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Information Asymmetry, Corporate Governance, and Shareholder Wealth: Evidence from Unfaithful Disclosures of Korean Listed Firms
Abstract
In this study, we investigate firms that the Korea Exchange claims have made unfaithful disclosures. We find that such firms experience significantly negative stock price returns, suggesting that their managements exploit the information asymmetry involved in unfaithful disclosures to expropriate shareholder wealth. Our evidence shows that firms with higher management ownership experience a smaller decline in stock returns following notices of unfaithfulness, implying that corporate governance could improve the overall information environment and thus eventually help mitigate the information asymmetry associated with investors’ lack of timely and correct information. An evaluation of idiosyncratic volatility, a direct measurement of information asymmetry, confirms our results.
... Em âmbito empresarial, a assimetria de informação acontece quando os executivos ou gestores possuem informações privadas e privilegiadas sobre o potencial econômico da empresa, enquanto que os investidores podem possuir informações relativamente vagas e limitadas (HAN et al., 2014). Diante disso, algumas pesquisas buscaram definir mecanismos que possivelmente auxiliariam na diminuição da assimetria de informação. ...
... De acordo com Álvares, Giacometti e Gusso (2008), o CA é visto pelos investidores como um mecanismo de governança corporativa que concede credibilidade às empresas, uma vez que sugere que os gestores estão atendendo de forma ampla e confiável as suas funções, e, agindo em prol da empresa como um todo. Entretanto, para que o CA cumpra de maneira eficaz com sua função de monitoramento e contribua de forma significativa na organização, é necessário que este possua algumas características que refletem a sua qualidade, as quais são: o número de membros do comitê (IBGC, 2009); membros independentes à organização (KLEIN, 2002;LIN;LI;YANG, 2006;IBGC, 2009) e; membros com expertise financeira ou contábil (JIRAPORN;SINGH;LEE, 2009;IBGC, 2009 WAHLEN, 1999;XIE;DADALT, 2003;DEFOND;HAN;HU, 2005), como uma forma de melhorar a qualidade dos relatórios financeiros, ou de diminuir o gerenciamento de resultados (FELO;KRISHNAMURTHY;SOLIERI, 2003;MÉNDEZ;GÁRCIA, 2007;PARSA et al., 2007). ...
... De acordo com Han et al. (2014), o CA é percebido como um mecanismo de governança que visa diminuir a assimetria de informação por meio de uma abordagem de monitoramento do comportamento dos gestores. Entretanto, para os autores, ainda existem informações "escondidas" pela administração, que nem sempre são facilmente detectadas pelo CA e pelos diretos, o que pode refletir no aumento da assimetria informacional. ...
O estudo objetivou analisar a influência do comitê de auditoria e de suas características de independência e expertise na assimetria da informação em empresas brasileiras. Para tanto, utilizouse de pesquisa descritiva, documental e quantitativa. A população de pesquisa correspondeu as 100 empresas listadas no índice IBRx100 da B3 (Brasil, Bolsa e Balcão), durante o período de 2012 a 2016. Os resultados relacionados a influência do comitê de auditoria na assimetria informacional não foram estatisticamente significantes, o que sugere que a existência de um comitê de auditoria por si só não se mostrou capaz de minimizar a assimetria informacional. Porém, quanto as empresas que possuíam comitê de auditoria e apresentaram características como independência e expertise, constatou-se que a expertise se mostrou estatisticamente significante e negativamente relacionada à assimetria informacional, o que gera indícios deque a existência de pelo menos um membro com expertise financeira no comitê, é capaz de minimizar a assimetria informacional entre gestores e investidores. Mediante os resultados evidenciados, contribui-se em cenário brasileiro como forma de nortear as empresas a estruturarem de maneira adequada seu comitê de auditoria, buscando membros com expertise financeira, para assim, melhorar a qualidade do comitê no cumprimento de suas funções e na redução da assimetria informacional.
... Habib (2023b) has underscored the importance of sound corporate governance practices in driving sustainable financial performance and enhancing total enterprise value. Nonetheless, a study by Ghozali et al. (2022) has found that corporate governance does not affect asymmetric information, while Poursoleyman et al. (2021), Han et al. (2014), and Jibril et al. (2023) in their empirical studies concluded differently that corporate governance exerts a substantial impact on the asymmetry of information. In their study, Effendi & Siregar (2015) observed that, as an oversight body, the company's audit committee does not effectively impact mandatory disclosure. ...
Purpose: The study aims to explore the effectiveness of audit committee features, such as the total members, meeting frequency, financial competence, and independence, as a determinant of asymmetric information with audit quality as moderating. Design/Method/Approach: We employed a regression model with panel data, analyzing 260 firm-year observations for entities whose shares traded on the Indonesia Stock Market from 2017 to 2021, all of which fall under the category of public interest entities. Findings: Our examination uncovered meeting frequency was statistically significant in reducing asymmetric information, and audit quality enhanced the interrelation of the meeting frequency, reducing asymmetric information. In contrast, our examination could not uncover any correlation between the total members, financial competence, and independence with asymmetric information. In addition, the study demonstrated no relationship between audit quality enhancing correlation between the total members, financial competence, and independence to mitigate asymmetric information. Theoretical Implications: The study supports agency and asymmetric information theories by demonstrating the significant role of oversight through frequent meetings in mitigating conflicts between agents and principals. This academic support enriches the existing literature and provides valuable insights for future research in the field. Practical Implications: Our findings suggest that the regular occurrence of dialogue between audit committees and management needs to be increased to provide better oversight and ultimately improve organizational performance, benefiting stakeholders and the board. Finally, our study implies the current regulations in Indonesia have not succeeded in encouraging the efficacy of audit committee monitoring through other features of audit committees as mandated by Indonesian regulation. Hence, regulatory breakthroughs by policymakers are essential to foster the performance of audit committees. Originality/Value: Our study provides a novel perspective on how audit committee features influence asymmetric information by providing insights by investigating the involvement of audit quality as a moderating factor. Research Limitations/Future Research: While our study may be limited in its applicability due to the constrained data sourced from the Indonesian Stock Market, the potential insufficiency of proxy variables in apprising audit committee efficacy, and the restricted use of control variables, addressing these constraints should be a focus of future studies to achieve a more comprehensive understanding. Paper Type: Empirical JEL Classification: G34, O16
... Managers may use the free cash flows of the company for their own ends instead of value maximization for shareholders. Hence, shareholders do not want to retain their money with the managers and prefer to dispose of it as dividends to them (Jensen, 1986, ;Lee et al., 2014). As Brailsford and Yeoh (2004) suggested, in a company with high free cash flows and operating in a low growth environment, the controlling managers prefer to pursue investment rather than to dispose of free cash flows in the form of dividend payments. ...
Information asymmetry between insiders and outsiders creates various issues for a firm, such as the agency problem where managers pursue their own interests even at the cost of the well-being of the firm’s shareholders, and probable external financial constraints where external investors discount risk by causing a surge in the cost of financing. Normally, a firm manages the issues of the agency problem and external financing constraints by omitting or initiating dividend payments. Therefore, this study investigated the impact of corporate governance on dividend policies in the presence of financial constraints using a sample of 139 non-financial firms listed on PSE, where a weak regulatory framework generates agency problems and the underdevelopment of the financial sector causes financing constraints for businesses. The results reveal that, in Pakistan, dividends are an Outcome of governance practices. As the quality of firm-level governance improves, shareholders are provided with the legal strength to ultimately force firm managers to pay dividends. Along with the agency problem, the availability of external financing is an important factor related to dividend payment decisions in Pakistan. When a company is confronted with agency problems and financial constraints simultaneously, managers try to avoid costly external financing rather than reducing the agency’s problem. The results of the study can be further refined by enhancing the study period and sample size. Furthermore, the work can be extended by classifying sample subjects to the nature of industry and group ownership.
... Agency theory had a significant impact on the emergence of corporate governance (Hassan et al. 2019) and was the basis of the corporate governance idea. The theory developed in response to shifts in the forms of ownership, which led to important developments in the areas of control and performance measurement (Sanchez-Marin et al. 2011;Billett et al. 2017;Bens and Monahan 2004;Bonsall and Miller 2017;Han et al. 2014;Jensen and Meckling 1976;Bathala and Rao 1995). Agency theory focuses on the issue of conflict between the principal and the agent and holds that this conflict can be resolved through corporate governance mechanisms, since the agent does not always strive to meet the principal's objectives. ...
The purpose of this study was to determine whether corporate governance is an important and effective technique for enhancing investors’ confidence in existing and prospective companies and for creating opportunities for safe investment in Yemen. A survey was conducted among certified public accountants to assess the importance of corporate governance. We employed regression analysis to test our hypothesis. According to the results of the study, corporate governance is an essential component of success for companies, and those firms that apply corporate governance best practices are highly regarded. Additionally, the findings suggest that regulators, policymakers, and standard-setters should raise awareness of the importance of protecting shareholders’ rights by providing seminars and courses for Yemeni media, unions, and professional associations. Moreover, in an environment of uncertainty there is a reluctance to invest and a prevalent tendency to invest in real estate. Furthermore, the results indicate that corporate governance is not practiced by all companies but only to a limited extent by some joint-stock companies. Most of the Yemeni companies that have adopted CG are joint-stock companies, so investors prefer to invest in these companies. The findings of this study provide valuable insights for regulators, practitioners, and academicians. We recommend that this survey be extended to a larger sample, including supervisory managers of companies. This study provides an insightful contribution, because it clarifies the importance of corporate governance for Yemeni investors and investee companies.
... In the prior empirical literature, many researchers have investigated the impact of corporate governance reforms on corporate governance practices and disclosure. For instance, Han et al. (2014) found that the overall information environment could improve through good Corporate Governance and eventually reduce the information asymmetry problem. Sana and Yadav (2012) found empirical evidence that the financial disclosure of Indian firms have moderately improved after the Security and Exchange Board of India (SEBI) Corporate Governance reforms. ...
Trust is the focal point of this thesis. Trust is an integral part of capitalist economics and, therefore, corporate governance. The relationship of trust serves as a bond and brings together different individuals of diverse interests to work along to fulfil their objectives. But in the last two decades, this relationship of trust badly shaken due to various reasons. In order to resort the bond of trust, policymakers in different jurisdictions have developed and introduced various policies and procedures. The same effort has been made by the Security and Exchange Commission of Pakistan (SECP), as it developed and implemented the country first Corporate Governance Code in 2002 and revised them twice in 2012 and 2017. But making rules, regulations, procedures and policies are only one aspect of restoring the relationship of trust. The rules can be made very strong and as fancy as possible, but only the implementation, compliance, and actions make them effective. Therefore, this paper empirically examines and evaluates the SECP Corporate Governance Code and tries to find out to what degree the SECP has succeeded in restoring the relationship of trust. The study has developed a Governance Disclosure Quality Index (GQI) using guidelines identified in the United Nations Conference on Trade and Development (UNCTAD, 2006). In contrast with the previous studies in Corporate Governance domains, which mainly examined and compared the Corporate Governance practices between developing and developed countries, this study examines and compares the Corporate Governance practices within a single country, but in three different time periods. The research's main findings show that the Governance Disclosure Quality of the Pakistani listed banks in their annual reports enhanced (and so trust) after each revision of the SECP Corporate Governance Code.
... Consensus findings indicated that good corporate governance could boost firm value and attract investors to stock markets. Indeed, the purpose of establishing Corporate Governance Codes in various countries is to address the information asymmetry issue between businesses and investors (Han et al. 2014;Maina et al. 2017). However, empirical research concerning board governance influences the relationship between information disclosure and firm performance is limited. ...
The board of directors’ role is paramount in businesses because it reflects the organisation’s ability to earn investor confidence and improve financial performance. This paper aims to examine the relationship between environmental and social (ES) information disclosure and firm financial performance and the interaction effects of board meetings on the relationship between ES and firm performance in Malaysian publicly traded firms from 2013 to 2017. This article contributes to the theoretical foundations of the agency theory as it relates to the corporate governance function. The agency theory framework is used to capture the inherent interrelationships between the board of directors and firm performance. The study’s findings indicate that a firm’s relationship between ES and financial performance, measured by Tobin Q and return on equity, may be significantly affected by board meetings.
... Stewardship theory refers to the interest alignment between managers and shareholders where managers will bear higher costs if managers only fulfill their interests and achieve their goals by themselves (Caers et al., 2006;Davis et al., 1997). As asymmetry reduction and higher information quality increase shareholders' wealth (Han et al., 2014), managers are less likely to engage in opportunistic earnings management. ...
Purpose
This paper aims to examine the effect of managerial ability (MA) on real earnings management and the effect of real earnings management by higher ability managers on future profitability, at a different level of the crime rate.
Design/methodology/approach
The research sample includes 864 manufacturing firms-years listed on the Indonesian Stock Exchange. MA uses an efficiency score by data envelopment analysis. Real earnings management is measured by abnormal activities. The crime rate is measured by logarithm natural of the number of crimes per 100.000 citizens in the region where the firm is headquartered. Data analysis uses fixed-effect regression.
Findings
MA increases real earnings management in the region where the firm is headquartered with a higher crime rate while MA will reduce real earnings management in the region where the firm is headquartered with a lower crime rate. Also, real earnings management by higher-ability managers gives a signal of better future profitability in the region where the firm is headquartered with a lower crime rate.
Originality/value
This research contributes to filling the previous gap of managerial characteristics ability-related on real earnings management by providing regional crime rate as a determinant factor of managers’ ethical behavior. This research is the first one to considers the regional crime rate treatment to the relationship between MA and real earnings management especially in Indonesia. This research also provides new evidence of efficient real earnings management for a lower crime rate group of samples to give a signal of better future profitability.
... One of the critical advantages of robust corporate governance is its ability to diminish information asymmetry (Habib, 2005;Cui et al., 2018;Cai et al., 2015). A firm with a low level of information asymmetry has better value and more robust corporate governance (Cai et al., 2015;Han et al., 2014)). Robust corporate governance provides two significant benefits which eventually lead to better firm performance; first, reduction in monitoring cost by investors (Mohan and Chandramohan, 2018;Habib, 2005;Jensen and Meckling, 1979;Lombardo and Pagano, 2006) and second, reduction in the cost of capital (Habib, 2005). ...
Current practice shows that firms throughout the world are in favor of high cash holdings; yet, they are still performing well. This situation contradicts the agency and free cash flow theories, which suggest that excessive cash may increase agency costs and lower firm performance. The purpose of this study is to examine the relationship between corporate governance, cash holdings, and firm performance. Five thousand four hundred twenty observations were conducted, and a balanced panel data analysis was performed. The results indicate that corporate governance has a significant impact on cash holdings, corporate governance has a significant impact on firm performance, and cash holding has a significant impact on a firm's performance. The findings of this study do not show any evidence to support the agency and free cash flow theories among non-financial Malaysian firms listed on Bursa Malaysia. Thus, this study contributes to the finance and accounting literature by gaining a better understanding of firm performance indicators in Malaysia, specifically.
... Neste artigo considera-se que o sistema de governança pública não é simplesmente produto do governo (VAN SCHOOTEN;VERSCHUUREN, 2008), mas sim, produto da pluralidade de atores que interagem na sociedade (ENROTH, 2011), a partir de distintas racionalidades e que a melhor compreensão desse sistema vai ao encontro de práticas mais transparentes e justas no Brasil. Deste modo, dentro do sistema de governança, uma das visões amplamente compartilhada tem sido a de que uma maior transparência (disclosure) seria benéfica para os sujeitos envolvidos (HERMALIN; WEISBACH, 2012;HAN, 2014). No entanto, poucos estudos se dispõem a explicitar o comportamento do discurso empregado nas divulgações e a forma como esse pode ser utilizado com o propósito de manipulação por parte das organizações. ...
O objetivo deste artigo foi analisar como diferenciam-se a configuração e o comportamento do discurso da Petrobras nas citações ao Tribunal de Contas da União e à Comissão de Valores Mobiliários, em comunicados e fatos relevantes para o mercado. A Governança é compreendida aqui, como produto da pluralidade de atores que interagem na sociedade. Nesse sentido, considera-se que as práticas discursivas que integram a transparência-um dos elementos da Governança-são racionalizadas e exercem influência na percepção do mercado e na legitimidade da organização. Trata-se de estudo interpretativista, em que se utilizou a abordagem qualitativa e a técnica de análise de conteúdo, por meio da coleta de Comunicados e Fatos Relevantes divulgados pela companhia, no período de 2005 a 2018. Os resultados demonstram três configurações do discurso: (i) defesa; (ii) subordinação; e (iii) validade da ação. Observou-se que o comportamento discursivo nas referências aos órgãos reguladores apresenta diferenças ao longo do tempo, em que foram utilizados mecanismos de repetição, intertextualidade e interdiscursividade para legitimar as ações da companhia. Por fim, procura-se contribuir com a literatura dos estudos organizacionais e da área de contabilidade, com os gestores e com os responsáveis pelas divulgações das entidades, ao evidenciar a importância de se observar a linguagem e as configurações do discurso em busca de um mercado mais transparente e de um sistema de governança mais justo para os distintos atores envolvidos.
... Z. Wang and Zhang (1998) provide a model of principal-agent relation and found that information asymmetry has a significant negative impact on firm investment. Han, Kim, Lee, and Lee (2014) proposed that the existence of information asymmetry has a significant negative effect on the stock returns of firms and that information asymmetry is associated with investors due to lack of timely and correct information. Baxamusa, Mohanty, and Rao (2015) addressed the effect of information asymmetry on firm investment and stated that equity is used to fund project with higher information asymmetry, while debt is used to fund investment with lower information asymmetry. ...
The main objectives of this study are to examine the impact of stock price performance on firm’s investment and to investigate the counter impact of changes in investment expenditures on stock price performance. The random effects model was applied on the panel data of Chinese manufacturing firms listed at the Shanghai Stock Exchange and the Shenzhen Stock Exchange during the period 2002 to 2016. The sample contains 398 firms with 5,970 observations. Although there is a statistically significant and negative relationship between stock price and investment expenditures, the impact of stock price on investment expenditures is far greater than that of investment expenditures on stock price. Information asymmetry positively mediates both investment sensitivity to stock prices and stock prices sensitivity to investment. This study is a valuable contribution toward the analysis of investment decision making by manufacturing firms in China. It also provides guidelines for investors to assess the informational status of the capital market before making investment decisions and to comprehensively understand the different decisions made by firms with regard to the issue of new stocks and the indirect information attached with such issues.
... However, corporate governance facilitates the alignment of managerial interests with the shareholders, thereby resulting in the production of more reliable financial reports, which, in turn, improve the information environment (Watts and Zimmerman, 1986). Some recent studies (Kanagaretnam et al., 2007;Holm and Schøler, 2010;Han et al., 2014) have also noted that effective governance mechanisms largely improve the information environment and hence reduce information asymmetry. Moreover, the reliability of the financial information decreases in the presence of managerial opportunism, which can be controlled through some governance mechanisms (Dechow et al., 1996;Wild, 1996). ...
Purpose
The purpose of this paper is to explore the effects of competitive pressure on financial statements’ comparability (comparability) by analyzing various dimensions of competition.
Design/methodology/approach
The authors study the effect of competition on comparability using the comparability measure of De Franco et al. (2011) and various proxies for competition, competition from existing/potential rivals and non-price competition (NPC).
Findings
This study documents that competition is positively associated with comparability, and this effect is more (less) pronounced for industry followers (leaders). The authors also document that competition from existing rivals enhances comparability, but competition from potential entrants does not. Moreover, NPC is also a significant determinant of comparability. Furthermore, the competition from existing/potential rivals plays no significant role in the production of comparable financial statements in state-owned enterprises. The results are robust to alternative measures of comparability and methodological approaches.
Originality/value
This study is the first empirical study that documents a new channel (comparability) through which competition affects financial statements. The findings support the argument that competitive pressure acts as a governance mechanism, disciplines management and increases comparability leading to lower information asymmetry (governance view). However, the findings contest the argument that higher competition motivates managers to withhold information (proprietary cost hypothesis). By examining the effect of state ownership, this study might also help to characterize the effects of changes in corporate objectives on managerial decisions related to financial reporting.
... By monitoring, management will be difficult to hide information on the deviant behavior and negligence (Elbadry et al., 2010). This was confirmed by Lee et al. (2011) which states that shareholders of companies with poor corporate governance could suffer losses due to dishonest disclosure that led to the asymmetry of information . ...
Information asymmetry is a condition in which there is an imbalance of information acquired by management (as agent) and information acquired by the shareholders and other stakeholders. In this condition, management tends to be more informed about the company rather than outsider including shareholders. Accordingly, management has the opportunity to deviates which might benefit themselves individually or collectively. This study aimed to determine the effect of corporate governance mechanisms and audit quality on information asymmetry with share price, return volatility and firm size as control variables. Research object is property and real estate firms which are listed in the Indonesian Stock Exchange-year 2009 until 2011. The study was categorized as causality descriptive verification. Selected samples based on purposive sampling method is 30 firms. The data used are secondary data. Data analysis method used is multiple linear regression analysis in which model were qualified of classical assumption test. The results showed that: (1) board size, board composition, audit committee size and ownership concentration as corporate governance mechanism along with audit quality simultaneously and significantly affect information asymmetry as much as 84.6%, (2) Partially, audit quality has significant negative effect on information asymmetry. Meanwhile, other variables showed no significant effect on information asymmetry. (3) Share price control variable has significant positive effect, return volatility has significant positive effect, while firm size has significant negative effect on information asymmetry.
This paper examines the effects of audit quality and firm growth on the relationship between corporate cash holdings and firm performance by using a sample of about 2500 unique non-financial Indian firms from 2000 to 2017, consisting of 51,388 firm-year observations. The results obtained by controlling for potential endogeneity using the dynamic panel generalised method of moment (GMM) approach show that cash holdings have an inverse U-shaped (concave) relationship with firm performance, which is stronger for firms with higher audit quality than firms with lower audit quality. Our findings also show that firm growth affects the cash holdings and firm performance relationship and the moderating effect of audit quality. Our study highlights the need for corporate managers to consider firm performance, audit quality and firm growth levels in policy decisions on cash holdings.
the size of the Firm , the role that firms' announcements play on their dividend in the financial market, and the availability of information to help investors make rational decisions to eliminate The problem of information asymmetry, because these announcements send positive information to investors in the financial market, their content indicates that the management believes that the share is trading in the financial market at less than its true fair value . The study focused on two main dimensions of the problem, for which two hypotheses were formulated, The study relied on a sample consisting of (69) dividend announcements by (30) Firms listed on the Iraq Share Exchange for the period from 1/1/2016 to 2/26/2020. And by using a number of financial and statistical methods using the programs (EXCEL) and (SPSS-23). In order to analyze the study variables and test their hypotheses, the study reached a number of conclusions, perhaps the most important of which is that the size of the Firm is related to the information sent to the money market by announcing the dividend and this was inferred through the results of the average cumulative abnormal returns for small Firms, which were higher than the averages of large Firms all along Event window due to the increase state of informational asymmetry .
يهدف البحث لدراسة وتشخيص وقياس محددات هيكل الملكية المتمثلة بنماذج وانواع هياكل الملكية للمصارف عينة البحث ، تشخيص متطلبات الافصاح في تقرير تعليقات الادارة وما يتضمنه من محاور وفقرات واختبار مدى وجود مستوى مقبول للامتثال لتلك المتطلبات وتحديد ابعاد ظاهرة لاتماثل المعلومات وقياسها للمصارف عينة البحث، اختبار طبيعة العلاقة بين محددات هيكل الملكية متمثلة بـ (نسب التملك وهوية المساهمين) وتقرير تعليقات الادارة في المصارف عينة البحث ، اختبار اثر كل من نماذج وانواع هياكل الملكية وتقرير تعليقات الادارة والمتغيرات الضابطة في لا تماثل المعلومات لعينة من المصارف المدرجة في سوق العراق للأوراق المالية (السوق النظامي) بلغت (11) مصرفا للمدة (2009-2018).
بعد تحليل محددات هيكل الملكية الى نماذج وانواع حسب نسب التملك وهوية المساهمين تم قياس هيكل الملكية بقسمة عدد الاسهم المملوكة من قبل المساهمين على اجمالي اسهم المصارف عينة البحث ،ثم تم قياس الافصاح عن تعليقات الادارة في تقريرها من خلال مؤشر التعليقات الادارية الذي يتكون من (88) بند مقسمة على اربع محاور حسب عناصر المحتوى لتقرير تعليقات الادارة ،كما تم استعمال مقياس تقلب عوائد الاسهم (stock return volatility) لقياس لا تماثل المعلومات ،هذا وتم الاستناد الى الاختبارات الاحصائية (One Sample T-test) ، (Pearson Correlation) ، Multiple Linear Regression)) لاختبار فرضيات البحث.
ومن اهم الاستنتاجات التي توصل اليها البحث هي: ان محددات هيكل الملكية في الوحدات المساهمة بشكل عام يمكن تمييزها الى بعدين رئيسين الاول يمثل تركيز الملكية اما البعد الثاني يمثل هوية المالكين. انخفاض مستوى الافصاح عن تعليقات الادارة للمصارف عينة البحث وبدلالة احصائية. توجد علاقة بين محددات هيكل الملكية وتقرير تعليقات الادارة وبدلالة احصائية. يوجد اثر لمحددات هيكل الملكية متمثلة بنموذج هيكل الملكية المركزة وانواع هياكل الملكية متمثلة بالملكية الادارية والمؤسساتية والعائلية والاجنبية ؛ ولتقرير تعليقات الادارة في لا تماثل المعلومات.
اهم التوصيات التي اكد عليها البحث: دعم مستوى الافصاح عن تعليقات الادارة وزيادة الاهتمام بمحتوى عناصره بشكل اكبر ،والتأكيد على انها مسؤولية مشتركة لا تتحدد بالجهات التشريعية او المنظمات المهنية فحسب ،بل تمتد لتشمل ادارة سوق العراق للأوراق المالية والبنك المركزي وادارة المصارف ،لذا ينبغي التأكيد على زيادة الاهتمام بالإفصاح. تكثيف الجهود لإدارة سوق العراق للأوراق المالية والبنك المركزي وادارة المصارف لتخفيض لا تماثل المعلومات بين الاطراف او الطرف المطلع وتلك الاطراف غير المطلعة.
Existing studies indicated that firm debt holders can use the credit default swap (CDS) market to hedge their credit risk, and thus they would reduce their monitoring of the firms, leading to largely distressed firms shirking and increasing positive abnormal earnings accruals. Besides providing insurance, however, the CDS spreads also perform price discovery of credit risk information sought by trade creditors and potential lenders who are not protected. High absolute abnormal discretionary accruals or bad earnings quality, especially negative abnormal accruals, would lead adverse CDS price signals that are very costly to the firm. This compels the firm under nondistressed conditions to be able to improve cash holdings, cash flows, working capital, and earnings reporting quality. Our new results indicate that the channels of improvement in earnings quality are through a firm’s large accounts payable and low cash holdings related to trade credit exposures. In the longer run, this leads to higher profitability and improved firm value. Thus, the generation of public information via the CDS market reduces information asymmetry and can enforce greater discipline in discretionary accounts reporting.
This study investigates the effects of planned and unplanned production suspension on firm value. We find that the increased business risk caused by the production suspension negatively affects firm value. Additionally, good corporate governance alleviates the negative effect of planned suspensions, while only firm-specific factors affect unplanned suspensions. Moreover, among firms facing unplanned suspensions, those with strong governance recover faster than firms with weak governance because the former have stable managerial structures. Finally, business group-affiliated firms cope with planned production suspensions well, whereas they are more vulnerable to unplanned suspensions. The result suggests that the group-level supplier-demander relationships have potential business risk owing to low flexibility in unexpected business situations.
Foreign institutional capital performs a critical role in the development of the tourism industry. Little research has been conducted to understand how foreign institutional investors choose tourism firms from the governance perspective. The primary purpose of the current study is to bridge this research gap by examining the signaling roles of CEO ownership, domestic institutional ownership, and institutional directors in preferences of foreign institutional investors. Outcomes show foreign institutional investors are more likely to invest in tourism firms who have higher CEO ownership, lower domestic institutional ownership, and a higher level of institutional directors. Implications and limitations are accordingly discussed.
We investigate the information benefits from R&D capitalization by focusing on the role of financial analysts in mitigating information asymmetry. Using a large sample of Korean firms, we find a positive association between analyst coverage and the market valuation of expensed R&D indicating that an analyst's activities can help investors to understand the implications of R&D investments. In contrast, analyst coverage does not significantly improve the valuation of capitalized R&D, suggesting that capitalization itself mitigates information asymmetry between firms and investors. We also find that our results are relevant only for firms with fewer alternative sources of information and firms unaffiliated with business groups.
This research investigates the association between the upgrade/downgrade of rankings in corporate governance evaluation exercises and stock price reactions. Using Taiwan equities as the research setting, this study finds that firms receiving an upgraded (downgraded) ranking from corporate governance evaluation exercises do not experience significantly positive (negative) abnormal returns, but there is actually a positive (negative) correlation between such an upgrade (downgrade) after these evaluation exercises as well as abnormal returns under the condition of better company financial performance. This study contributes to the extant literature by shedding additional light on the correlation among corporate governance evaluation exercises, abnormal returns, and company financial performance.
The study aims to investigate the relationship between board size and firm’s performance for a sample of non-financial French firms listed on the CAC 40 between 2005 and 2017. We estimated the firm’s performance using two types of metrics, the accounting-based measures (ROA and ROE) and the market-based measures (Tobin Q and MTB). By applying the panel data regressions (fixed-effects and random-effects), the findings show that there is a positive effect of board size on firm performance. In addition, our results show that the optimal number of the board size should be between 13 and 17 members in order to achieve good performance for non-financial French firms.
Keywords:
Corporate Governance; Board Size; Firm Performance; French Firms
Purpose
Financial statement fraud (FSF) committed by companies implies the current status of the companies may not be healthy. As such, it is important to detect FSF, since such companies tend to conceal bad information, which causes a great loss to various stakeholders. Thus, the objective of the paper is to propose a novel approach to building a classification model to identify FSF, which shows high classification performance and from which human-readable rules are extracted to explain why a company is likely to commit FSF.
Design/methodology/approach
Having prepared multiple sub-datasets to cope with class imbalance problem, we build a set of decision trees for each sub-dataset; select a subset of the set as a model for the sub-dataset by removing the tree, each of whose performance is less than the average accuracy of all trees in the set; and then select one such model which shows the best accuracy among the models. We call the resulting model MRF (Modified Random Forest). Given a new instance, we extract rules from the MRF model to explain whether the company corresponding to the new instance is likely to commit FSF or not.
Findings
Experimental results show that MRF classifier outperformed the benchmark models. The results also revealed that all the variables related to profit belong to the set of the most important indicators to FSF and that two new variables related to gross profit which were unapprised in previous studies on FSF were identified.
Originality/value
This study proposed a method of building a classification model which shows the outstanding performance and provides decision rules that can be used to explain the classification results. In addition, a new way to resolve the class imbalance problem was suggested in this paper.
A presente pesquisa teve por objetivo analisar a influência das características do conselho de administração na assimetria informacional de empresas. A metodologia foi descritiva, documental e quantitativa. As empresas analisadas corresponderam as 100 listadas no índice IBRx100 da B3 – Brasil, Bolsa e Balcão de 2012 a 2016. A coleta de dados foi realizada na base de dados Thomson e estes foram analisados por meio de estatística descritiva e regressão linear múltipla - OLS. Os resultados revelaram a presença da assimetria da informação entre executivos e investidores, em que se constatou a diminuição de tal assimetria, pelo maior tamanho do conselho de administração e independência dos membros, além do tamanho da empresa e rentabilidade desta. Assim, constatou-se que o controle de monitoramento conselho de administração para realizar suas responsabilidades perante a simetria da informação e diminuição dos custos de agência necessita apresentar determinadas características, em que somente sua implantação não garante este intuito. O estudo contribuiu por demonstrar que mecanismos de governança corporativa como o conselho de administração se projetados com qualidade podem diminuir problemas de agência, além disso, podem mitigar preocupações dos usuários externos quanto a informações assimétricas, podendo aumentar a confiança destes em relação à empresa.
Main aim of this study to reveal the impact of repurchases announcement of Common Stock on its Prices in the Formwork of Signal Theory based on the size of firm , and the role of this theory in explaining processing the informational asymmetry of supports efficiency of the market and the availability of information to help investors making decisions rational , repurchases is a positive signal sent to the investors in financial market its including that the management believes that stock is trading in financial market are below their fair value . The study is based on two main dimensions of the problem for which the following two hypotheses were devised : -
• The size of firm has no relationship on the strength of the signal sent to the market through the repurchasing announcement , and therefore the does not vary size of informational asymmetry according to firm size .
• The Kuwait Stock Exchange is not efficient in level a half strong in response to the informational content of the repurchase announcement .
The study sample included 170 announcement made by 65 firm listed on the Kuwait Stock Exchange for the period from 1/1/2012 to 24/4/2015 . It is worth mentioning that the selection of Kuwait Stock Exchange was a means, not an end, since the foundation end is studying Iraq Stock Exchange but for technical reasons related with the absence of the academic awareness needed for repurchase programs by the firms on the one hand and the dealers in the market from the other hand , this creative mechanism of the policy of payment was not used and the many advantages of it were lost which that can interests of all the parties in market , and does not end with bridging the gap of informational asymmetry and improve the efficiency of the market specialized of the rare economy resources .
Through the use of various financial and statistical methods using (EXCEL) for analyze the variables of the study and test its hypotheses, the study reached the following conclusions, most important of which is that size of firm has relationship on the strength of the signal sent to the market through repurchases announcement , and argued on through the results average of the accumulated abnormal return value stocks versus growth stocks . the most effect was of value stocks with great difference , this is contrary to the first hypothesis . the study also proved that there was an inefficient response to the informational content of the repurchase announcement by the Kuwait Stock Exchange . This confirms the market inefficiency in a half strong manner and this supports the truth of second hypothesis of the study . Based on this , the study reached a number of recommendations including necessity of adopting on the signal theory especially in inefficient financial markets to reduce the problem of informational asymmetry between insiders and outside investors.
المستخلص : ان الهدف الرئيس لهذه الدراسة هو تسليط الضوء لبيان اثر اعلان اعادة شراء الاسهم العادية في اسعارها باطار نظرية الاشارة اعتمادا على حجم الشركة , والدور الذي تلعبه هذه النظرية في تفسير ومعالجة عدم التماثل المعلوماتي وبما يدعم كفاءة السوق , واتاحة المعلومات لمساعدة المستثمرين باتخاذ القرارات الرشيدة , فإعادة الشراء ترسل إشارة ايجابيـــة الى المستثمرين في الســـوق المالية ، يشــير مضمونها الى أن الادارة ترى بأن السهم يتداول في السوق الماليـــة بأقل من قيمته الحقيقية العادلة . وتمحورت الدراسة على بعدين رئيسين للمشكلة والتي صيغت لأجلها الفرضيتين الآتيتين:
• ليس لحجم الشركة علاقة بقوة الاشارة المرسلة لسوق المال عبر اعلان اعادة الشراء , وبالتالي فلا يختلف حجم عدم التماثل المعلوماتي باختلاف حجم الشركة .
• ان سوق الكويت للأوراق المالية ليست كفوءة بالمستوى نصف القوي في الاستجابة للمحتوى المعلوماتي لإعلان اعادة الشراء .
واعتمدت الدراسة على عينة مكونة من 170)) اعلان من قبل 65)) شركة مدرجة في سوق الكويت للأوراق المالية للمدة من 1/1/2012 الى 24/4/2015. ومن الجدير بالذكر ان الغاية الاساس هو دراسة سوق العراق للأوراق المالية ولكن تم اختيار سوق المال الكويتي جاء وسيلة وليس غاية لأسباب فنية ترتبط بغياب الوعي العلمي اللازم وعدم الاهتمام ببرامج اعادة الشراء من جانب الشركات من جهة ومن جانب المتعاملين في السوق من جهة اخرى , فغابت المزايا المتعددة لهذه الالية المبدعة وانعدم استخدامها كسياسة دفع التي يمكن ان يستفاد منها جميع الاطراف المتعاملة في السوق , ولا تنتهي عند رأب فجوة عدم التماثل المعلوماتي والارتقاء بكفاءة السوق التخصيصية لموارد الاقتصاد النادرة
وباستخدام عدد من الأساليب المالية والاحصائية باستخدام برنامج EXCEL)) من أجل تحليل متغيرات الدراسة واختبار فرضياتها , وتوصلت الدراسة إلى عدد من الاستنتاجات لعل من أهمها ان لحجم الشركة علاقة بقوة الاشارة المرسلة لسوق المال عبر اعلان اعادة الشراء واستدل على ذلك عبر نتائج متوسطات العوائد غير العادية المتراكمة للشركات الصغيرة والتي كانت اعلى من متوسطات للشركات الكبيرة على طول نافذة الحدث نظراً لارتفاع حالة عدم التماثل المعلوماتي في الاولى , وهذا يتعارض مع الفرضية الاولى للدراسة . كما أثبتت النتائج ان استجابة سوق الكويت للأوراق المالية غير كفوءة ( متحيزة وبطيئة وغير تامة) للمحتوى المعلوماتي لإعلان اعادة الشراء ما يؤكد عدم كفاءة السوق بالشكل نصف القوي وهذا يدعم صحة فرضية الدراسة الثانية . وبناءً على ذلك خرجت الدراسة بعدد من التوصيات لعل من اهمها ضرورة الاعتماد على نظرية الاشارة خصوصاً في الاسواق المالية غير الكفوءة لتقليل او القضاء على مشكلة عدم التماثل المعلوماتي بين المطلعين والمستثمرين الخارجيين .
In this study we analyze the relation between institutional investment duration and corporate governance using a new metric of investment duration that accounts for firm-specific investment durations of each institution. We conjecture that institutional investors that hold a firm’s shares for a longer duration have greater incentives and ability to influence the firm’s governance structure. Consistent with this conjecture, we find that a broadly defined index of corporate governance increases with the duration of institutional ownership. We also show that the relation between investment duration and corporate governance varies across different types of institutions and across firms with different stock market liquidities.
Using Korean stock market data, we document evidence that firm age is a key determinant of firm value. Specifically, firm value (measured by the market-to-book equity ratio) has a downward sloping relation with firm age. We also find that profitability and capital expenditures decline as firms age, suggesting that firms may become less valuable with age as they become less profitable and run out of investment opportunities. Our evidence also suggests that firms conduct IPOs by capitalizing on a small window of opportunity for listing during which their profitability is temporarily at its peak. Because this profitability is not sustainable, IPO issuers experience a sharp drop in profitability, contributing to a negative relation between firm value and age in the post-IPO period. The learning hypothesis of Pástor and Veronesi () is unable to explain the negative firm age-value relation in the Korean stock market, given that uncertainty does not decline with age and that the negative relation is either non-existent or very weak among dividend-non-payers.
Manuscript Type
Empirical
Research Question/Issue
We examine the relation between stock repurchases and their potential false signaling of undervaluation using unique K orean data.
Research Findings/Insights
We find that the firms that repurchase stocks frequently are less undervalued and have lower post‐announcement operating performance than firms that repurchase stocks infrequently. We further find that agency cost and industry‐adjusted T obin's Q of frequent repurchase firms negatively affect abnormal returns from the repurchase announcement. Corporate governance, especially ownership structure and board independence, affects the probability of frequent signaling.
Theoretical/Academic Implications
Our results suggest that the main motivation for frequent stock repurchases is likely to be false signaling, and that corporate governance can mitigate false signaling caused by agency cost.
Practitioner/Policy Implications
Frequent stock repurchases are not necessarily motivated by firm undervaluation. Rather, the degree of agency problems and managers' abuse of information asymmetry tend to increase the frequency of stock repurchases. Therefore, frequent stock repurchases are associated with false signaling by managers; this false signaling can be lowered through better corporate governance. This finding supports the monitoring effect of corporate governance systems.
We study the relationship between measures of corporate governance policy (mostly related to antitakeover restrictions) and idiosyncratic risk in stock returns. Low quality governance is associated with low levels of idiosyncratic risk, low trading activity and low efficiency of corporate investment. Poor-quality earnings reporting, in contrast, is associated with high levels of idiosyncratic risk and low efficiency of corporate in-vestment. The results are robust to controls for other influences and various empirical methods. We interpret these results as evidence that openness to the market for con-trol is important for private information generation, whereas high-quality accounting information releases tend to crowd out or substitute for private information. When the relation of governance and volatility is taken into account, only the governance-independent component of volatility is found to be related to the efficiency of corporate investment decisions. This finding supports the proposition that information is more important than governance when it comes to the investment decision.
This paper examines the valuation impacts of outside independent directors in Korea, where a regulation requiring outside directors was instituted after the Asian financial crisis. In contrast to studies of U.S. firms, the effects of independent directors on firm performance are strongly positive. Foreigners also have positive impacts. The effects of indigenous institutions such as chaebol or family control are insignificant or negative. This implies that the effect of outsiders depends on board composition as well as the nature of the market in which the firm operates.
The Modigliani-Miller theorem on the irrelevancy of financial structure implicitly assumes that the market possesses full information about the activities of firms. If managers possess inside information, however, then the choice of a managerial incentive schedule and of a financial structure signals information to the market, and in competitive equilibrium the inferences drawn from the signals will be validated. One empirical implication of this theory is that in a cross section, the values of firms will rise with leverage, since increasing leverage increases the market's perception of value.
The question of what makes a concept coherent (what makes its members form a comprehensible class) has received a variety of answers. In this article we review accounts based on similarity, feature correlations, and various theories of categorization. We find that each theory provides an inadequate account of conceptual coherence (or no account at all) because none provides enough constraints on possible concepts. We propose that concepts are coherent to the extent that they fit people's background knowledge or naive theories about the world. These theories help to relate the concepts in a domain and to structure the attributes that are internal to a concept. Evidence of the influence of theories on various conceptual tasks is presented, and the possible importance of theories in cognitive development is discussed.
We report strong OLS and instrumental variable evidence that an overall corporate governance index is an important and likely causal factor in explaining the market value of Korean public companies. We construct a corporate governance index (KCGI , 0∼100) for 515 Korean companies based on a 2001 Korea Stock Exchange survey. In OLS , a worst-to-best change in KCGI predicts a 0.47 increase in Tobin's q (about a 160% increase in share price). This effect is statistically strong (t = 6.12) and robust to choice of market value variable (Tobin's q , market/book, and market/sales), specification of the governance index, and inclusion of extensive control variables. We rely on unique features of Korean legal rules to construct an instrument for KCGI . Good instruments are not available in other comparable studies. Two-stage and three-stage least squares coefficients are larger than OLS coefficients and are highly significant. Thus, this article offers evidence consistent with a causal relationship between an overall governance index and higher share prices in emerging markets. We also find that Korean firms with 50% outside directors have 0.13 higher Tobin's q (roughly 40% higher share price), after controlling for the rest of KCGI . This effect, too, is likely causal. Thus, we report the first evidence consistent with greater board independence causally predicting higher share prices in emerging markets. Copyright 2006, Oxford University Press.
This paper analyzes the survival of organizations in which decision agents do not bear a major share of the wealth effects of their decisions. This is what the literature on large corporations calls separation of 'ownership' and 'control.' Such separation of decision and risk bearing functions is also common to organizations like large professional partnerships, financial mutuals and nonprofits. We contend that separation of decision and risk bearing functions survives in these organizations in part because of the benefits of specialization of management and risk bearing but also because of an effective common approach to controlling the implied agency problems. In particular, the contract structures of all these organizations separate the ratification and monitoring of decisions from the initiation and implementation of the decisions.
In this paper we review the academic evidence on earnings management and its implications for accounting standard setters and regulators. We structure our review around questions likely to be of interest to standard setters. In particular, we review the empirical evidence on which specific accruals are used to manage earnings, the magnitude and frequency of any earnings management, and whether earnings management affects resource allocation in the economy. Our review also identifies a number of opportunities for future research on earnings management.
We examine three-day cumulative abnormal returns around the announcement of 702 newly appointed outside directors assigned to audit committees during a period before implementation of the Sarbanes-Oxley Act (SOX). Motivated by the SOX requirement that public companies disclose whether they have a financial expert on their audit committee, we test whether the market reacts favorably to the appointment of directors with financial expertise to the audit committee. In addition, because it is controversial whether SOX should define financial experts narrowly to include primarily accounting financial experts (as initially proposed) or more broadly to include nonaccounting financial experts (as ultimately passed), we separately examine appointments of each type of expert. We find a positive market reaction to the appointment of accounting financial experts assigned to audit committees but no reaction to nonaccounting financial experts assigned to audit committees, consistent with accounting-based financial skills, but not broader financial skills, improving the audit committee's ability to ensure high-quality financial reporting. In addition, we find that this positive reaction is concentrated among firms with relatively strong corporate governance, consistent with accounting financial expertise complementing strong governance, possibly because strong governance helps channel the expertise toward enhancing shareholder value. Together, these findings are consistent with financial expertise on audit committees improving corporate governance but only when both the expert and the appointing firm possess characteristics that facilitate the effective use of the expertise.
The question of what makes a concept coherent (what makes its members form a comprehensible class) has received a variety of answers. In this article we review accounts based on similarity, feature correlations, and various theories of categorization. We find that each theory provides an inadequate account of conceptual coherence (or no account at all) because none provides enough constraints on possible concepts. We propose that concepts are coherent to the extent that they fit people's background knowledge or naive theories about the world. These theories help to relate the concepts in a domain and to structure the attributes that are internal to a concept. Evidence of the influence of theories on various conceptual tasks is presented, and the possible importance of theories in cognitive development is discussed.
This paper examines the trading behaviors of individual investors as well as domestic and foreign institutional investors around a unique corporate event: unfaithful disclosure (non-disclosure, canceling disclosure and changing disclosure of a firm's material information). Our study relied on the daily trading data of different groups of investors in Korea's stock market. We found that the market reacts negatively toward announcements on forewarnings of unfaithful disclosure by the Korea Exchange as well as toward the confirmation of the forewarnings. Further, our finding indicates that firms that are proved to be responsible for the unfaithful disclosure tend to perform poorly prior to the announcement days of the forewarnings. This implies that poor-performing firms are likely to have negative information and thus, have incentives not to disclose or not to correctly disclose bad news. In addition, our result demonstrates that firms performing poorly before receiving the forewarnings subsequently perform poorly after confirmation of the unfaithful disclosure, which is consistent with the incentives of unfaithful disclosure. Most importantly, we found that individual investors constantly buy shares of firms receiving the forewarnings prior to the announcements, whereas both domestic and foreign institutional investors sell them. Even after the confirmation of unfaithful disclosure, individual investors continue to buy shares of unfaithful firms and domestic and foreign institutional investors continue to sell them. Because institutional investors are considered to be better informed and/or more sophisticated investors than individual investors, this finding adds to the evidence of information asymmetry among different types of investors prior to the news release as well as to the evidence of trading behaviors by individual investors who are unsophisticatedly following the news release.
This study investigates the relation between disclosure policy and liquidity in equity markets. Disclosure policy influences market liquidity because uninformed investors “price protect” against adverse selection, and this price protection is manifested in market liquidity. Bid-ask spreads, the empirical measure of market liquidity used in this study, are predicted to be inversely related to disclosure policy. In addition, increased trading by informed traders and higher probability of information event occurrence are predicted to both increase spreads and intensify the relation between spreads and disclosure policy. These predictions apply during periods in which no news about the firm is disclosed or pending. The results show that relative bid-ask spreads for firms with disclosure rankings in the bottom third of the empirical distribution are approximately 50 percent higher than spreads for firms with disclosure rankings in the top third of the empirical distribution. Tests that assume endogenous disclosure policy reveal a significant negative relation between disclosure policy and spreads, even after controlling for the effects of return volatility, trading volume, and share price. Tests for cross-sectional variation in spreads and for the sensitivity of spreads to disclosure policy based on informed trade activity and probability of information event occurrence are generally consistent with the predictions, though these results are not statistically significant. The findings of this study are consistent with the notion that a well-regarded disclosure policy reduces information asymmetry and hence increases liquidity in equity markets.
This paper examines the effect of audit committee appointments on shareholder wealth in Korea. We show that stock prices generally increase with audit committee appointments; however, chaebol (business group) affiliates and firms switching audit committee membership are associated with significantly lower stock returns. We suggest that this may be due to management's opportunistic behavior that influences the selection of committee members to their advantage. Audit committee independence and financial literacy of audit committee members appear to help alleviate this opportunistic behavior. In sum, the regulatory governance mechanism established in Korea following the Asian financial crisis seems to be partly effective.
In this paper we review the academic evidence on earnings management and its implications for accounting standard setters and regulators. We structure our review around questions likely to be of interest to standard setters. Specifically, we review the empirical evidence on which particular accruals are used to manage earnings, the magnitude and frequency of any earnings management, and whether earnings management affects resource allocation in the economy. Our review identifies a number of important opportunities for future research on earnings management.
Outside directors and audit committees are widely considered to be central elements of good corporate governance. We use a 1999 Korean law as an exogenous shock to assess how board structure affects firm market value. The law mandates 50% outside directors and an audit committee for large public firms, but not smaller firms. We study how this shock affects firm market value, using event study, difference-in-differences, and instrumental variable methods, within a regression discontinuity approach. The legal shock produces large share price increases for large firms, relative to mid-sized firms; share prices jump in 1999 when the reforms are announced.In a companion paper, Bernard Black, Woochan Kim, Hasung Jang and Kyung-Suh Park, How Corporate Governance Affects Firm Value: Evidence on Channels from Korea (working paper 2011), http://ssrn.com/abstract=844744, we provide evidence on the channels through which governance may affect firm value. For our earlier cross-sectional research on Korean corporate governance, see:Bernard Black, Hasung Jang and Woochan Kim, Does Corporate Governance Affect Firms' Market Values? Evidence from Korea,: 22 Journal of Law, Economics and Organization 366-413 (2006), nearly final version at http://ssrn.com/abstract=311275Bernard Black, Hasung Jang & Woochan Kim, Predicting Firms' Corporate Governance Choices: Evidence from Korea, 12 Journal of Corporate Finance 660-691 (2006), nearly final version at http://ssrn.com/abstract=428662
An examination of the executive compensation structure of 153 randomly-selected manufacturing firms in 1979–1980 provides evidence supporting advocates of incentive compensation, and also suggests that the form rather than the level of compensation is what motivates managers to increase firm value. Firm performance is positively related to the percentage of equity held by managers and to the percentage of their compensation that is equity-based. Moreover, equity-based compensation is used more extensively in firms with more outside directors. Finally, firms in which a higher percentage of the shares are held by insiders or outside blockholders use less equity-based compensation.
The purpose of this paper is two-fold. First, I attempt a taxonomy of the extant accounting literature on disclosure: that is, a categorization of the various models of disclosure in the literature into well-integrated topics. With regard to the taxonomy, I suggest three broad categories of disclosure research in accounting. The first category, which I dub “association-based disclosure”, is work that studies the effect of exogenous disclosure on the cumulative change or disruption in investors’ individual actions, primarily through the behavior of asset equilibrium prices and trading volume. The second category, which I dub “discretionary-based disclosure”, is work that examines how managers and/or firms exercise discretion with regard to the disclosure of information about which they may have knowledge. The third category, which I dub “efficiency-based disclosure”, is work that discusses which disclosure arrangements are preferred in the absence of prior knowledge of the information, that is, preferred unconditionally. Then, in the final section of the paper, I recommend information asymmetry reduction as one potential starting point for a comprehensive theory of disclosure. That is, I recommend information asymmetry reduction as a vehicle to integrate the efficiency of disclosure choice, the incentives to disclose, and the endogeneity of the capital market process as it involves the interactions among individual and diverse investors.
We examine the role of the board of directors, the audit committee, and the executive committee in preventing earnings management. Supporting an SEC Panel Report's conclusion that audit committee members need financial sophistication, we show that the composition of a board in general and of an audit committee more specifically, is related to the likelihood that a firm will engage in earnings management. Board and audit committee members with corporate or financial backgrounds are associated with firms that have smaller discretionary current accruals. Board and audit committee meeting frequency is also associated with reduced levels of discretionary current accruals. We conclude that board and audit committee activity and their members' financial sophistication may be important factors in constraining the propensity of managers to engage in earnings management.
We examine the relationship between the quality of corporate governance and information asymmetry in the equity market around quarterly earnings announcements. We use the change in market liquidity (i.e., bid–ask spreads and depths) around the announcements as a proxy for information asymmetry. We use principal components analysis to identify three factors, board independence, board structure and board activity, that capture the information in the eight individual corporate governance variables we examine. We then use ordinary least squares and two-stage least squares to estimate the relations between market liquidity changes and the following four explanatory variables: directors’ and officers’ percentage stock holdings, board independence, board structure, and board activity. Our results indicate that changes in bid–ask spreads at the time of earnings announcements are significantly negatively related to board independence, board activity, and the percentage stock holdings of directors and officers. We also find that depth changes are significantly positively related to board structure, board activity, and directors’ and officers’ percentage stock holdings. Our results are consistent with the hypothesis that firms with higher levels of corporate governance have lower information asymmetry around quarterly earnings announcements.
Management plays a dominant role in selecting outside directors, inviting skepticism about outsiders' ability to make independent judgments on firm performance. Our examination of wealth effects surrounding outside director appointments finds significantly positive share-price reactions. We find no clear evidence that outside directors of any particular occupation are more or less valuable than others. The results are consistent with the hypothesis that outside directors are chosen in the interest of shareholders.
During the 1997 Korean financial crisis, firms with higher ownership concentration by unaffiliated foreign investors experienced a smaller reduction in their share value. Firms that had higher disclosure quality and alternative sources of external financing also suffered less. In contrast, chaebol firms with concentrated ownership by controlling family shareholders experienced a larger drop in the value of their equity. Firms in which the controlling shareholders’ voting rights exceeded cash flow rights and those who borrowed more from the main banks also had lower returns. Our results suggest that change in firm value during a crisis is a function of firm-level differences in corporate governance measures.
This paper examines how the onset of a financial crisis affects the operation of internal capital markets among firms within a diversified business group. We find that active internal capital markets within Korean business groups (chaebols) attenuate the financial constraints of the group-affiliated firms, allowing them to make efficient capital allocations during the early 1990s. However, these markets barely function after the financial crisis of 1997. Instead, we observe public debt markets serving as a substitute for internal capital markets. Our results suggest that chaebol firms’ coordinated attempts to achieve healthier financial structures in the wake of the crisis have taken place at the expense of investment efficiency.
This study examines how ownership structure and conflicts of interest among shareholders under a poor corporate governance system affected firm performance before the crisis. Using 5,829 Korean firms subject to outside auditing during 1993–1997, the paper finds that firms with low ownership concentration show low firm profitability, controlling for firm and industry characteristics. Controlling shareholders expropriated firm resources even when their ownership concentration was small. Firms with a high disparity between control rights and ownership rights showed low profitability. When a business group transferred resources from a subsidiary to another, they were often wasted, suggesting that “tunneling” occurred. In addition, the negative effects of control-ownership disparity and internal capital market inefficiency were stronger in publicly traded firms than in privately held ones.
This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the ‘separation and control’ issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears these costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem.The directors of such [joint-stock] companies, however, being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master's honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.Adam Smith, The Wealth of Nations, 1776, Cannan Edition(Modern Library, New York, 1937) p. 700.
We investigate the relationship between management ownership and market valuation of the firm, as measured by Tobin's Q. In a 1980 cross-section of 371 Fortune 500 firms, we find evidence of a significant nonmonotonic relationship. Tobin's Q first increases, then declines, and finally rises slightly as ownership by the board of directors rises. For older firms, there is evidence that Q is lower when the firm is run by a member of the founding family than when it is run by an officer unrelated to the founder.
Assistant Professor of Finance, New York University. The author acknowledges the helpful suggestions and comments of Keith V. Smith, Edward F. Renshaw, Lawrence S. Ritter and the Journal' reviewer. The research was conducted while under a Regents Fellowship at the University of California, Los Angeles.
Currently, a director is classified as independent if he or she has neither financial nor familial ties to the CEO or to the firm. We add another dimension: social ties. Using a unique data set, we find that 87% of boards are conventionally independent but that only 62% are conventionally and socially independent. Furthermore, firms whose boards are conventionally and socially independent award a significantly lower level of compensation, exhibit stronger pay-performance sensitivity, and exhibit stronger turnover-performance sensitivity than firms whose boards are only conventionally independent. Our results suggest that social ties do matter and that, consequently, a considerable percentage of the conventionally independent boards are substantively not.
Empirical studies estimating the impact of firm performance on executive pay have primarily concentrated on the short-run response. In this study, the authors present estimates of the complete dynamic response of CEO pay to firm performance. They find that the cumulative response of pay to performance is roughly ten times that of the contemporaneous response, a onetime innovation in firm performance typically raises pay over the next 4-5 years, and compensation arrangements have shifted toward greater performance sensitivity and longer-term pay arrangements over the four decades studied. Copyright 1995 by University of Chicago Press.
Shareholder rights vary across firms. Using the incidence of 24 governance rules, we construct a "Governance Index" to proxy for the level of shareholder rights at about 1500 large firms during the 1990s. An investment strategy that bought firms in the lowest decile of the index (strongest rights) and sold firms in the highest decile of the index (weakest rights) would have earned abnormal returns of 8.5 percent per year during the sample period. We find that firms with stronger shareholder rights had higher firm value, higher profits, higher sales growth, lower capital expenditures, and made fewer corporate acquisitions. © 2001 the President and Fellows of Harvard College and the Massachusetts Institute of Technology
We identify factors that lead to changes among corporate directors. We hypothesize that the CEO succession process and firm performance will affect board composition. Our findings are consistent with both hypotheses. When their CEO nears retirement, firms tend to add inside directors (who may be possible candidates to be the next CEO) Just after a CEO change, inside directors with short tenures appear more likely to leave the board (they, perhaps, being the losing candidates). We also find that inside directors are more likely to leave the board and outside directors more likely to join after a firm performs poorly and when a firm leaves a product market.
American corporations raised approximately $287.84 billion annually between 1980 and 1991 through public issues of debt and equity. This paper analyzes the post-issue operating performance of both debt and equity issuers, controlling for factors which have been shown to explain post-issue firm operating performance, such as free cash flow, performance "run up", and investment in real assets. If finds that security offering announcements convey negative information about the future operating performance of the issuer.
We study how the composition of the board of directors and incentives from direct shareholdings affect firm performance in a sample of large, publicly traded firms. We use an instrumental variables approach that controls directly for endogeneity of both shareholdings and board composition. We find no evidence that cross-sectional patterns in board composition are correlated with cross-sectional patterns in performance. This result is consistent with a number of different explanations, all of which suggest that potential regulation of board composition would not be beneficial. Similar to the previous literature, we find a nonmonotonic relation between ownership and performance. Our results suggest that this relation is not a product of the endogeneity of shareholdings. Finally, we find that firm performance suffers if the CEO stays on too long (beyond 15 years).
We examine whether equity-linked private securities offerings are used as a mechanism for tunneling among firms that belong to a Korean chaebol. We find that chaebol issuers involved in intragroup deals set the offering prices to benefit their controlling shareholders. We also find that chaebol issuers (member acquirers) realize an 8.8% (5.8%) higher (lower) announcement return than do other types of issuers (acquirers) if they sell private securities at a premium to other member firms, and if the controlling shareholders receive positive net gains from equity ownership in issuers and acquirers. These results are consistent with tunneling within business groups. Copyright 2006 by The American Finance Association.
This study examines the stock price effects of security offerings and investigates the nature of information inferred by investors from offering announcements. Changes in share price are unrelated to characteristics of offerings such as the net amount of new financing, relative offering size, and the quality rating of debt issues. The type of security is the only significant determinant of the price response. The opposite patterns of abnormal stock returns following the announcement of completed versus cancelled offerings suggest that managers issue common stock or convertible debt when in managers' view shares are overpriced.
We study the relationship of corporate governance policy and idiosyncratic risk. Firms with fewer antitakeover provisions display higher levels of idiosyncratic risk, trading activity, private information flow, and information about future earnings in stock prices. Trading interest by institutions, especially those active in merger arbitrage, strengthens the relationship of governance to idiosyncratic risk. Our results indicate that openness to the market for corporate control leads to more informative stock prices by encouraging collection of and trading on private information. Consistent with an information-flow interpretation, the component of volatility unrelated to governance is associated with the efficiency of corporate investment. Copyright 2007 by The American Finance Association.
Although researchers have documented gains from insider trading, the sources of private information leading to information asymmetry and insider gains have not been comprehensively investigated. We focus on research and development (R&D)-an increasingly important yet poorly disclosed productive input-as a potential source of insider gains. Our findings, for the period from 1985 to 1997 indicate that insider gains in R&D-intensive firms are substantially larger than insider gains in firms without R&D. Insiders also take advantage of information on planned changes in R&D budgets. R&D is thus a major contributor to information asymmetry and insider gains, raising issues concerning management compensation, incentives, and disclosure policies. Copyright The American Finance Association 2000.
This paper considers a firm that must issue common stock to raise cash to undertake a valuable investment opportunity. Management is assumed to know more about the firm's value than potential investors. Investors interpret the firm's actions rationally. An equilibrium model of the issue-invest decision is developed under these assumptions. The model shows that firms may refuse to issue stock, and therefore may pass up valuable investment opportunities. The model suggests explanations for several aspects of corporate financing behavior, including the tendency to rely on internal sources of funds, and to prefer debt to equity if external financing is required. Extensions and applications of the model are discussed.
Data on corporate governance and disclosure practices reveal wide within-country variation that decreases with the strength of investors' legal protection. A simple model identifies three firm attributes related to that variation: investment opportunities, external financing, and ownership structure. Using firm-level governance and transparency data from 27 countries, we find that all three firm attributes are related to the quality of governance and disclosure practices, and firms with higher governance and transparency rankings are valued higher in stock markets. All relations are stronger in less investor-friendly countries, demonstrating that firms adapt to poor legal environments to establish efficient governance practices. Copyright 2005 by The American Finance Association.
This paper provides a positive theory of voluntary disclosure by firms. Previous theoretical work on disclosure of new information by firms has demonstrated that releasing public information will often make all shareholders worse off, due to an adverse risk-sharing effect. This paper uses a general equilibrium model with endogenous information collection to demonstrate that there exists a policy of disclosure of information which makes all shareholders better off than a policy of no disclosure. The welfare improvement occurs because of explicit information cost savings and improved risk sharing. This provides a positive theory of precommitment to disclosure, because it will be unanimously voted for by stockholders and will also represent the policy that will maximize value ex ante. In addition, it provides a “missing link” in financial signalling models. Apart from the effects on information production analyzed in this paper, most existing financial signalling models are inconsistent with a firm taking actions which facilitate future signalling because release of the signal makes all investors worse off.
This essay details a model of capital structure and financial equilibrium, developed in order to provide more theoretical information about informational asymmetries, financial structure, and financial intermediation. Although direct information transfer about the abilities of the entrepreneur and/or the quality of the firm is uncertain, one publicly available signal is investment in the project by the entrepreneur. This model demonstrates how a firm's value increases with the share of the firm shared by the entrepreneur, and a firm's financial structure can be related to a project or firm's value. Other models cannot readily account for the presence of financial intermediaries, in part because they do not incorporate the role of asymmetric information -- with this model, financial intermediation (which provides a validation role for the credibility of information and has a means of recouping the cost of information gathering and legitimation) can be interpreted as a response to asymmetric information. Within this model, it is determined that the set of investment projects undertaken coincides with the set that would be undertaken if direct information transfer were possible. (CBS)
This paper analyzes the survival of organizations in which decision agents do not bear a major share of the wealth effects of their decisions. This is what the literature on large corporations calls separation of "ownership" and "control." Such separation of decision and risk bearing functions is also common to organizations like large professional partnerships, financial mutuals and nonprofits. We contend that separation of decision and risk bearing functions survives in these organizations in part because of the benefits of specialization of management and risk bearing but also because of an effective common approach to controlling the implied agency problems. In particular, the contract structures of all these organizations separate the ratification and monitoring of decisions from the initiation and implementation of the decisions. Journal of Law and Economics, Vol. XXVI, June 1983. Separation of Ownership and Control * Eugene F. Fama and Michael C. Jensen Journal of...
Information content of unfaithful disclosures
- Sohn S. K.
Sohn, S. K., 2001, Information content of unfaithful disclosures, Yonsei Business Review 38, pp. 1–31.
Corporate governance and equity prices
- Gompers
Does corporate governance predict firms’ market values? Evidence from Korea
- Black