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.

Disclosure of proxy voting information by Australian managed investment schemes

The US Securities and Exchange Comission requires registered management investment companies to disclose how they vote proxies relating to portfolio securities they hold. The primary purpose of this rule is to enable fund investors to monitor the role of institutional shareholders in the corporate governance practices of public companies. In Australia, despite reform proposals, there are no regulations requiring institutional investors to report proxy voting procedures and practises. There is little evidence of voluntary disclosure of proxy voting by Australian managed investment schemes in equities, indicating that there are costs involved in such disclosure.

Basel III new capital requirements, impacts and bank behavior

For some years, researchers could not find a clear effect of capital adequacy on the risk profile of banks, as shareholders could increase the riskiness of the assets (qualitative effect), crowding-out the effect of reduced leverage (volume effect). Some shareholders might have the will to increase the riskiness of the assets, but they may lack the power to do so. Considering only ”powerful” shareholders, definitive conclusions were drawn but with constant ownership profile. In this paper I investigate whether there is a significant change in the type of shareholders in response to regulatory capital shocks and, if so, will the banking system be in the hands of more “desired” shareholders. I find that ownership profile responds to a regulatory shock, changing the risk appetite of the ruling power at the bank. I find more banks and the government in the ownership of undercapitalised banks and much less institutional shareholders and free float. I claim that these new shareholders may not the desired ones, given the objective of the regulatory change, as they are associated with a preference for more leverage. One possible explanation for this crowding-out effect is that regulators are trying to contain idiosyncratic risk (more linked to the riskiness of the assets) with a rule that contains systematic risk (capital adequacy). This has a distorting effect on ownership. Another insight can be drawn from the tests: supervisors should be aware of significant ownership movements that cause the crowding-out.

Market reactions to changes in the Nasdaq-100 Index membership

We examine stock market reactions around the Nasdaq-100 Index reconstitutions. We find a symmetric and transitory price response accompanied by a significant increase in trading volume on the effective date. Firms added to the Nasdaq-100 Index experience significant increases in institutional ownership, the number of market makers, and the number of shareholders. In contrast, firms removed from the index show significant decreases in the number of institutional shareholders. Additions to the Nasdaq-100 Index also show significant increases in four liquidity measures, whereas deletions demonstrate significant decreases in two liquidity measures. These changes in liquidity are related to the abnormal return on the announcement day. Taken together, the results suggest support for the price pressure, liquidity, and investor awareness hypotheses.

L’activisme actionnarial : une perspective canadienne

Si l’on considère que le rôle des actionnaires varie dans un continuum qui s’étend de la passivité à l’une des extrémités jusqu’au contrôle total de la société dans laquelle ils ont investi, on peut affirmer que si, à une certaine époque, les investisseurs institutionnels ont privilégié une certaine forme d’apathie rationnelle, cette réalité a évolué. Loins d’avoir atteint l’autre extrémité du spectre, on doit néanmoins constater que désormais, les dirigeants et les actionnaires dominants doivent faire face à un nombre limité d’actionnaires institutionnels qui se connaissent et détiennent une part importante des titres d’une société. Malgré la présence d’obstacles légaux et organisationnels qui entravent toujours aujourd’hui l’exercice des droits des actionnaires, il semble que les interventions des investisseurs institutionnels aient transcendé la règle de la majorité en ayant recours à des moyens inusités pour diminuer les risques d’opportunisme au sein des sociétés ouvertes. En effet, si l’activisme des investisseurs institutionnels est un phénomène complexe qui prend des formes multiples souvent opaques et qui est difficile à cerner avec précision, il est néanmoins possible d’affirmer que ce mécanisme de gouvernance joue un rôle des plus importants en contribuant à limiter les coûts d’agence découlant de l’extraction de bénéfices privés par les dirigeants et les actionnaires dominants. En effet, au Canada, où la structure de propriété d’une majorité de sociétés est concentrée, l’activisme actionnarial permet de faire contrepoids au vaste pouvoir discrétionnaire des dirigeants ainsi qu’à l’influence qu’exercent les actionnaires dominants afin d’assurer une certaine forme de protection aux droits des actionnaires minoritaires.

Disclosure of proxy voting information by Australian managed investment schemes

The US Securities and Exchange Commission requires registered management investment companies to disclose how they vote proxies relating to portfolio securities they hold. The primary purpose of this rule is to enable fund investors to monitor the role of institutional shareholders in the corporate governance practices of public companies. In Australia, despite reform proposals, there are no regulations requiring institutional investors to report proxy voting procedures and practices. There is little evidence of voluntary disclosure of proxy voting by Australian managed investment schemes in equities, indicating that there are costs involved in such disclosure.

Shareholder values, not shareholder value : the role of 'ethical funds' and 'ethical entrepreneurs' in connecting shareholders' values with their investments

This article rebuts the still-common assumption that managers of capitalist entities have a duty, principally or even exclusively, to maximise the monetary return to investors on their investments. It argues that this view is based on a misleadingly simplistic conception of human values and motivation. Not only is acting solely to maximise long-term shareholder value difficult, it displays, at best, banal single-mindedness and, at worst, sociopathy. In fact, real investors and managers have rich constellations of values that should be taken account of in all their decisions, including their business decisions. Awareness of our values, and public expression of our commitment to exemplify them, make for healthier investment and, in the long term, a healthier corporate world. Individuals and funds investing on the basis of such values, in companies that express their own, display humanity rather than pathology. Preamble I always enjoyed the discussions that Michael Whincop and I had about the interaction of ethics and economics. Each of us could see an important role for these disciplines, as well as our common discipline of law. We also shared an appreciation of the institutional context within which much of the drama of life is played out. In understanding the behaviour of individuals and the choices they make, it seemed axiomatic to each of us that ethics and economics have a lot to say. This was also true of the institutions in which they operate. Michael ·had a strong interest in 'the new institutional economics' I and I had a strong interest in 'institutionalising ethics' right through the 1990s.' This formed the basis of some fascinating and fruitful discussions. Professor Charles Sampford is Director, Key Centre for Ethics, Law, Justice and Governance, Foundation Professor of Law at Griffith University and President, International Institute for Public Ethics.DrVirginia Berry is a Research Fellow at theKey Centre for Ethics, Law,Justice andGovernance, Griffith University. Oliver Williamson, one of the leading proponents of the 'new institutional economics', published a number of influential works - see Williamson (1975, 1995,1996). Sampford (1991),' pp 185-222. The primary focus of discussions on institutionalising ethics has been in public sectorethics: see, for example, Preston and Sampford (2002); Sampford (1994), pp 114-38. Some discussion has, however, moved beyond the public sector to include business - see Sampford 200408299

The impact of the Malaysian code on corporate governance: compliance, institutional investors and stock performance

In 2001, the Malaysian Code on Corporate Governance (MCCG) became an integral part of the Bursa Malaysia Listing Rules, which requires all listed firms to disclose the extent of compliance with the MCCG. Our panel analysis of 440 firms from 1999 to 2002 finds that corporate governance reform in Malaysia has been successful, with a significant improvement in governance practices. The relationship between ownership by the Employees Provident Fund (EPF) and corporate governance has strengthened during the period subsequent to the reform, in line with the lead role taken by the EPF in establishing the Minority Shareholders Watchdog Group. The implementation of MCCG has had a substantial effect on shareholders' wealth, increasing stock prices by an average of about 4.8%. Although there is no evidence that politically connected firms perform better, political connections do have a significantly negative effect on corporate governance, which is mitigated by institutional ownership.

Institutional investors, risk/return and corporate governance : practical lessons from the Global Financial Crisis

The global grown in institutional investors means that firms can no longer ignore their influence in capital markets. However, not all institutional investors have the same motives to influence the firms they invest in. Institution investors' ability to influence management depends on the size of their investment and whether they have any business relations with the firm. Using a sample of Australian firms from 2006 to 2008, our empirical results show that the proportion of a company's shares held by institutional investors is positively associated with firm governance ratings, risk and profitability. This study shows that a positive association between risk and return is associated with large active institutional ownership, which we interpret as shareholders with sufficient power to pressure management to increase short-term profits.

Accounting information systems as institutional carriers: a case study of regulatory compliance in UK asset management houses

Previously, governments have responded to the impacts of economic failures and consequently have developed more regulations to protect employees, customers, shareholders and the economic wellbeing of the state. Our research addresses how Accounting Information Systems (AIS) may act as carriers for institutionalised practices associated with maintaining regulatory compliance within the context of UK Asset Management Houses. The AIS was found to be a strong conduit for institutionalized compliance related practices, utilising symbolic systems, relational systems, routines and artefacts to carry approaches relating to regulative, normative and cultural-cognitive strands of institutionalism. Thus, AIS are integral to the development and dissipation of best practice for the management of regulatory compliance. As institutional elements are clearly present we argue that AIS and regulatory compliance provide a rich context to further institutionalism. Since AIS may act as conduits for regulatory approaches, both systems adopters and clients may benefit from actively seeking to codify and abstract best practices into AIS. However, the application of generic institutionalized approaches, which may be applied across similar organizations, must be tempered with each firm’s business environment and associated regulatory exposure. A balance should be sought between approaches specific enough to be useful but generic enough to be universally applied.

Investigation of institutional investors’ responsible investment practices in UK

The focus of Corporate Governance is shifting from the role of directors to active ownership. Based on their fiduciary duty to other shareholders, it is believed that institutional investors have an important role to play in this regard. However, the Pension Funds and the Sovereign Wealth Organisations are not driven by the same set of objectives. In addition, Environmental Social and Governance (ESG) issues in investment decision-making are now becoming more important and they are capable of becoming the mainstream in the future. However, there are widespread variations in perception of fiduciary responsibilities, ESG issues appraisal, as well as the strategies adopted by institutional investors on shareholder engagement as responsible investors. Responsible Investment market is largely driven by institutional investors and they are expected to continue to lead the way. This research work investigates the role of the main asset owners and their advisors in responsible investment practices in the UK. It adopts a qualitative approach using semi-structured interviews, questionnaire and meetings observations. Gathered data is analysed using grounded theory and the findings highlight the perception of the various investor groups to corporate governance. The research work contributes to the body of knowledge by assessing the corporate governance perspectives of the various classes of institutional investors which may have practical implications for other countries.

Doing which work? A practice approach to institutional pluralism

This chapter takes a social theory of practice approach to examining institutional work; that is, how institutions are created, maintained, and disrupted through the actions, interactions, and negotiations of multiple actors. We examine alternative approaches that organizations use to deal with institutional pluralism based on a longitudinal real-time case study of a utility company grappling with opposing market and regulatory logics over time. These two logics required the firm to both mitigate its significant market power and also maintain its commercially competitive focus and responsiveness to shareholders. Institutional theorists have long acknowledged that institutions have a central logic (Friedland & Alford, 1991) or rationality (DiMaggio & Powell, 1983; Scott, 1995/2001; Townley, 2002), comprising a set of material and symbolic practices and organizing principles that provide logics of action for organizations and individuals, who then reproduce the institutions through their actions (Glynn & Lounsbury, 2005; Suddaby & Greenwood, 2005). Despite a monolithic feel to much institutional theory, in which a dominant institutional logic appears to prevail, institutional theorists also acknowledge the plurality of institutions (e.g. Friedland & Alford, 1991; Kraatz & Block, 2008; Lounsbury, 2007; Meyer & Rowan, 1977; Whittington, 1992). While these pluralistic institutions may be interdependent, they are not considered to coexist in harmony; “There is no question but that many competing and inconsistent logics exist in modern society” (Scott, 1995: 130).

Evaluating the impact of institutional logic on the corporate Internet reporting by Egyptian listed companies

This study explores the institutional logic(s) governing the Corporate Internet Reporting (CIR) by Egyptian listed companies. In doing so, a mixed methods approach was followed. The qualitative part seeks to understand the perceptions, believes, values, norms, that are commonly shared by Egyptian companies which engaged in these practices. Consequently, seven cases of large listed Egyptian companies operating in different industries have been examined. Other stakeholders and stockholders have been interviewed in conjunction with these cases. The quantitative part consists of two studies. The first one is descriptive aiming to specify whether the induced logic(s) from the seven cases are commonly embraced by other Egyptian companies. The second study is explanatory aiming to investigate the impact of several institutional and economic factors on the extent of CIR, types of the online information, quality of the websites as well as the Internet facilities. Drawing on prior CIR literature, four potential types of logics could be inferred: efficiency, legitimacy, technical and marketing based logics. In Egypt, legitimacy logic was initially embraced in the earlier years after the Internet inception. latter, companies confronted radical challenges in their internal and external environments which impelled them to raise their websites potentialities to defend their competitive position; either domestically or internationally. Thus, two new logics emphasizing marketing and technical perspectives have emerged, in response. Strikingly, efficiency based logic is not the most prevalent logic driving CIR practices in Egypt as in the developed countries. The empirical results support this observation and show that almost half of Egyptian listed companies 115 as on December 2010 possessed an active website, half of them 62 disclosed part of their financial and accounting information, during December 2010 to February 2011. Less than half of the websites 52 offered latest annual financial statements. Fewer 33(29%) websites provided shareholders and stock information or included a separate section for corporate governance 25 (22%) compared to 50 (44%) possessing a section for news or press releases. Additionally, the variations in CIR practices, as well as timeliness and credibility were also evident even at industrial level. After controlling for firm size, profitability, leverage, liquidity, competition and growth, it was realized that industrial companies and those facing little competition tend to disclose less. In contrast, management size, foreign investors, foreign listing, dispersion of shareholders and firm size provided significant and positive impact individually or collectively. In contrast, neither audit firm, nor most of performance indicators (i.e. profitability, leverage, and liquidity) did exert an influence on the CIR practices. Thus, it is suggested that CIR practices are loosely institutionalised in Egypt, which necessitates issuing several regulative and processional rules to raise the quality attributes of Egyptian websites, especially, timeliness and credibility. Beside, this study highlights the potency of assessing the impact of institutional logic on CIR practices and suggests paying equal attention to the institutional and economic factors when comparing the CIR practices over time or across different institutional environments in the future.