Corporate governance and risk management : the role of risk management and compensation committees

This paper examines the role of compensation and risk committees in managing and monitoring the risk behaviour of Australian financial firms in the period leading up to the global financial crisis (2006–2008). This empirical study of 711 observations of financial sector firms demonstrates how the coordination of risk management and compensation committees reduces information asymmetry. The study shows that the composition of the risk and compensation committees is positively associated with risk, which, in turn, is associated with firm performance. More importantly, information asymmetry is reduced when a director is a member of both the risk and compensation committees which moderate the negative association between risk and firm performance for firms with high risk.

Essays on Corporate Governance and the Quality of Disclosed Earnings: Across Transitional Europe

A growing body of empirical research examines the structure and effectiveness of corporate governance systems around the world. An important insight from this literature is that corporate governance mechanisms address the excessive use of managerial discretionary powers to get private benefits by expropriating the value of shareholders. One possible way of expropriation is to reduce the quality of disclosed earnings by manipulating the financial statements. This lower quality of earnings should then be reflected by the stock price of firm according to value relevance theorem. Hence, instead of testing the direct effect of corporate governance on the firm’s market value, it is important to understand the causes of the lower quality of accounting earnings. This thesis contributes to the literature by increasing knowledge about the extent of the earnings management – measured as the extent of discretionary accruals in total disclosed earnings - and its determinants across the Transitional European countries. The thesis comprises of three essays of empirical analysis of which first two utilize the data of Russian listed firms whereas the third essay uses data from 10 European economies. More specifically, the first essay adds to existing research connecting earnings management to corporate governance. It testifies the impact of the Russian corporate governance reforms of 2002 on the quality of disclosed earnings in all publicly listed firms. This essay provides empirical evidence of the fact that the desired impact of reforms is not fully substantiated in Russia without proper enforcement. Instead, firm-level factors such as long-term capital investments and compliance with International financial reporting standards (IFRS) determine the quality of the earnings. The result presented in the essay support the notion proposed by Leuz et al. (2003) that the reforms aimed to bring transparency do not correspond to desired results in economies where investor protection is lower and legal enforcement is weak. The second essay focuses on the relationship between the internal-control mechanism such as the types and levels of ownership and the quality of disclosed earnings in Russia. The empirical analysis shows that the controlling shareholders in Russia use their powers to manipulate the reported performance in order to get private benefits of control. Comparatively, firms owned by the State have significantly better quality of disclosed earnings than other controllers such as oligarchs and foreign corporations. Interestingly, market performance of firms controlled by either State or oligarchs is better than widely held firms. The third essay provides useful evidence on the fact that both ownership structures and economic characteristics are important factors in determining the quality of disclosed earnings in three groups of countries in Europe. Evidence suggests that ownership structure is a more important determinant in developed and transparent countries, while economic determinants are important determinants in developing and transitional countries.

Corporate governance and compliance with International Financial Reporting Standards (IFRSs):evidence from two MENA stock exchanges

This study examines the influence of corporate governance structures on the levels of compliance with IFRSs disclosure requirements by companies listed on the stock exchanges of two leading MENA (Middle East and North Africa) countries, Egypt and Jordan. This study employs a cross-sectional analysis of a sample of non-financial companies listed on the two stock exchanges for the fiscal year 2007. Using an unweighted disclosure index, the study measures the levels of compliance by companies listed on the two stock exchanges investigated.Univariate and multivariate regression analyses are used to estimate the relationships proposed in the hypotheses. In addition, the study uses semi-structured interviews in order to supplement the interpretation of the findings of the quantitative analyses. An innovative theoretical foundation is deployed, in which compliance is interpretable through three lenses - institutional isomorphism theory, secrecy versus transparency (one of Gray’s accounting sub-cultural values), and financial economics theories. The study extends the financial reporting literature, cross-national comparative financial disclosure literature, and the emerging markets disclosure literature by carrying out one of the first comparative studies of the above mentioned stock exchanges. Results provide evidence of a lack of de facto compliance (i.e., actual compliance) with IFRSs disclosure requirements in the scrutinised MENA countries. The impact of corporate governance mechanisms for best practice on enhancing the extent of compliance with mandatory IFRSs is absent in the stock exchanges in question. The limited impact of corporate governance best practice is mainly attributed to the novelty of corporate governance in the region, a finding which lends support to the applicability of the proposed theoretical foundation to the MENA context. Finally, the study provides recommendations for improving de facto compliance with IFRSs disclosure requirements and corporate governance best practice in the MENA region and suggests areas for future research.

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.

Essays on the Costs and Benefits of Large Shareholders in Corporate Governance (summary section only)

“Corporate governance deals with the ways in which suppliers of finance to firms assure themselves of getting a return on their investment” (Shleifer and Vishny (1997, p. 737). According to La Porta et al. (1999), research in corporate finance relevant for most countries should focus on the incentives and capabilities of controlling shareholders to treat themselves preferentially at the expense of minority shareholders. Accordingly, this thesis sets out to answer a number of research questions regarding the role of large shareholders in public firms that have received little attention in the literature so far. A common theme in the essays stems from the costs and benefits of individual large-block owners and the role of control contestability from the perspective of outside minority shareholders. The first essay empirically examines whether there are systematic performance differences between family controlled and nonfamily controlled firms in Western Europe. In contrast to the widely held view that family control penalizes firm value, the essay shows that publicly traded family firms have higher performance than comparable firms. In the second essay, we present both theoretical and empirical analysis on the effects of control contestability on firm valuation. Consistent with the theoretical model, the empirical results show that minority shareholders benefit from a more contestable control structure. The third essay explores the effects of individual large-block owners on top management turnover and board appointments in Finnish listed firms. The results indicate that firm performance is an important determinant for management and board restructurings. For certain types of turnover decisions the corporate governance structure influences the performance / turnover sensitivity. In the fourth essay, we investigate the relation between the governance structure and dividend policy in Finnish listed firms. We find evidence in support of the outcome agency model of dividends stating that lower agency conflicts should be associated with higher dividend payouts.

Corporate Governance in European Banks: Essays on Bank Ownership

Banks are important as they have a central role in the financial system, where funds are channelled either through financial intermediaries, such as banks, or through financial markets, hence promoting growth in any economy. Recently, we have been reminded of the drawbacks of the central role of banks. The current financial crisis, which started out as a sub-prime mortgage crisis in the US, has become a global financial crisis with substantial impact on the real economy in many countries. Some of the roots to the current financial crisis can be sought in the changing role of banks and in bank corporate governance. Moreover, the substantial revitalising measures taken have been justified by the central role of banks. Not only are banks important, they are also very special. The fact that banks are regulated in conjunction with greater opacity, make bank corporate governance different from corporate governance in non-bank companies. Surprisingly little is, however, known about bank corporate governance, in particularly, in a European setting. Hence, the objective of this doctoral thesis is to provide new insights in this research area by examining banks from 37 different European countries. Each of the three essays included in the doctoral thesis examines a particular aspect of bank corporate governance. In the first essay the interaction between the regulatory environment a bank operates in and its ownership structure is explored. Indicators of the severity of the moral hazard problem induced by the deposit insurance system and implicit too-big-to-fail government guarantee, particular features of deposit insurance systems as well as legal protection of shareholders, legal origin of a country and level of integration to the European community are used in the analysis. The empirical findings confirm previous findings on the link between legal protection of shareholders and ownership structure. Moreover, they show that differences in deposit insurance system features can explain some of the differences in ownership structure across European banks. In the second essay the impact of management and board ownership on the profitability of banks with different strategy is examined. The empirical findings suggest that the efficiency of these two particular corporate governance mechanisms varies with the characteristics of the agency problem faced by the bank. More specifically, management ownership is important in opaque non-traditional banks, whereas board ownership is important in traditional banks, where deposit insurance reduces the monitoring incentives of outsiders. The higher profitability does, however, go together with higher risk. In the third essay the profitability and risk of commercial, savings and cooperative banks are compared. The empirical findings suggest that distinct operational and ownership characteristics rather than only the mere fact that a bank is a commercial, savings or cooperative bank explain the profitability and risk differences. The main insight from the three essays is that a number of different aspects should be addressed simultaneously in order to give the complexity of bank corporate governance justice.

Corporate Governance Mechanisms and Firm Performance:Evidence from Finland

This paper examines the association between corporate governance attributes and firm performance of Finnish firms during 1990 – 2000. The empirical results suggest that corporate governance matters for firm performance. First, univariate test results indicate that firms characterized by a high (efficient) level of corporate governance have delivered greater stock returns, are higher valued based on the measure of Tobin’s Q, and exhibit higher ratios of cash flow to assets, on average, in comparison to their counterparts characterized by a low (inefficient) level of corporate governance. Second, controlling for a number of well-known determinants of stock returns, we find evidence that firms categorized by inefficient corporate governance have delivered inferior returns to shareholders during the investigation period. Finally, after controlling for several common determinants of firm value, we find that firms characterized by efficient corporate governance have been valued higher during the investigation period, measured by Tobin’s Q.

Growth and public finance in Bihar

This paper explores the causal links between the role of public finance and Bihar's growth and development in the last decade; and argues that these links are tenuous. Bihar's growth acceleration precedes the ‘policy reforms' in public finance based on the ‘good governance' agenda initiated since 2005-06. However, the constraints on sustaining efforts to close Bihar's development gap with the rest of India stems from the nature of the growth process in its regional, sectoral and social dimensions and the contradictory means and ends of the ‘policy reforms' in public finance. Together, this has not only prevented the economic growth to add to public coiffeurs of the state but also occluded the role of tax institutions.

Corporate governance, managers' independence, exporting, and performance of firms in transition economies

Using data on 157 large companies in Poland and Hungary, this paper employs Bayesian structural equation modeling to examine the relations among corporate governance, managers' independence from owners in terms of strategic decision making, exporting, and performance. Managers' independence is positively associated with firms' financial performance and exporting. In turn, the extent of managers' independence is negatively associated with ownership concentration, but positively associated with the percentage of foreign directors on the firm's board. We interpret these results as indicating that concentrated owners tend to constrain managerial autonomy at the cost of the firm's internationalization and performance, but board participation of foreign stakeholders enhances the firm's export orientation and performance by encouraging executives' decision-making autonomy.

State control and corporate governance in transition economies:25 years on from 1989

Research Question/Issue - Which forms of state control over corporations have emerged in countries that made a transition from centrally-planned to marked-based economies and what are their implications for corporate governance? We assess the literature on variation and evolution of state control in transition economies, focusing on corporate governance of state-controlled firms. We highlight emerging trends and identify future research avenues. Research Findings/Insights - Based on our analysis of more than 100 articles in leading management, finance, and economics journals since 1989, we demonstrate how research on state control evolved from a polarized approach of public–private equity ownership comparison to studying a variety of constellations of state capitalism. Theoretical/Academic Implications - We identify theoretical perspectives that help us better understand benefits and costs associated with various forms of state control over firms. We encourage future studies to examine how context-specific factors determine the effect of state control on corporate governance. Practitioner/Policy Implications - Investors and policymakers should consider under which conditions investing in state-affiliated firms generates superior returns.

Climate change-related corporate governance information : an explanation of the difference between the supply of and demand for such information

This study investigates the gap between the climate change-related corporate governance information being disclosed by companies, and the information sought by stakeholders. To accomplish this objective we utilised previous research on stakeholder demand for information, and we conducted in-depth interviews with six corporate representatives from major Australian emission-intensive companies. Having gained and documented a rich insight into the potential factors responsible for the current gap in disclosure we find that the existence of an expectations gap; the perceived cost of providing commercially sensitive information; the limited accountability being accepted by the corporate managers; and, a lack of stakeholder pressure together contribute to the lack of disclosure. In highlighting the gap in disclosure, this study suggests strategies to reduce the gap in climate change-related corporate governance disclosures.

Statutory-backed continuous disclosure regime and corporate disclosure behaviour : does corporate governance matter?

Since 1 December 2002, the New Zealand Exchange’s (NZX) continuous disclosure listing rules have operated with statutory backing. To test the effectiveness of the new corporate disclosure regime, we compare the change in quantity of market announcements (overall, non-routine, non-procedural and external) released to the NZX before and after the introduction of statutory backing. We also extend our study in investigating whether the effectiveness of the new corporate disclosure regime is diminished or augmented by corporate governance mechanisms including board size, providing separate roles for CEO and Chairman, board independence, board gender diversity and audit committee independence. Our findings provide a qualified support for the effectiveness of the new corporate disclosure regime regarding the quantity of market disclosures. There is strong evidence that the effectiveness of the new corporate disclosure regime was augmented by providing separate roles for CEO and Chairman, board gender diversity and audit committee independence, and diminished by board size. In addition, there is significant evidence that share price queries do impact corporate disclosure behaviour and this impact is significantly influenced by corporate governance mechanisms. Our findings provide important implications for corporate regulators in their quest for...

Corporate governance and securities class actions

This study investigates the governance attributes of firms that have been subject to securities class actions (SCAs). There has been a recent sizable increase in the number of firms subject to SCAs in Australia. We examine a sample of firms that have been subject to SCAs due to disclosure breaches and match the firms by industry and size to a control sample. First, we examine the compliance culture of the SCA firms via the frequency of Australian Securities Exchange (ASX)queries of the firm and find that the frequency of ASX queries is positively associated with the occurrence of a SCA. Secondly, we provide evidence that SCA firms exhibit weaker levels of corporate governance than the matched control sample. In addition, we contribute to the understanding of firms subject to SCAs and their corporate governance attributes. Our results suggest the presence of a nomination committee may be associated with higher agency costs and that the influence of CEO duality may reduce the effectiveness of a nomination committee.