Superior Corporate Governance Research Articles

Do managers have more incentives to hoard bad news during panic? A study of terrorist attacks and stock price crash risk

We identify a robust and significant relationship, both statistically and economically, between the rise in a firm's stock price crash risk and the occurrence of terrorist attacks in the vicinity of the firm's headquarters. The empirical findings support the idea that terrorist attacks often trigger increased performance pressures and elevated investor sensitivities, thereby initiating the information manipulation activities of firm managers. Additionally, we examine the heterogeneous effects of corporate governance quality and firm transparency, indicating that firms with superior corporate governance and transparency are less vulnerable to the impact of terrorist attacks. We offer insights into the economic consequences of managerial behavior responses because of the traumatic shock of terrorist attacks.

The first public offering of a corporate bond issuance and the expected impact on the securities market and economy in Albania

This study aims to investigate the anticipated importance of the inaugural corporate bond issuance through public offering on the Albanian Stock Exchange (ALSE) and its potential ramifications for the bond market, investors, the broader financial sector, and the Albanian economy. Given that the ALSE has been predominantly characterized by government bonds, the initial public offering of the first corporate bond represents a noteworthy landmark that could facilitate the advancement of the Albanian financial market. We will scrutinize how this progression may result in heightened market liquidity, by appealing to both domestic and international investors, thereby increasing the aggregate trading volume and liquidity, within the exchange. Additionally, we will deliberate on the function of corporate bonds in diversifying the array of financial instruments accessible on the ALSE, which may assist in risk mitigation and the cultivation of a more stable financial environment. Moreover, we will analyze how the issuance of corporate bonds could promote superior corporate governance practices, culminating in increased transparency, more rigorous financial reporting, and bolstered investor confidence. Finally, we will contemplate the potential of corporate bond issuances to stimulate economic growth by supplying companies with an alternative avenue of funding for expansion and investment initiatives. This can result in job generation, enhanced productivity, and comprehensive economic development in Albania. By examining the anticipated consequences of the first corporate bond issuance on the ALSE, this study will illuminate the potential advantages and challenges associated with this development, laying the groundwork for future inquiries as the market undergoes further evolution.

Cash, crisis, and capers: The UK's cashbox policy during COVID-19

This study investigates the market impact of the “Cashbox” policy introduced in the UK during the COVID-19 pandemic, which eased shareholder approval norms for equity issuances. Using manually collected data, we find that Cashbox issue announcements yield abnormal returns 4–6 % higher than other issuances, indicating that investors prioritise liquidity over agency concerns during the pandemic. Notably, this effect is more pronounced in firms facing greater financial constraints or exhibiting superior corporate governance. Our study sheds light on the impact of crisis-driven policy changes on financial markets, providing important and timely implications for policymakers and investors on the trade-off between rapid capital access and governance standards in times of significant social crises.

The power of good corporate governance in activating the impact of internal information quality on tax savings

PurposeThis paper examines the moderating effect of good corporate governance on the association between internal information quality and tax savings.Design/methodology/approachThis study uses a quantitative approach. It employs an Australian sample of analysis composed of 1,295 firm-year observations from the period 2017 to 2021. Data relating to corporate governance are hand-collected from the annual reports.FindingsBased on the result of the analysis, this study demonstrates that the interaction between corporate governance and quality of internal information is positively associated with tax savings. Superior corporate governance is critical in activating the effect of internal information quality on tax savings. This finding is robust to a battery of robustness checks and additional tests.Research limitations/implicationsThis examination utilizes only publicly traded companies from one developed country.Practical implicationsFor the company management, an effective governance structure must be at the top because it will determine the development of all other areas. This study emphasizes the need to continuously improve the effectiveness of corporate governance practices. For long-term investors, an important indicator that can be considered in assessing the “safety” of a company’s tax strategy is its corporate governance aspects. For regulators, this study is expected to assist regulators in creating a more adequate corporate governance implementation and disclosure package to be implemented by corporations in the future.Originality/valueThis study provides new evidence on a crucial construct that can strengthen the relationship between internal information quality and tax savings.

Advertising and corporate cash holdings

This study investigates the effect of advertising on corporate cash holdings. Using a comprehensive sample of Chinese listed firms from the 2011–2022 period, we find that advertising increases corporate cash holdings. This finding remains valid across various robustness measures and is attenuated for state-owned enterprises. Mechanism tests show that advertising affects cash holdings by improving analyst coverage. Our study is the first to examine the role of advertising in corporate cash holdings and substantiates the perspective that firms with superior corporate governance maintain greater cash reserves.

Returnee directors and cost of debt

This study examines the relationship between returnee directors and cost of debt. We use robust econometric modelling on large unique sample data of 15,832 firm-year observations from 2007 to 2018. We find a negative and significant association between returnee directors and the cost of debt, suggesting that these directors give firms access to cheaper debt capital. The negative relationship is more pronounced in private-owned firms and firms with more than one returnee director. In further analyses, we demonstrate that returnee directors' favourable influence on the cost of debt is through improvement in internal monitoring mechanisms evident in quality financial reporting. Our findings provide evidence of how returnee directors send positive signals to the debt market through effective monitoring and transmission of superior corporate governance practices to emerging markets.

Board composition and corporate governance performance: investigating the effects of diversity

ABSTRACT This study investigated the diversity of the BOD and explored its impact on corporate governance through quantitative empirical analysis. This study uniquely adopted Taiwan Stock Exchange Corporate Governance 100 Index (TWSE CG 100 Index) as the measurement of corporate governance performance. Five highly related indicators, i.e. gender, independence, education, legal, finance or accounting profession, and seniority to measure board diversity, which could be efficient variables on predicting the firms’ likelihood being listed in the TWSE CG 100 Index, were used as independent variables. The results showed that board independence and the seniority of directors have a positive impact on corporate governance. This study made several important contributions. First, this study shed light on the conflicting evidence on the relationship between board diversity and firm corporate governance performance for the Taiwan economy. Second, this paper uniquely adopted TWSE CG 100 Index, and the findings can contribute to giving investors predictions about the quality of corporate governance and can serve as an incentive for corporates to enhance superior corporate governance. Furthermore, this study can contribute to practice by providing optimization suggestions for BOD composition and nomination. At last, this paper demonstrated policy justifications and implications for Taiwan government.

Does electronic economics matter to financial technology firms?

This paper addresses the notion of electronic economics by examining financial technology (fintech) firms' performance and corporate governance quality, using data from the United States. The findings support our maintained assumption that due to the economics of electronic platforms perused by financial technology firms, these firms outperform firms from other industries (non-Fintech). The final sample comprises 1,712 company-year observations between 2010 and 2019 (pre-COVID-19). The evidence suggests that our corporate governance quality index, developed from Organisation of Economic Cooperation and Development (www.oecd.org/corporate/corporate-governance-factbook.htm, 2019) guidelines, accurately captures corporate governance quality in the United States, principally due to the inclusion of an anti-bribery policy indicator, in the index. The results suggest that this evidence is not merely an artefact due to the corporate governance quality index potentially capturing priced risk factors. Our findings reveal that fintech firms have superior corporate governance quality than non-fintech and that fintech firms place more reliance on internal versus external corporate governance mechanisms, vis-a-vis companies in other industries.

With other people’s money: Campaign financing as an agency problem

Agency theory explanations for corporate political activity assume that managers distort resource allocation to invest in political connections to pursue personal benefits. While distorted resource allocations yield poor earning quality, we expect that companies with efficient governance may curb this opportunistic behavior. We used matching procedures to identify the effects of financing political campaigns on the earning quality of the firm. We assembled an original panel of listed firms in Brazil from 1998 to 2013. We found that firms that donated to electoral campaigns had a lower earning quality than nondonor firms. Firms with superior corporate governance instruments were able to reduce the harmful effects on earning quality. These results support the tenets of agency theory in explaining why firms engage in politics.

Impact of XBRL on Voluntary Adopters' Financial Reporting Quality and Cost of Equity Capital

ABSTRACTWe investigate whether corporate governance quality explains differences in financial reporting quality and cost of capital following the XBRL Voluntary Filing Program (VFP) launched by the SEC. Research on the effects of voluntary XBRL adoption remains valuable, as a bill recently introduced in Congress could revert the majority of U.S. public companies to voluntary compliance. Further, such research informs investors, researchers, and regulators in other countries that do not yet require XBRL. We hypothesize that the likelihood of achieving XBRL's expected benefits is greater in companies with stronger corporate governance. For instance, such companies might implement XBRL in ways that substantially improve information gathering and reporting; or make better use of XBRL to enhance its benefits, regardless of implementation strategy. Results confirm the expected interactive effect of voluntary XBRL adoption and corporate governance strength on both financial reporting quality and cost of capital. These findings suggest that not all voluntary adopters benefited from XBRL; rather, only those with superior corporate governance show measurable benefits during our study period.

Product Market Competition and Corporate Investments: An Empirical Analysis

In this paper, we empirically test the impact of industry concentration on corporate investment. Using both traditional proxies and recently developed text-based measures of industry concentration, we show that firms operating in competitive industries invest significantly more in both physical capital and research and development relative to their peers in concentrated industries. We also find that the propensity to invest less by managers of monopolistic firms is partially mitigated by superior corporate governance that reduces the agency problems related to managerial slack. Our results are consistent with the notion that firms in competitive industries have a greater incentive to invest and innovate relative to the managers of monopolistic firms, where the managers' incentives are to maintain their monopoly rents. Our findings have clear policy implications in that investment and innovation, and hence economic growth, may be adversely affected in the current era of increasing industry concentration and declining competition.

Innovative Enterprise or Sweatshop Economics?: In Search of Foundations of Economic Analysis

In his essay on the sharp contrast between the theory of innovative enterprise and what he calls sweatshop economics, William Lazonick demonstrates how neoclassical economics with its methodology of constrained optimization trivializes the business enterprise while its ideology that companies should be run to maximize shareholder value legitimizes financial predators, many senior corporate executives among them, in the looting of the industrial corporation. As a result, even liberal economists have failed to comprehend the “era of corporate plundering” that since the mid-1980s has contributed to extreme concentration of income among the richest households and the erosion of middle-class employment opportunities. To come to grips with the key economic issues of our time, he calls for a transformation of economic thinking so that the innovative enterprise is at the center of economic analysis. The theory of innovative enterprise exposes as costly intellectual failures “perfect competition” as the ideal of economic efficiency, “constrained optimization” as the primary tool of economic analysis, and “maximizing shareholder value” as the ideology of superior corporate governance. The theory of innovative enterprise provides, moreover, a clear and compelling rationale for sharing the gains of business enterprise among stakeholders in the broader community, in conjunction with government policies that seek to support sustainable prosperity, characterized by stable and equitable economic growth.

Who makes the grade and why? Corporate governance scores in Thailand

Purpose – The purpose of this paper is to describe the characteristics of publically listed firms in Thailand that have achieved superior corporate governance scores (CGSs) and their motivations. Design/methodology/approach – In-depth interviews with CFOs and directors were conducted to gain insights into the firms’ motivations in increasing their CGS. Multiple regression, ANOVA and t-tests were employed to examine the score patterns. In total, we collected a year’s data from 502 companies from the 2010 Thai stock market database. Findings – Interview results suggest that high CGS can: first, help reduce the cost of debt; second, help the firm achieve incremental profitability; third, improve a firm’s value and stock price; and fourth, create confidence among insiders and build trust among outsiders. The quantitative analysis indicates that large state enterprises and widely held companies that issue bonds are significantly more likely to obtain good CGS. Frequency of board meetings and superior financial performance are also associated with higher governance ratings. Originality/value – This study systematically examines the characteristics of companies achieving different corporate governance rankings and investigates possible motivations behind their choices.

Innovative Enterprise or Sweatshop Economics? In Search of Foundations of Economic Analysis

In Capitalism, Socialism, and Democracy, Joseph Schumpeter asserts: “perfect competition is not only impossible but inferior, and has no title to being set up as a model of ideal efficiency.” For neoclassical economists, the large corporation is a “market imperfection” that, compared with “perfect competition,” should result in higher product prices and lower industry output. Yet business history reveals the capability of the most productive enterprises to generate massive quantities of output at low costs to attain large market shares with buyers benefiting from low prices even as employees receive higher pay and shareholders ample dividends. By integrating the history of industrial development in Britain and the United States with the ideas of leading economic thinkers, this essay demonstrates the absurdity of perfect competition as the ideal of economic efficiency. Indeed, I show that, in their desire to make the market rather than the firm the main arbiter of resource allocation, neoclassical economists have enshrined the sweatshop as the foundation of their analysis, with profoundly negative consequences for understanding how a modern economy actually operates and performs. In doing so, neoclassical economists ignore not only the economic history of capitalism but also the intellectual history of their own discipline. I conduct a journey through two hundred years of economic thought – from Adam Smith’s The Wealth of Nations (1776) to Alfred Chandler’s The Visible Hand (1977) – to derive analytical foundations for a theory of innovative enterprise that can explain and explore firm-level sources of productivity growth in the economy. What then do more sophisticated theories of the firm rooted in the neoclassical tradition have to offer? In a section of this essay that I call (borrowing a phrase from Adolf Berle and Gardiner Means) “Economic Theory for ‘an Era of Corporate Plundering’,” I outline the shortcomings of Williamsonian transaction-cost theory and Jensenian agency theory for analyzing the role of the business corporation in the operation and performance of the economy. From the perspective of the theory of innovative enterprise, I demonstrate how the methodology of constrained optimization trivializes the business enterprise while the ideology that companies should be run to maximize shareholder value legitimizes financial predators, many senior corporate executives among them, in the looting of the industrial corporation. The “era of corporate plundering” since the mid-1980s has contributed to extreme concentration of income among the richest households and the erosion of middle-class employment opportunities. Finally, I call for a transformation of economic thinking so that the innovative enterprise is at the center of economic analysis. The theory of innovative enterprise exposes as costly intellectual failures “perfect competition” as the ideal of economic efficiency, “constrained optimization” as the primary tool of economic analysis, and “maximizing shareholder value” as the ideology of superior corporate governance. The theory of innovative enterprise provides, moreover, a clear and compelling rationale for sharing the gains of business enterprise among stakeholders in the broader community, in conjunction with government policies that seek to support sustainable prosperity, characterized by stable and equitable economic growth.

EFFECTS OF CORPORATE AND COUNTRY GOVERNANCE ON R&D INVESTMENT: EVIDENCE FROM EMERGING MARKETS

We investigate how corporate governance influences R&D across 13 emerging markets. We find that superior corporate governance increases corporate R&D spending. These results suggest that corporate governance may influence management's discretion to avoid risky innovative projects. We also find that the link between firm-level governance and corporate R&D is stronger in countries with weaker country-level governance. These results suggest substitutability between firm and country governance in generating innovation activities.

Does the Superior Corporate Governance Mitigate Agency Costs?

Does the Superior Corporate Governance Mitigate Agency Costs?

Cross-Border Reverse Mergers: Causes and Consequences

We study non-U.S. companies that have used reverse mergers as a means to adopt U.S. corporate law (and sometimes U.S. securities law as well). Early adopters of cross-border reverse mergers and those firms that hired a Big Four auditor exhibited superior corporate governance outcomes. Later adopters of cross-border reverse mergers were likely to strategically mimic the early entrants only to gain access to U.S. capital markets — that is, they took some governance actions but not others — and are shown to be likely to have worse corporate governance outcomes over time. Firm-level origins in China initially appears to be a significant negative determinant of at least some corporate governance outcomes, but the variable loses its statistical power when examining the most comprehensive data set on cross-border reverse mergers yet assembled and when including a battery of relevant control variables. Adoption of Nevada’s corporate law is associated with some of the most serious restatements involving real corporate governance and data manipulation problems. In summary, the evidence supports the existence of strategic mimicry, which the capital market did not fully discern for many years. It also supports the explanatory power of reputational bonding to explain the fact that adoption of U.S. institutions can be used either to build reputation or to exploit relatively weak U.S. cross-border law enforcement.

Financial derivatives, opacity, and crash risk: Evidence from large US banks

We test how the use of financial derivatives affects banks’ informational structure and future stock performance based on a sample of large bank holding companies in the US. Using banks’ use of financial derivatives as a proxy for opacity, we find that high level use of interest rate and foreign exchange derivatives are associated with an increase in the synchronicity (R2) of stock price movements with the market index, which indicates less revelation of bank-specific information to the market. This finding is consistent with the prediction of the model developed by Wagner (2007). We document that superior corporate governance tempers these effects. Finally, we find that an increase in the opacity is significantly and positively related to an increase in banks’ future stock price crash risk.

The character and denomination of shares in the Victorian equity market1

The seminal work of J. B. Jefferys highlighted two unusual features of the Victorian equity market, namely high share denomination and uncalled capital. This article examines the extent to which publicly traded company stocks in the nineteenth century had these features. It also analyses the effect of these features on stock returns using monthly data for the London Stock Market over the period 1825–70. We find that stocks with unpaid capital earned a higher return, which is consistent with investors being rewarded for the risk of a call on their personal assets. We also find that stocks with a high share denomination earned a lower return, which is consistent with the view that this feature was conducive to superior corporate governance.

Corporate Governance of LBOs: The Role of Boards

This paper studies whether the success of private equity-backed rms is at least in part due to their superior corporate governance. We construct a new data set of all public to private transactions in the UK between 1998 and 2003. We focus on the role of boards in LBOs and look at changes in the board when a public company is taken private. We nd that when a company goes private the board size decreases and its composition changes drastically. LBO sponsors are more present on the boards of the most dicult deals, i.e. when their expertise is most needed. To see whether the eect of this involvement is positive we study the change in the CEO turnover after the company is taken private. We nd that more dicult LBOs have a higher turnover, but a higher presence of LBO sponsors on the board does not increase CEO turnover. This is consistent with the view that private equity can give a longer horizon to management. We also nd some evidence that the deals where LBO sponsors are not very present may be the ones which are driven primarily by nancial engineering