 publicly traded European firms from 16 countries over 2000-2018, we find the presence of foreign directors on audit committees to have a significant negative impact on financial reporting quality (FRQ). The effect is found to be weaker in countries with strong investor protection. We find linguistic differences within audit committees an important explanation for the negative influence of foreign directors on FRQ. The results are robust to alternative FRQ measures and model specifications, including difference-in-differences and propensity score matching. While foreign directors on a corporate board may create value for the firm by boosting the advisory capacity of that board, recruiting a foreign director to that firm’s audit committee may compromise the board’s monitoring function and the firm’s FRQ.

Investor Protection, Aggregate Accounting Earnings and Forecasts of Growth in GDP: International Evidence.

This study draws on the investor protection literature to examine differences in a country’s information environment that are likely to explain cross country variation in the extent to which macroeconomic forecasters take account of current earnings when forecasting future growth in GDP. Using a unique sample of analysts’ GDP forecasts from thirty countries, we find that economies with stronger levels of disclosure and enforcement regulation have a lower association between changes in aggregate earnings and errors in forecasts of GDP growth. The results are consistent with macroeconomic forecasters in countries with stronger investor protections taking greater account of changes in aggregate earnings when forecasting growth in GDP than analysts in countries with lower levels of investor protection.

Competition Laws and Earnings Management: International Evidence

By exploiting the staggered change of legal competition environment in 58 non-US countries, we find that firms tend to inflate their earnings when domicile countries adopt stricter competition laws, which supports the pressure effect of legal competition threats. This result is robust to alternative measures of earnings management and stringency of competition laws. Consistent with the pressure effect, firms inflate more earnings under the strength of competition laws when they face greater external pressure, receive less external discipline, and lack information transparency. In cross-country analyses, the impact of competition laws on earnings management is mitigated in IFRS countries and countries with stronger investor protection. By showing earnings inflation under stricter competition laws, this paper finds a side effect of competition laws on firms in terms of financial reporting quality, which should not be neglected by policymakers.

Corporate tax avoidance and cost of equity capital: international evidence

ABSTRACT This study examines the association between firm’s tax avoidance activities and cost of equity capital across 17 countries. Consistent with the prior study based on the U.S. evidence, within strong investor protection countries, the extent of firm’s tax avoidance is negatively associated with its cost of equity capital. This result indicates that strong investor protection induces investors to perceive firm’s tax avoidance activities as the results of efficient tax planning to reduce tax liabilities. To the contrary, we find that the extent of firm’s tax avoidance is positively associated with its cost of equity capital within weak investor protection countries. This result suggests that investors impose equity risk premium on firm’s tax avoidance activities in weak investor protection countries, where agency conflicts prevail more on firm’s tax avoidance activities. As the first international study on the association between firm’s tax avoidance activities and its cost of equity capital, this study contributes to the literature by suggesting that such an association may vary across countries depending on the strength of investor protection within each country of domicile.

Investors' time preferences and takeover performance

We investigate investors' time preferences and takeover outcomes in a cross-disciplinary international study. We use a cultural measure on long-term orientation (LTO) to capture investors' time preferences. Additionally, we study how investor protection and the nature of the deal (cross-border vs domestic) in connection with investors' time preferences come into play in explaining long-term takeover performance. Evaluating data on 38,153 M&A deals from 54 countries, over the period from 2000 to 2015, we offer empirical evidence that investors' future orientation significantly improves post-M&A performance, while short-term oriented behavior deteriorates takeover performance. Our findings further suggest that the positive impact of investors' future orientation on takeover performance is more pronounced in countries with strong investor protection. Moreover, the impact of investors' time preferences is stronger for domestic deals where the confounding impact of cultural differences is almost non-existent.

Controlling Shareholders in the Twenty-First Century: Complicating Corporate Governance Beyond Agency Costs

By the end of the twentieth century, the then-dominant literature on “law and finance” assumed that concentrated ownership was a product of deficient legal systems that did not sufficiently protect outside investors. At the same time, commentators posited that the competitive pressures of economic globalization would push countries around the world to adopt an efficient regime of strong investor protection, which was thought to facilitate ownership dispersion. Nevertheless, at the dawn of the 2020s, ownership concentration not only persists, but appears to be on the rise among the world’s largest companies. This symposium essay in honor of Ronald Gilson explores what went wrong with the original predictions from two decades ago and the resulting lessons for corporate governance analysis. It shows that the focus on agency costs that dominated the earlier literature overlooked the fact that corporate governance structures are both (i) influenced by factors beyond tradeoffs in agency costs (such as non-pecuniary private benefits of control and nationalism), and (ii) affect social welfare in ways other than through their effects on investor protection. The essay then reflects on the emerging challenges to what I call the “modularity approach” to corporate law scholarship, and contemporary law-and-economic analysis more generally, which stipulates that each area of law should serve one key efficiency objective.

Intensive Board Monitoring, Investor Protection and Segment Disclosure Quality: Evidence from EU

This study examined the association between intensive board monitoring (IBM) and segment disclosure quality (SDQ). It also investigated whether this association can be moderated by firm's home country investor protection (IP) level. Based on a panel of 271 non-financial European Union (EU) listed corporations covering the 2007–2012 period, this study estimated two multiple regression models including industry and year fixed effects. We found evidence that the segment disclosure quality is higher when a majority of outside directors serve on monitoring committees. We, also, found that the positive association between IBM and SDQ is more pronounced for firms in a weak IP environment and less pronounced for firms in a strong IP environment. Thus, we provided evidence in favor of a substitutive relationship between IBM and IP level with respect to their association with SDQ. Our findings are evidenced by several robustness tests.

Bank earnings management using commission and fee income

PurposeThe purpose of this paper is to investigate whether banks use commission and fee (CF) income to manage reported earnings as an income-increasing or income smoothing strategy.Design/methodology/approachThe authors employ the regression methodology to detect real earnings management.FindingsThe authors find that banks use CF income for income smoothing purposes and this behaviour persists during recessionary periods and in environments with stronger investor protection. The implication of the findings is that bank non-interest income which achieves diversification gains to banks is also used to manipulate reported earnings.Research limitations/implicationsThe findings show that real earnings management is prevalent among banks in Africa. Further research into earnings management should examine real earnings management among non-financial firms in developing regions.Practical implicationsFrom an accounting standard setting perspective, the evidence suggests the need for national/international standard setters to adopt strict revenue recognition rules that ensure that banks or firms report the actual fees they make, and to discourage banks from delaying (or deferring) the collection of fee income to manage or smooth reported earnings opportunistically.Originality/valueThis study contributes to the positive accounting theory (PAT) literature which examines the accounting and non-accounting decisions that influence managers’ choice of accounting methods in financial reporting. Extending the PAT, the authors show that certain conditions can incentivize managers to engage in earning management such as during recessions and weak institutional quality or weak investor protection.

Transfers of corporate control in firms with noncontrolling blockholders

AbstractI model the choice between a negotiated block trade and a public tender offer as means of acquiring control in a firm with a large minority blockholder. Potential acquirers differ in their (privately known) value‐creation ability. In equilibrium, block trades are made by lower ability acquirers compared to tender offers. The equal opportunity rule (EOR) and the “freezeout” rule are complements in promoting efficiency of control transfers. Stronger investor protection may hamper value‐increasing takeovers when the EOR is present. The model also delivers predictions about announcement returns and the incidence of block trades and tender offers under different legal regimes.

Bank Income Smoothing, Institutions and Corruption

This study investigates bank income smoothing, focusing on the effect of corruption on the extent of income smoothing by African banks. I find that banks use loan loss provisions to smooth positive (non-negative) earnings particularly in the post-2008 crisis period and this behaviour is reduced by strong investor protection. Also, I find that banks in highly corrupt environments smooth their positive (non-negative) earnings as opposed to smoothing the entire profit distribution. Finally, cross-country variation in bank income smoothing is observed. The findings have implications.

Bank income smoothing, institutions and corruption

This study investigates bank income smoothing, focusing on the effect of corruption on income smoothing by African banks. I find that banks use loan loss provisions to smooth positive (non-negative) earnings particularly in the post-2008 crisis period and this behaviour is reduced by strong investor protection. Also, I find that banks in highly corrupt environments smooth their positive (non-negative) earnings as opposed to smoothing the entire profit distribution. Finally, cross-country variation in bank income smoothing is observed. The findings have implications.

How does CEO pay slice influence corporate social responsibility? U.S.–Canadian versus Spanish–French listed firms

AbstractConsidering specific contextual differences (in laws, governance attributes, and CEO pay policies) found between the Anglo‐American and the European corporate governance models and controlling for institutional attributes, ownership structures, and firm's features characterizing the two settings, we aim to explore if there is a link between CEO pay slice (CPS) and corporate social responsibility (CSR). We follow Bebchuk et al. () to measure CPS. We consider sustainability indicators as proxy to capture CSR. Sustainability indicators are gathered from Global Reporting Initiative of sustainability standards (GRI's) report. Data cover the period 2010–2017 and consist of 1,440 U.S.–Canadian and Spanish–French firm‐year observations. American and Canadian (Spanish and French) firms are considered as to refer to the Anglo‐American (European) corporate governance model. Durbin–Wu–Hausman test is ruled to address endogeneity problem of dual variables and supports consistent null hypotheses of fixed effects model. Under the agency theory's “bright side” paradigm, univariate and multivariate cross‐country analysis supports that CPS is positively associated with firm's initiatives to engage in CSR and that sustainability is more pronounced under stronger investor protection, strict law enforcement, and higher corporate governance quality. Robustness checks reveal that (a) the deferred CPS–CSR causal effect seems higher for option‐based compensation than that for stock‐based compensation and (b) within the options (stocks) rewards, unvested options (restricted stocks) are the most effective to enhance firm's CSR practices.

Is the U.S. Unique? International Evidence on the Aggregate Earnings-Returns Association

We exploit differences in institutional and macroeconomic environments to shed light on what drives variation in the aggregate earnings-returns relation over time within the U.S. and across countries. We find that both intertemporal and cross-country variation in the aggregate earnings-returns association are driven primarily by two factors, namely, the monetary policy news conveyed in aggregate earnings and the market reaction to that news, which suggest that the strength of the discount rate news channel plays an important role in explaining the aggregate earnings-returns relation both within and outside of the U.S. We further find that institutional characteristics have a significant effect on the information content of aggregate earnings and hence on the aggregate earnings-returns association—aggregate earnings are more informative about policy changes in countries with stronger investor protection and greater accounting transparency. Overall, our study provides new evidence on what drives the aggregate earnings-returns relation across the globe.

Bank loan loss provisions, risk-taking and bank intangibles

This article investigates the relationship between discretionary loan loss provisions and bank intangibles among African banks. Prior studies have focused on how intangible assets affect firms’ profitability and valuation decisions with almost no focus on the role of loan loss provisions. We investigate whether banks increase (decrease) loan loss provisions in response to risks associated with investment in intangible assets. We find that discretionary loan loss provisions are inversely associated with bank intangible assets and change in intangible assets, but the inverse association is weakened in environments with strong investor protection. We observe that income smoothing is reduced among banks that have large intangible asset investment. Moreover, income smoothing is pronounced among banks that have few intangible asset investments but this behaviour is reduced for banks in environments with strong minority shareholders right protection.

Bank loan loss provisions, risk-taking and bank intangibles

This article investigates the relationship between discretionary loan loss provisions and bank intangibles among African banks. Prior studies have focused on how intangible assets affect firms’ profitability and valuation decisions with almost no focus on the role of loan loss provisions. We investigate whether banks increase (decrease) loan loss provisions in response to risks associated with investment in intangible assets. We find that discretionary loan loss provisions are inversely associated with bank intangible assets and change in intangible assets, but the inverse association is weakened in environments with strong investor protection. We observe that income smoothing is reduced among banks that have large intangible asset investment. Moreover, income smoothing is pronounced among banks that have few intangible asset investments but this behaviour is reduced for banks in environments with strong minority shareholders right protection.

Foreign Institutional Investors and Corporate Voluntary Disclosure Around the World

ABSTRACT We examine the impact of foreign institutional investors on firms' voluntary disclosure practices measured by management forecasts. In a sample of 32 non-U.S. countries, we find that, on average, foreign institutional investments lead to improved voluntary disclosure, and their impact is larger than that of domestic institutional investors. These results are more pronounced when foreign institutional investors (1) are unfamiliar with the firm's home country, (2) have longer investment horizons, and (3) are from countries with stronger investor protection and disclosure requirements than the firm's home country. However, we also find some evidence of voluntary disclosure deterioration in firms with foreign institutional investors from countries with inferior disclosure requirements and securities regulations and with concentrated foreign institutional ownership. Overall, our results suggest that the relation between foreign institutional investors and voluntary disclosure is much richer and more complex than what has been documented for domestic institutional investors in the literature.