Corporate governance mechanisms and earnings management in transitional countries – evidence from Chinese listed firms

The objective of this thesis is to investigate whether the corporate governance practices adopted by Chinese listed firms are associated with the quality of earnings information. Based on a review of agency and institutional theory, this study develops hypotheses that predict the monitoring effectiveness of the board and the audit committee. Using a combination of univariate and multivariate analyses, the association between corporate governance mechanisms and earnings management are tested from 2004 to 2008. Through analysing the empirical results, a number of findings are summarised as below. First, board independence is weakened by the introduction of government officials as independent directors on the boards. Government officials acting as independent directors, claim that they meet the definition of independent director set by the regulation. However, they have some connection with the State, which is the controlling shareholder in listed SOEs affiliated companies. Consequently, the effect of the independent director’s expertise in constraining earnings management is mitigated as demonstrated by an insignificant association between board expertise and earnings management. An alternative explanation for the inefficiency of board independence may point to the pre-selection of independent directors by the powerful CEO. It is argued that a CEO can manipulate the board composition and choose the "desirable" independent directors to monitor themselves. Second, a number of internal mechanisms, such as board size, board activities, and the separation of the roles of the CEO and chair are found to be significantly associated with discretionary accruals. This result suggests that there are advantages in having a large and active board in the Chinese setting. This can offset the disadvantages associated with large boards, such as increased bureaucracy, and hence, increase the constraining effects of a large and resourceful board. Third, factor analysis identifies two factors: CEO power and board power. CEO power is the factor which consists of CEO duality and turnover, and board power is composed of board size and board activity. The results of CEO power show that if a Chinese listed company has CEO duality and turnover at the same time, it is more likely to have a high level of earnings management. The significant and negative relationship between board power and accruals indicate that large boards with frequent meetings can be associated with low level of earnings management. Overall, the factor analysis suggests that certain governance mechanisms complement each other to become more efficient monitors of opportunistic earnings management. A combination of board characteristics can increase the negative association with earnings management. Fourth, the insignificant results between audit committees and earnings management in Chinese listed firms suggests that the Chinese regulator should strengthen the audit committee functions. This thesis calls for listed firms to disclose more information on audit committee composition and activities, which can facilitate future research on the Chinese audit committee’s monitoring role. Fifth, the interactive results between State ownership and board characteristics show that dominant State ownership has a moderating effect on board monitoring power as the State totally controls 42% of the issued shares. The high percentage of State ownership makes it difficult for the non-controlling institutional shareholders to challenge the State’s dominant status. As a result, the association between non-controlling institutional ownership and earnings management is insignificant in most situations. Lastly, firms audited by the international Big4 have lower abnormal accruals than firms audited by domestic Chinese audit firms. In addition, the inverse U-shape relationship between audit tenure and earnings quality demonstrates the changing effects of audit quality after a certain period of appointment. Furthermore, this thesis finds that listing in Hong Kong Stock Exchanges can be an alternative governance mechanism to discipline Chinese firms to follow strict Hong Kong listing requirements. Management of Hong Kong listed companies are exposed to the scrutiny of international investors and Hong Kong regulators. This in turn reduces their chances of conducting self-interested earnings manipulation. This study is designed to fill the gap in governance literature in China that is related to earnings management. Previous research on corporate governance mechanisms and earnings management in China is not conclusive. The current research builds on previous literature and provides some meaningful implications for practitioners, regulators, academic, and international investors who have investment interests in a transitional country. The findings of this study contribute to corporate governance and earnings management literature in the context of the transitional economy of China. The use of alternative measures for earnings management yields similar results compared with the accruals models and produces additional findings.

Actions for declaratory or injunctive relief by the Corporate Regulator under s 471B of the Corporations Act

This article by Ben McEniery discusses the matters a court will consider when leave to commence or proceed against a company in liquidation is sought not by a creditor seeking to prove a debt, but by the corporate regulator pursuing declaratory or injunctive relief.

Open source innovation in physical products : advantages and disadvantages, a corporate perspective

A better understanding of Open Source Innovation in Physical Product (OSIP) might allow project managers to mitigate risks associated with this innovation model and process, while developing the right strategies to maximise OSIP outputs. In the software industry, firms have been highly successful using Open Source Innovation (OSI) strategies. However, OSI in the physical world has not been studied leading to the research question: What advantages and disadvantages do organisations incur from using OSI in physical products? An exploratory research methodology supported by thirteen semi-structured interviews helped us build a seven-theme framework to categorise advantages and disadvantages elements linked with the use of OSIP. In addition, factors impacting advantage and disadvantage elements for firms using OSIP were identified as: „h Degree of openness in OSIP projects; „h Time of release of OSIP in the public domain; „h Use of Open Source Innovation in Software (OSIS) in conjunction with OSIP; „h Project management elements (Project oversight, scope and modularity); „h Firms. Corporate Social Responsibility (CSR) values; „h Value of the OSIP project to the community. This thesis makes a contribution to the body of innovation theory by identifying advantages and disadvantages elements of OSIP. Then, from a contingency perspective it identifies factors which enhance or decrease advantages, or mitigate/ or increase disadvantages of OSIP. In the end, the research clarifies the understanding of OSI by clearly setting OSIP apart from OSIS. The main practical contribution of this paper is to provide manager with a framework to better understand OSIP as well as providing a model, which identifies contingency factors increasing advantage and decreasing disadvantage. Overall, the research allows managers to make informed decisions about when they can use OSIP and how they can develop strategies to make OSIP a viable proposition. In addition, this paper demonstrates that advantages identified in OSIS cannot all be transferred to OSIP, thus OSIP decisions should not be based upon OSIS knowledge.

Leadership and the rise of the corporate psychopath: What can business schools do about the ‘snakes inside’?

Purpose: Leadership styles are reviewed and reassessed given recent research that links destructive leadership behaviours exhibited by unscrupulous executives with traits commonly identified as indicators of corporate psychopathy. Method/approach: A review of the literature describing the various theories dealing with the nature of leadership styles and the rise of interest in corporate psychopathy and destructive leadership. Implications: This paper offers a psychological perspective for future research which provides both impetus and additional support for further analysis and exploration of such leadership styles in the business environment. One distinct advantage of this extrapolation is the articulation of insights into aspects of decision making by leaders, providing further insight into the formulation of leadership development programs in organisations and courses in business schools training future leaders.

Environmental reporting and its relation to corporate environmental performance

This study examines how both the level and the nature of environmental information voluntarily disclosed by Australian firms relate to their underlying environmental performance. Disclosure is scored using an index developed by Clarkson et al. (2008) based on Global Reporting Initiative (GRI) Guidelines and the environmental performance measure is based on emission data available from the National Pollutant Inventory (NPI). The sample consists of 51 firms that reported to the NPI in both 2002 and 2006. The findings are as follows. First, descriptive statistics indicate that while there was modest improvement in disclosure between 2002 and 2006, the highest disclosure score obtained was just slightly in excess of 50% of the maximum available based on the GRI Guidelines. Second, the results consistently indicate that not only do firms with a higher pollution propensity disclose more environmental information; they also rely on disclosures that the GRI views as inherently more objective and verifiable. Taken together, these results suggest that concerns regarding the reliability of voluntary environmental disclosures in the Australian context remain valid and thereby potentially signal a need for both enhanced mandatory reporting requirements and improved enforcement. In this regard, our study also informs regulatory policy on mandatory disclosures of environmental performance.

Private equity bids in Australia : an exploratory study

In this study, we provide an insight into how private equity players choose their targets and the bid arrangements they prefer. We test our expectations of the unique features of private equity targets using a sample of 23 listed private equity target firms during 2001–2007. We find, relative to a benchmark sample of 81 corporate targets matched by year and industry, the private equity target firms to be larger, more profitable, use their assets more efficiently, more highly levered and have greater cash flow. Multivariate testing indicates that private equity targets have relatively greater financial slack, greater financial stability, greater free cash flow and lower measurable growth prospects. All conclusions are found to be robust to a control sample of 502 takeover bids during 2001–2007.

SOA for business networks - service delivery framework

The next generation of SOA needs to scale for flexible service consumption, beyond organizational boundaries and current B2B applications, into communities, eco-systems, and business networks. In the wider and, ultimately, global settings, new capabilities are needed so that business partners can efficiently and reliably enable, adapt, and expose services where they can be discovered, ordered, consumed, metered, and paid for, through new applications and opportunities, driven by third parties in the global "village". This trend is already underway, in different ways, through various early adopter market segments. For the small medium enterprises segment, Google, Intuit-Microsoft, and others have launched appstores, through which an open-ended array of hosted applications are sourced from the development community and procured as maketplace commondities. In the corporate sector, the marketplace model and business network hubs are being put in place on top of connectivity and network orchestration investments for capitalizing services as tradable assets, seen in banking/finance (e.g. American Express Intelligent Marketplace), logistics (e.g., the E2open hub), and the public sector (e.g., UK DirectGov whole-of-government citizen services delivery).

Throwing out the baby (boomers) with the bathwater : corporate sagacity or business blunder

This paper will focus on the group of people who were born between 1946 and 1962 immediately after the Second World War when servicemen and women returned from the forces and started families. They have been named the baby boomers because of their numbers. In Australia it is estimated that there are four million baby boomers who are approaching retirement age. The paper raises the question of whether the attitudes we have about older workers need to change and mature. Evidence for questioning entrenched myths about older staff in the work force will be discussed.

Corporate, risk, mining camps and knowledge/power

Australia is currently in the midst of a major resources boom. However the benefits from the boom are unevenly distributed, with state governments collecting billions in royalties, and mining companies billions in profits. The costs are borne mostly at a local level by regional communities on the frontier of the mining boom, surrounded by thousands of men housed in work camps. The escalating reliance on non–resident workers housed in camps carries significant risks for individual workers, host communities and the provision of human services and infrastructure. These include rising rates of fatigue–related death and injuries, rising levels of alcohol–fuelled violence, illegally erected and unregulated work camps, soaring housing costs and other costs of living, and stretched basic infrastructure undermining the sustainability of these towns. But these costs have generally escaped industry, government and academic scrutiny. This chapter directs a critical gaze at the hopelessly compromised industry–funded research vital to legitimating the resource sector’s self–serving knowledge claims that it is committed to social sustainability and corporate responsibility. The chapter divides into two parts. The first argues that post–industrial mining regimes mask and privatise these harms and risks, shifting them on to workers, families and communities. The second part links the privatisation of these risks with the political economy of privatised knowledge embedded in the approvals process for major resource sector projects.

Corporate social and environmental responsibility in relation to the agricultural sector and the food supply chain : a Case Study of Waitrose

Waitrose has a strong commitment to organic farming but also uses products from 'conventional' farms. At the production stage, Waitrose own-label products are fully traceable, GM-free and all suppliers undergo a detailed assessment programme based on current best practice. Crop suppliers to Waitrose operate an authenticity programme to certify that each assignment is GM-free and produce is screened for pesticide residues. Waitrose sources conventional crops grown from 'Integrated Crop Management Systems' (ICMS) using best horticultural practices. The 'Assured Product' scheme regulates all UK produce to ICMS standards and these audits are being extended worldwide. Business is withdrawn from suppliers who fail the audit. In relation to this, Waitrose has increased its Fairtrade range as in its view 'Buying these products provides direct additional benefit to workers in the developing countries where they are produced and assists marginal producers by giving them access to markets they would not otherwise have'. Currently, Waitrose is developing its own sustainable timber assessment criteria. For livestock, protocols are in place to ensure that animals are reared under the 'most natural conditions possible' and free range produce is offered where animals have access to open space although some produce is not from free-range animals. Waitrose also use a 'Hazards Analysis Critical Points' system to identify food safety hazards that occur at any stage from production to point of sale and to ensure that full measures are in place to control them. In addition, mechanisms have been implemented to reduce fuel use and hence reduce CO2 emissions in the transport of products and staff, and to increase the energy use efficiency of refrigeration systems which account for approximately 60% of Waitrose energy use.

Corporate profit and impression management in developing markets

In this study, we examine how organisations in Fiji communicate or legitimise their profit. We base the need for understanding this phenomenon on the following premise. Organisations are part of a wider society, and in competition for scarce resources. Organisations obtain the rights to consume resources upon conception, but must continually legitimise their rights of existence and the need to access the resources. Legitimacy is the ability to continue to justify one’s authority to exist in a society. Organisations rights to resources are contractual, and have a moral obligation to act in a responsible manner and justify their outcomes, actions, and activities to external stakeholders. Such justifications would be an attempt at legitimizing their existence by some form of impression management. Impression management refers to the process by which individuals attempt to influence the impression of others (Melo et al. 2009). In corporate reporting, impression management occurs when management selects, display, and presents that information in a manner that distorts readers’ perceptions of corporate achievements (Neu 1991; Patten 2002), and is managed best through disclosures (O’Donovan 2002). In developing economies, there is significant Government protection that creates near-monopoly sectors and industries. The rendered protection permits organisations to provide essential services to the community at reasonable costs. Organisations in these sectors and industries have an ominous need to legitimise their position and actions. The bond between the organisations and the society is much stronger, making organisations devote more effort in communicating their activities. Protection permits organisations to make reasonable profits to sustain their operations. Society may not accept abnormal profits from operational efficiencies. Profit is fundamental to the society’s perception of an organisation, amplifying the need for the firm to justify a level of profit. Abnormal profit for organisations construes bad news, and organisations would make relevant disclosures to manage stakeholder impressions on profit (Patten 2002). Organisations can manage impressions by disclosing information in a particular way. That is, organisations would want to put the impression that the abnormal profit is justified and the society will obtain its benefits in future. Such form of impression management requires unambiguous disclosure of information. The readability of corporate disclosures is an important indicator of organisational abnormal profit-related legitimacy efforts in developing economies.

Corporate governance and misappropriation

This study examines the occurrence of misappropriation-type fraud within Australian listed firms and the relation between the incidence of this type of fraud and a firm's governance strength. We measure governance strength using factors relating to traditional corporate governance, such as board composition, CEO duality, and audit committee composition, as well as factors relating to information technology governance. In our study, we use actual dollar amount of fraud reported by listed companies responding to the 2004 KPMG Fraud Survey as one of three different misappropriation measures and publicly available firm-specific data to measure the other variables in the model. Our study found that where the chief executive officer (CEO) also holds the position of chairperson of the board of directors, the likelihood of fraud increases. We also find that the greater the number of independent directors on the audit committee, the lower the level of fraud. Taken together, these results are particularly encouraging as they provide support for regulatory bodies such as the Australian Stock Exchange (ASX) and the Australian Securities and Investment Commission (ASIC), which place considerable emphasis on the importance of establishing good corporate governance practices. The study provides empirical evidence that employing good corporate governance reduces the risk of the misappropriation of assets.