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Abstract

We ask whether and when shareholder-oriented foreign owners are likely to change corporate governance logics in a stakeholder-oriented setting by introducing shareholder-oriented governance practices. We focus on board monitoring and claim that because the bundle of practices used in a stakeholder context does not protect shareholder-oriented foreign owners’ interests, they seek to introduce their own practices. Our results suggest that board monitoring is only activated when shareholder-oriented foreign ownership is high and that the influence of foreign ownership is especially strong in firms without large domestic owners, with high levels of risk and poor performance. Our findings uncover the possibility of the co-existence of different corporate governance logics within a given country, shaped by the nature and weight of foreign owners.

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... Second, foreign shareholders favor voluntary adoption of US GAAP in Japanese MNEs. Under stakeholder-oriented corporate governance, foreign shareholders have shareholder-oriented logics (Desender et al., 2016;Sakawa & Watanabel, 2020b). Thus, foreign shareholders stress the compatibility of financial reporting in Japanese MNEs. ...
... Under a US region-specific approach of Japanese MNEs, the compatibility of financial reporting is higher for MNEs adopting US GAAP than for those adopting IFRS. Under stakeholder-oriented corporate governance, foreign shareholders have shareholder-oriented logics (Desender et al., 2016). Therefore, greater presence of foreign shareholders pressurizes Japanese MNEs to adopt US GAAP to enhance the compatibility of financial reporting in MNEs. ...
... Under stakeholderoriented governance logic, the goal of the firm is to balance interests among all stakeholders in the firm (Jackson, 2005). Japan is known for its stakeholder-oriented corporate governance (Desender et al., 2016;Sakawa & Watanabel, 2019;Yoshimori, 1995). As Tsunogaya et al. (2015) argue, practitioners insist on a cautious convergence approach to deal with disparities between Japanese Generally Accepted Accounting Principles (Japanese GAAP) and IFRS. ...
Article
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This study investigates the relationship between the degree of a company’s internationalization and the voluntary adoption of International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Practices (GAAP) based on an analysis of Japanese multinational enterprises (MNEs). Our research is based on a unique setting, namely, the co-existence of voluntary IFRS and US GAAP, which began in Japanese corporations after March 2010. We find as follows. First, voluntary IFRS and US GAAP adoption is higher in Japanese MNEs with a higher internationalization degree. Second, greater foreign shareholding of Japanese MNEs would result in voluntary US GAAP adoption rather than that of IFRS. This result implies that foreign shareholders prefer US GAAP adoption over IFRS adoption or Japanese GAAP. Under a semi-globalization perspective, Japanese MNEs tend to have a US region-specific approach. This finding is interpreted as follows: foreign shareholders with shareholder-oriented logics stress the compatibility of financial reporting of MNEs with a US region-specific approach. Our study also provides new insight into international accounting standards of MNEs under stakeholder-oriented corporate governance. Corporate governance deviation, such as US GAAP adoption, is caused by greater presence of foreign shareholders with shareholder-oriented logics.
... The monitoring role of foreign shareholders would help lessen the suboptimal decisions of managers and reduce manager misbehaviour that negatively affect shareholders. However, the monitoring role of foreign shareholders is effective if and only if the level of their ownerships is sufficient (Desender, Aguilera, Lópezpuertas-Lamy & Crespi, 2016). Thus, with the use of agency theory, this research provides further explanation for earnings management from the perspective of CEO power and analyses the effect of CEO power on earnings management in the presence of foreign ownership. ...
... Given the separation of ownership and control, foreign shareholders encounter considerably higher information asymmetry than local ones (Anh Vu, Tower, & Scully, 2011). Thus, foreign investors seek to protect their interests through rigorous monitoring mechanisms suggested by good corporate governance practices (Desender et al., 2016). In fact, more agency conflicts occur between ownership concentration and minority shareholders in Asian countries. ...
... However, Estélyi & Nisar (2016) recognise a positive association between national board diversity and firm performance, in which this relationship is likely to be strongly affected when power is concentrated on a CEO. Desender et al. (2016) find that the impact of foreign ownership on board monitoring is stronger when domestic owners are predominantly absent. Firm risk is also higher, thereby leading to less profitable firms (Desender et al., 2016). ...
Article
Using a sample of Vietnamese listed companies from 2007–2016, this study examines the impact of CEO power on earnings management. This work also explores how the association between CEO power and earnings management differs between companies with high foreign ownership (FOR) and low FOR. Our fixed‐effects panel regression analyses reveal that CEO power significantly and positively affects earnings management, whereas FOR can control earnings management. However, when the sample is split into companies with high and low FOR, the significantly positive effect of CEO power is evident only in the group with high FOR, thereby suggesting that CEO power works positively on earnings management given high FOR. These results remain qualitatively the same when the composite CEO power is replaced with individual measures of CEO power. Overall, policymakers with an oversight function should be aware of the potential dual roles of foreign investors.
... The Japanese corporate governance system was characterized by a stable bank ownership structure during the 1990s (Aoki, 1990;Aoki et al., 1994). Long-term relationships between banks and client firms are common in stakeholder-oriented corporate governance systems like Japan, unlike market-oriented systems like the U.S. (Desender et al., 2016). Effective monitoring by banks mitigates agency problems in Japanese corporations (Kang and Shivdasani, 1995;Morck et al., 2000). ...
... The increase of foreign shareholders would be highly observed in Japanese corporations post 2000s (Aguilera et al., 2017). Desender et al. (2016) describe that foreign ownership only accounted for less than 5% in the early 1990s. Kato et al. (2009) report that the average ownership of foreign shareholders is about 5% during 1997-2007. ...
... In shareholder-oriented corporate governance dealing with foreign shareholders, better managerial disclosure practices are keenly important for short-term profit (Bushee and Noe, 2000). Under stakeholder-oriented corporate governance, foreign shareholders have shareholder-oriented logic (Desender et al., 2016). Japanese corporate governance is transitioning and foreign shareholdings are increasing (Hoshi and Kashyap, 2010) such that foreign investors have been functioning as active monitors in Japanese corporations (Sakawa and Watanabel, 2020b;Sakawa et al., 2021c). ...
Article
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This paper investigates whether disclosure quality of analyst forecasts on management forecasts is measured as reliance of analyst forecasts on management forecasts and dispersion of analyst forecasts is affected by the internationalization under a unique setting of effectively mandated management forecasts in Japan. We find that higher internationalization would result in lower disclosure quality of analyst forecasts on management forecasts in Japanese corporations. This implies that firms with higher internationalization face the complexity and uncertainties. Second, greater foreign shareholdings enhance the disclosure quality of analyst forecasts on management forecasts, suggesting the effectiveness of foreign shareholders' disclosure pressure. Finally, greater bank ownership would also enhance the credibility of analyst forecasts on management forecasts under stakeholder-oriented corporate governance.
... Management attempt to mitigate the associated agency costs by establishing "a series of mechanisms that seek to reconcile the interests of shareholders and managers" (O'Sullivan, 2000: 399). These mechanisms include external (or statutory) auditing where independent auditors enhance the credibility of a company's financial statements (Agarwal and Chadha, 2005;Desender et al., 2013;Desender et al., 2016). Other mechanisms pertain to the ways in which companies are directed and controlled (O'Sullivan, 2000;Larcker and Richardson, 2004), including incentive effects of executive share ownership (Jensen and Meckling, 1976), and the review of financial reporting and the engagement of the external auditor by the audit committee (Krishnan et al., 2011;Krishnan, 2005). ...
... FIRMSIZE is measured as the natural logarithm of the book value of total assets (Desender et al., 2016). Size reflects both the magnitude and complexity of the firm's operations. ...
Article
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We extend prior research on corporate governance and non-audit services (NAS) by distinguishing between the management entrenchment region of management ownership and regions in which the interests of management and shareholders converge. Management entrenchment and convergence-of-interests regions were estimated for our sample of 5198 Australian firm-years. NAS is negatively (positively) associated with management ownership in the convergence-of-interests (entrenchment) regions. However, using a sub-sample based on firms that have audit committees, we find the association between NAS and management ownership is confined to the entrenchment region, while audit committee strength is negatively associated with NAS fees across all management ownership regions. JEL Classification: M42, M48
... A practically and theoretically meaningful perspective to investigate the role of shareholders is the shareholder internationality which describes the mixture of nationalities among shareholders. On the one hand, with the globalization of investment, foreign shareholders in firms have brought substantial changes to corporate governance (Aguilera et al. 2019;Desender et al. 2016). On the other hand, the impact of shareholder internationality on firm internationalization has received broad attention from international business scholars (e.g., Filatotchev et al. 2008;Singla et al. 2017). ...
... Second, the present study answers the call for incorporating owners' attitudes and decision making into studies in the contexts of emerging markets (Cuervo-Cazurra 2012; Singla et al. 2017). Most of the extant studies on shareholder internationality have focused on developed market firms (e.g., Ahmadjian and Robbins 2005;David et al. 2006;Desender et al. 2016). This research is conducted in Colombia, whose research findings can be generalized to many other neighboring countries in Latin America due to the high level of homogeneity (Aguilera et al. 2017), as well as other emerging markets such as China and India. ...
Article
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In light of the increasing efforts made by emerging market firms to engage in international business through importing activities, identifying the characteristics that motivate importing business and contribute to its success is practically and theoretically meaningful. Drawing upon a knowledge-based view (KBV), we examine how the shareholder internationality affects a firm’s importing activities. We hypothesize that the shareholder internationality can facilitate a firm’s import initiation and contribute to the diversity of importing countries of origin. Moreover, the divergence of shareholders’ nationality backgrounds may hinder import initiation, but motivate importing from dispersed countries of origin during the import development process. A longitudinal analysis of Colombian firms supports our hypotheses.
... Under these inter-firm networks, Japanese firms are monitored by banks and cross-holding companies in order to maintain strategic and long-term relationships. As a result, Japanese firms adopt so-called stakeholder-oriented corporate governance, which seeks to achieve goals beneficial to various stakeholders, including non-controlling shareholders [22,34,52,53]. Under stakeholder-oriented corporate governance, the demand for accounting information is small, as the interests among stakeholders are resolved through private channels [15]. ...
... This is characteristic of the stakeholder-oriented corporate governance system adopted in Japan. However, as previous studies [52,63] pointed out, corporate governance in Japan is in a transition period, and the share of foreign investors has increased with the disposal of bad loans and bank restructuring since 2000. Indeed, in our sample, firms with foreign investors as shareholders, or DFOREIGN, averaged about 24.5%. ...
Article
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This study aimed to investigate the impact of parent companies and other multiple large shareholders (MLSs) on the audit fees in Japanese firms, where stakeholder-oriented corporate governance is adopted. In such a firm, monitoring by many stakeholders can mitigate conflicts among shareholders. However, because the key stakeholders of these firms tend to resolve information asymmetry problems through insider communication, the level of audit effort is affected not only by the audit risk from principal–principal conflicts, but also by the demands of key stakeholders. Japanese parent companies tend to spin off their departments with high growth potential and provide incentives to lower subsidiaries’ cost of capital through information disclosure. Therefore, parent companies require greater audit efforts, and consequently, audit fees are expected to be higher. However, when MLSs are shareholders of the listed subsidiary, they can obtain relevant information via private communication. Thus, the need for quality accounting information will be smaller, the level of audit effort required will be smaller, and as a result, audit fees will be smaller. The results are consistent with these expectations. This paper contributes to the sustainable growth and economic development of firms and markets and has implications for the development of effective corporate governance mechanisms.
... Thus, research on Japanese multinationals' host county portfolios and tax avoidance has important implications for many counties. Third, Japanese firms' corporate governance is stakeholder-oriented (Desender et al. 2016;Kaler 2006;Witt and Stahl 2016), which is consistent with stakeholder theory (Freeman 1984). Studies have found that Japanese multinationals behave more ethically due to international stakeholder pressure (Lewin et al. 1995). ...
... One fundamental assumption underlying H1 and H2 is that foreign stakeholders can influence Japanese multinationals' decision making. One of the fundamental reasons why foreign stakeholders can put such pressure on Japanese firms is that they have stakeholder-oriented corporate governance (Desender et al. 2016;Kaler 2006;Witt and Stahl 2016). In H1 and H2, we assume that the number of host countries with strong investor protection and high ethical standards is negatively related to a firm's tax avoidance practices, as such a country portfolio can mitigate private control benefits and enhance the ethical interactions between firms and stakeholders. ...
Article
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This study investigates the conditions under which host country portfolios are more likely to regularize corporate tax behavior. We use a sample comprising data on Japanese multinationals covering 2004 to 2014 to examine the relationship between foreign direct investment (FDI) host country portfolios and tax avoidance from the perspectives of investor protection and ethical standards. Our multivariate regression results show that the number of countries with strong investor protection/high ethical standards in the FDI host country portfolio is negatively related to tax avoidance. We also find that the effect of investor protection/ethical standards is less pronounced when the degree of indulgence is high. Further analyses show that the relationships we find are affected by disclosure requirements, local regulations, and accounting standards. These findings remain unchanged after several sensitivity checks. Overall, this study contributes to the business ethics literature by showing that FDI host country investor protection and ethical standards are external monitoring mechanisms for mitigating tax avoidance by multinationals.
... Furthermore, foreign independent directors are relatively cut off from Chinese local networks (Giannetti et al., 2015;Masulis et al., 2012) and their presence tends to "strike the innate balance of the characteristics referred to as Guanxi (connection, ties, connectedness), Renqing (favor), and Mianzi (face) among the local Chinese" (Du et al., 2017, p. 143). Without being constrained by local ties, systems and regulations in China, foreign independent directors can make full use of their excellent expertise and experience, become advocates for change and advance their firms' balance of internal and external CSR (Desender et al., 2016;Luo et al., 2021). For example, Mun and Jung (2018) suggest that without being subject to local institutions, foreign actors tend to reform discriminatory employment practices where there exists a high level of workplace gender inequality. ...
... Finally, our study sheds light on the relationship between independent directors and CSR in China. Prior research argues that the effectiveness of corporate governance mechanisms hinges significantly on the institutional environment (Desender et al., 2016;Liu et al., 2015). ...
Article
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Purpose This study aims to examine the effect of independent directors on the corporate social responsibility (CSR) gap – a misalignment between internal and external CSR. More specifically, the authors investigate how two types of independent directors (i.e. politically connected and foreign) affect a firm’s CSR gap in China. Design/methodology/approach The authors use the fixed-effects regression model to analyze the panel dataset, which is conducted by a sample of Chinese publicly listed firms from 2008 to 2015. Findings The findings indicate that, on average, firms undertake more external than internal CSR actions. Importantly, the authors find that firms having politically connected independent directors on boards have a wider gap between their internal and external CSR. In contrast, firms having foreign independent directors on boards have a narrower gap between their internal and external CSR. Practical implications This study provides insights into the role of independent directors in increasing or decreasing the gap between a firm’s internal and external CSR actions, which offers important implications for policymakers and investors. Originality/value This study extends the literature on the causes of the CSR gap and deepens the theoretical understanding of the governance role of independent directors in China.
... We test our hypotheses using panel data by considering firm-year as the unit of analysis. Following Baltagi and Wu (1999) and Desender et al. (2016), we adopt the FGLS regression model, which provides reliable estimates in the presence of heteroscedasticity (Wooldridge, 2002). This technique allows estimation in the presence of autoregressive, AR(1), disturbances within panels and cross-sectional correlation and heteroscedasticity across panels. ...
... Furthermore, for our specific data set, this regression technique has a number of advantages over fixed effects (FE) estimation. First, FE estimation requires significant within-panel variation of the variable values to produce consistent and efficient estimates (Desender et al., 2016). Second, FE estimates may aggravate the problem of multicollinearity if solved with least squares dummy variables (Baltagi et al., 2005). ...
Article
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Integrating new institutional economics and resource dependence theory, this study investigates whether in transition economies, characterized by shifting from centrally commanded to more market-oriented economies, there are performance differences among family firms (FFs), nonfamily firms (non-FFs), and former state-owned enterprises (former SOEs), and whether political connections affect these differences. Our findings suggest that FFs outperform non-FFs and former SOEs, unless non-FFs have politically connected CEOs. The performance gap in favor of FFs increases at high levels of board political connection intensity. Among FFs, the top-performing ones either promote nonfamily leadership or combine family leadership with politically connected boards of directors.
... Fourth, from a different perspective, there is a view that greater stakes are held by relational shareholders in Japanese firms (David et al. 2010;Desender et al. 2016). These relational shareholders benefit from the financial performance of these firms, as well as from their multiple relationships with them (David et al. 2010). ...
... Relational owners are domestic shareholders who have close relationships with their firms. 4 Transactional owners are foreign shareholders who have a 'shareholderoriented' scope and they are expected to mitigate agency conflicts in publicly traded corporations (Desender et al. 2016). ...
Article
Agency theory predicts that institutional ownership plays an important role in monitoring corporate risk-taking. This study examines this ownership-risk taking linkage in Japan over the period 2007 and 2019. We proxy risk through measures of idiosyncratic risk, total risk, and market beta. We show that (relational) foreign institutional shareholdings (do not) induce corporate risk-taking, thereby mitigating (preserving) the managerial ‘quiet life’ in Japanese corporations. Using 2SLS analysis, the roles of institutional shareholders are robust to endogeneity concerns. Finally, we also confirm robustness using alternative accounting-based risk proxies such as the standard deviation of Tobin’s Q and ROA. Our study implies that the monitoring of institutional shareholders is important in Japanese corporations whose top executives might be prone to seek a ‘quiet life’.
... Such policies directly affect strategic decisions in firms across the globe and those that do not comply may receive less investment. This is but one example of foreign institutional ownership, a phenomenon that runs into trillions of US dollars and has many different faces (Desender et al., 2016;Sethuram et al., 2021;Shi et al., 2020). Most sovereign wealth funds have an explicitly global brief, whilst private equity and hedge funds have become increasingly willing to cross national boundaries, raising questions as to their impacts on national business systems different from that encountered in their country of origin . ...
... There is an increasing trend of research in strategic entrepreneurship on early-stage institutional investors and their decision-making processes (Cumming & Johan, 2017). Another stream deals with the effects of international institutional investors on local firms, such as a push towards international strategy (Ray et al., 2016), or increased exposure to a foreign government and a propensity to engage in nonmarket strategies as a result (Desender et al., 2016;Shi et al., 2020). However, opinion is divided as to whether the consequences occur at the target firm-level only or challenge entire systems, and whether the observed effects are due to the country of origin (Guery et al., 2017), or rather the intrinsic nature of an investor . ...
Research
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Call for Papers for a Special Issue in Global Strategy Journal Ownership and Global Strategy Submission deadline: June 15, 2022 Guest Editors: Geoffrey T. Wood, Western University, Canada Anna Grosman, Loughborough University London, UK Michael J. Mol, Copenhagen Business School, Denmark & University of Birmingham, UK Supervising Editor: Alvaro Cuervo-Cazurra, Northeastern University, USA Who owns the firm (local or foreign shareholders, governments or private investors, concentrated or diffused shareholders, traditional or alternative investors) has long been an essential topic for research on organizations. At the same time, our conceptualization of ownership has widened over time to incorporate owners as strategists (most prominently in the case of entrepreneurial financiers), sources of capital (as in the case of large joint-stock companies), and mechanisms of control (direct or via institutional intermediaries). The linkages and tensions amongst these conceptual foundations (for instance, the tension between ownership, ownership structures, and control) have been the focus of a large literature in global strategy (Cuervo-Cazurra et al., 2019; Ferreira & Matos, 2008; Mudambi & Navarra, 2004; Shi et al., 2021). At the same time, this diversity in conceptual foundations provides numerous opportunities for advancing our understanding of the role of ownership in global strategy. This is the objective of this special issue: analyzing how ownership affects global strategy and, by extension, how strategies are employed to accommodate owners.
... The literature has established how foreign institutional owners, building on their knowledge, networks, and monitoring abilities, influence their firms' strategizing. Foreign investors are motivated to intervene since their own interests might differ from the objectives of domestic shareholders, who are potentially more entangled with the firm and less inclined to exercise strict oversight (Desender et al., 2016;Yamanoi & Asaba, 2018). To intervene, they can use two channels of influence: first, "voice"-that is, direct influence, such as exercising their voting rights or private engagement with the management, and second, indirect influence via "exit"-that is, selling their stakes (Hennig et al., 2022;McCahery et al., 2016). ...
... Second, we contribute to the literature on the determinants of national competitiveness (e.g., Fainshmidt et al., 2016;Porter, 1990;Thompson, 2004) by explicating the role of inward foreign investments, specifically through institutional investors. Drawing on arguments from the literature examining the influence of foreign institutional investors (Aggarwal et al., 2011;Desender et al., 2016;Ferreira & Matos, 2008;Luong et al., 2017), we uncover how investors from countries with high-quality competitiveness factors increase their firms' competitive repertoire complexity and that this source is an imperfect substitute for firms' low-quality domestic context. Thus, we demonstrate how investors not only export governance mechanisms (Ellis et al., 2017) but also the characteristics of their countries. ...
Article
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Recent research has shown that firms' ability to employ complex competitive repertoires can create long‐term competitive advantages. Since research on its determinants has focused on the firm level, we lack an understanding of how country‐level factors impact firms' implementation of complex competitive repertoires. Our cross‐country study addresses this gap by integrating a model of country‐level competitiveness factors with insights from the literature on competitive dynamics and portable governance. We argue that a country context with high‐quality competitiveness factors enables firms to implement complex competitive repertoires. In addition, we hypothesize that firms with foreign investors from countries with high‐quality competitiveness factors can partially compensate for low‐quality factors in firms' domestic context. We found support for our hypotheses in an unbalanced sample containing 1,340 firms from 32 countries. Employing complex competitive repertoires (i.e., diverse and dynamic arrays of competitive actions), such as price reductions or new product introductions, can help firms outcompete their competition. We argue and empirically show that firms' domestic country context, specifically high‐quality governance, factor and demand conditions, related and supporting industries, and strong context for rivalry drive their ability to implement complex repertoires. Moreover, we find that ownership by foreign investors from favorable country backgrounds can partly compensate for firms' weak conditions at home by serving as enabling bridges. Managers who aim to improve their firms' repertoire complexity but are restricted by their domestic country context may consider attracting foreign investors from countries that have what their countries lack.
... Although the disclosure policy is too strict but still the creditors can only see what is disclosed. As per the US anti monopoly legislation, no single bank can provide multiple services (Desender, Aguilera, Lópezpuertas & Crespi, 2016). Although this was to eliminate the influence of bank in the organization but expanding the borrowed financing to multiple investors sometimes proved to be the worst experience for the whole economy especially in times of crunch or slump in the economy. ...
Article
Lack of governance has always been an issue in Pakistan, restricting growth of its companies. The increased competition due to arrival of MNCs, well-equipped with best practices, emphasizes the need of good corporate governance systems according to socioeconomic culture of Pakistan. A good corporate governance system helps accelerate the socioeconomic growth of a country by maintaining a balance between rights of all stakeholders. The corporate governance models adopted by most of organizations in Pakistan and other developing nations include Anglo-US, German and Japanese models. The same are reviewed to evaluate their application in Pakistan. The study will help understand benefits and problems of mentioned corporate governance systems and also help design a system best for Pakistan ensuring balance of power and representation of all stakeholders that is one of the main reasons behind poor governance in Pakistan.
... These owners persuade managers to pursue risky strategies via actively voting for their shares, diplomacy, or even confrontational proxy fights. The presence of FI owners even compels independent directors to perform a proactive monitoring role and to take steps to fulfil FI owners' interest(Colpan et al., 2011;Desender, Aguilera, Lópezpuertas-Lamy, & Crespi, 2016). Focal firms, hence, have been responsive to FI owners' expectations about strategic risk-taking by conducting CBA.FI owners, as part of their global portfolio, hold shares in the focal firms to earn profit and diversify their portfolios. ...
Thesis
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Cross border acquisition (CBA), entailing a high level of risk, requires considerable experiential knowledge that EMNEs lack. There is a gap in the knowledge around how EMNEs compensate for their lack of experiential knowledge and how this experiential knowledge influences EMNEs’ adoption of CBA. Drawing from organisational learning theory and agency theory, this study posits that experiential knowledge acquired from inward internationalisation positively influences EMNEs’ CBA decisions and the effect can be modified by the varying strategic motives that dominant owners want to pursue in the organisation. The study examined a sample of 369 CBAs conducted by 205 Indian public listed companies from 2009 to 2017 to test the hypotheses in an Indian context.
... Although the disclosure policy is too strict but still the creditors can only see what is disclosed. As per the US anti monopoly legislation, no single bank can provide multiple services (Desender, Aguilera, Lópezpuertas & Crespi, 2016). Although this was to eliminate the influence of bank in the organization but expanding the borrowed financing to multiple investors sometimes proved to be the worst experience for the whole economy especially in times of crunch or slump in the economy. ...
... For example, in German and Japanese corporate governance, monitoring by relationshiporiented banks may effectively substitute for an active market for corporate control (Aoki, 2001). Universalistic policy prescriptions may therefore lead to important shortcomings, and, as a result, they need to consider the institutional within which firms operate (Aguilera & Cuervo-Cazurra, 2004;Aguilera et al., 2008;Desender et al., 2016). A number of recent studies demonstrate this point clearly. ...
Article
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This paper draws on the articles in the Forum on Corporate Governance to discuss how corporate governance and accounting research complement each other well in explaining how companies are governed as well as properly managed from an accounting point of view. We put special attention to the cross-national differences in both corporate governance systems and accounting practice and how that affect multiple organizational outcomes ranging from financial performance to corporate social performance and reporting quality.
... Agency difficulties may be applicable to every former shareholder, particularly FI. Geographical separation and cultural difference may produce conflicts of interests/information asymmetry for local managers and investors on the one hand and FI on the other, promoting a separation in attitudes to RT (e.g., Desender et al, 2016). Dahlquist and Robertson (2001) proposed that FI has similarities with institutional investment and that information asymmetry/agency difficulties may be mitigated to improvements in corporate structure, CG, and increased active monitoring. ...
Article
This paper scrutinizes the influence on corporate risk-taking of foreign ownership for 461 listed companies in Vietnam between 2012 and 2016. A threshold regression method is employed for assessing a "threshold" influence of foreign ownership interests. The findings show that foreign investment promotes corporate risk-taking up to a certain point; once past this threshold, there is little significant influence on foreign investment. The findings imply that a minimum level of foreign ownership is needed in order to have a significant effect on corporate risk-taking in Vietnam. ARTICLE INFO
... These characteristics lead foreign investors to have a high information asymmetry, also increased by the distance that exists between the investors' country, as, in many cases, they are institutional investors, and China (Cao et al., 2017). A considerable lack of transparency means that investors are particularly sensitive to those indicators that characterize quality governance (Desender et al., 2016). An extant body of literature also highlights the marked misalignment of interests between managers and shareholders in China, which leads to a substantial increase in agency costs (e.g. ...
Article
Purpose The paper aims to empirically test the impact of intellectual capital (IC) on a firm's dividend policy. Further, the authors investigate the moderator effect of Chief Executive Officer's (CEO) characteristics (gender, age and education) on this relationship. Design/methodology/approach The research was carried out on the main Chinese listed companies reported on the CSI 100 Index from 2016 to 2018. To assess the impact of IC on the dividend policy and then the moderating effect of the characteristics of the CEOs, the authors used a fixed effects panel data analysis. Findings The results suggest a positive impact of IC on dividend policies. In addition, this relationship is enhanced when the CEO is a woman, and the lower the age the higher the effect is. Originality/value To the best of the authors' knowledge, this is the first empirical study that explores the effect of IC on a firm's dividend policy in an emerging country. Specifically, this paper demonstrates the impact that IC has on the creation of shareholder value. Furthermore, considering the characteristics of the CEOs, this study tests new moderating effects in the relationship between IC and value creation and highlights how IC, dividends and CEO characteristics can be useful in aligning interests between ownership and management, enriching the debate on agency theory.
... The presence of one ownership structure can reduce agency problems because shareholders will help control the company so that managers do not take actions that can harm shareholders (Lozano et al., 2016). In addition, foreign ownership of shares can be used to monitor management and minimize agency conflicts (Desender et al., 2016). ...
Article
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Intellectual capital is an important element in determining the performance of banking companies. This study aimed to examine the effect of intellectual capital investment, good corporate governance (proxied by foreign ownership and institutional ownership), and barriers to entry on intellectual capital performance. This research was conducted on conventional banking companies listed on the Indonesia Stock Exchange from 2015 to 2019. The sample was selected using a purposive sampling method based on specific criteria. Eighty-nine banking companies met the criteria. Data analysis was performed using multiple linear regression analysis. The results of this study indicate that intellectual capital investment and barriers to entry have a negative effect on intellectual capital performance. On the other hand, foreign ownership and institutional ownership have no significant effect on intellectual capital performance. These findings recommend that banking companies pay attention to efficiency in investment in human resource development to improve bank performance. Inefficient investment in human resources can lead to a decrease in intellectual capital performance. Banking companies also need to continuously innovate service products to maintain their competitiveness and no longer rely on fixed asset investment as an element of a barrier to entry.
... To mitigate possible simultaneity, we lag all explanatory variables by one period (Desender et al., 2016). That is, data pertaining to the independent variable, the moderators, and all controls are from the years 2008 through 2015, and data pertaining to the dependent variable are from 2009 through 2016. ...
Article
Green innovation has been recognized as a strategic priority for enhancing corporate image and achieving superior performance, yet few studies have examined the impact of state ownership on green innovation in emerging economies. Building on the institutional theory and resource-based view, this study investigates how state ownership affects green innovation within a given institutional environment and in combination with firm characteristics. Using panel data for listed Chinese firms from 2008 through 2016, our findings indicate that state ownership positively affects a firm's green innovation. Moreover, the facilitating role of state ownership in green innovation is strengthened in regions with advanced legal development, for firms with sufficient resources, or when a board chair possesses functional experience. These findings provide novel insights into how alignment between state ownership, the institutional environment, and organizational features affects green innovation in emerging economies.
... Thus it is expected that the risk of litigation will be lower in family firms, given the concentration of ownership. Therefore, in line with other studies (Aguilera & Crespi-Cladera, 2012;Desender et al., 2014), we do not associate higher quality financial information with larger audit firms, leading to the formulation of the following research hypothesis: ...
Article
El objetivo del estudio consiste en analizar la calidad de la información financiera de las empresas españolas, comparando las empresas familiares y las no familiares, y relacionando dicha calidad con las prácticas de gobierno corporativo. Para alcanzar este objetivo se analizó una muestra de 650 empresas españolas durante el período 2011-2016. Con base en la teoría de la agencia y en la literatura sobre la riqueza socioemocional, los resultados muestran una mayor calidad de la información financiera en las empresas familiares, relación que se ve reforzada por los factores de gobierno corporativo. Nuestros resultados son consistentes con la investigación previa y con las premisas de la teoría de agencia, que indican menores asimetrías de información entre propietarios y gestores en el singular contexto de las empresas familiares. Además, nuestro trabajo proporciona evidencia empírica de que la participación de las mujeres en el consejo de administración contribuye a la mayor calidad de la información financiera en las empresas familiares, contribuyendo a explicar la heterogeneidad de las empresas familiares en términos de gestión del resultado contable. El estudio contribuye a cubrir la brecha que existe en la literatura sobre la influencia del contexto de empresa familiar y la influencia de la presencia de las mujeres en el consejo sobre la calidad de la información financiera.
... This does not grant them managerial control over those companies, but it does make them influential stakeholders (cf. Ahmadjian & Robbins, 2005;Deeg et al., 2016;Desender et al., 2016). ...
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... Since the subprime mortgage crisis in the United States, a series of financial scandals have occurred in succession, which prove that even in advanced countries, there are still problems of board governance [1]. The US board of directors' governance system, which has been regarded as a model of study in the past, has been severely challenged. ...
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... In general, foreign ownership occurs when multinational firms with operations in many countries make long-term investments in a foreign country, typically through foreign direct investment or takeover (Desender et al., 2016). This type of ownership attracts the interest of international foreign analysts, who frequently ask for transparent corporate disclosures to allow them to closely monitor managers. ...
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... Second, shareholders may have a more salient influence to achieve certain corporate goals by controlling board decisions (David et al., 2007;Gond and Piani, 2013;Sikavica et al., 2020). Third, because shareholders may be connected with different regional environments (Aguilera and Crespi-Cladera, 2016;Aguilera et al., 2021;Bueno-Garcia et al., 2021), they may bring their own experience and knowledge to a firm's established practices (Desender et al., 2016). ...
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Debates about the drivers of corporate environmental strategy as well as the influence of shareholders on environmental investments have grown exponentially in the last decade. This paper provides a novel perspective on the influence of investors on a firm's environmental strategy by theorizing how the shareholders' orientation may provide different resources for firms to outperform environmental institutional pressures, and further analyzing how foreign market exposure moderates this relationship. Our results, produced from a longitudinal sample of 2,237 observations between 2007 and 2017 from 276 US firms in 11 industries, show that having a higher percentage of strategic shareholders positively drives firms' environmental proactivity. Meanwhile, having a higher percentage of financial shareholders is positively related to firms' environmental proactivity only at high levels of foreign market exposure, but is negatively related at low levels. Our results contribute to the ownership and environmental strategy literature by delimitating the different influences of strategic and financial investors on firms' environmental strategy and making a bridge between institutional and resource-based perspectives.
... Internal governance mechanisms comprise effectively structured boards of directors to monitor managerial behavior (Hillman & Dalziel, 2003). Independent boards, comprised of a larger proportion of outside (i.e., non-current firm employees) vis-à-vis inside-directors (i.e., members of the top management team) (Luan & Tang, 2007), had been advocated for based on that the former would be more effective in curtailing managers' engaging in value-destroying activities (Desender et al., 2016). In addition, internal governance mechanisms include incentives alignment, pertaining to managers' compensation mix, characteristically splitting between short-term (i.e., salary and annual bonus) and long-term compensation (i.e., a portfolio of stocks and options) (Cuevas-Rodríguez et al., 2012). ...
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Theorists and practitioners still argue about different shareholders' environmental preferences. Drawing on various processes of institutional theory such as deinstitutionalization and defensive institutionalism, we test the differences between foreign and national shareholders' influences on firms' environmental proactivity. Specifically, we focus on the country of origin of the dominant shareholders and the environmental culture of the countries of origin of the shareholders. Using unbalanced panel data from between 2006 and 2017, which includes 12,527 observations of 1532 different firms from 11 economic sectors and across 23 countries, our results show that foreign shareholders are more prone to modifying existing environmental practices, whereas national shareholders may accept them, despite being reluctant to implement such changes. We make a contribution by showing that the deinstitutionalization forces coming from foreign shareholders are stronger than the defensive institutionalism efforts of national shareholders. However, such forces are not always the best options for sustainability.
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Research Question/Issue We explore how the interrelations of governance mechanisms (“bundles”) influence a firm’s propensity for corporate acquisitions. Focusing on four key internal and external mechanisms, namely board of directors monitoring, CEO pay incentives, takeover market discipline and institutional investor monitoring, we use a sample of 1,171 completed M&A deals by 799 US firms during the period 1998‐2015 to test the Substitution vs Complementarity Hypotheses. Research Findings/Insights The findings provide, in the main, support for both the Substitution and the Complementarity Hypotheses, with several incentives alignment, internal and external monitoring mechanisms acting as substitutes and complements of each other towards firm acquisitiveness. Theoretical/Academic Implications Our results challenge the notion that corporate governance mechanisms purely function as independent factors and contribute to the configurational perspective of corporate governance. They offer new evidence that combinations or “bundles” of firm‐level governance mechanisms can allow for differing degrees of firm acquisitiveness. Practitioner/Policy Implications Different governance “bundles” will have different implications for major strategic decisions such as corporate acquisitions. Firms seeking to control or increase acquisition propensity can thus consider “equifinal” governance configurations, whereby alternative combinations of governance mechanisms can lead to comparable, desired outcomes.
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Shareholder value maximization has spurred a long-standing and heated debate between the proponents of a unified corporate objective function and the supporters of multi-constituency goals of the corporation. We weigh in on the corporate purpose debate from a different point of view: that of the shareholders. Specifically, we seek to critically assess the assumptions about shareholders embedded in the shareholder value maximization doctrine and examine the implications of three contemporary shareholding practices: (a) shareholders investing concurrently in competing firms, (b) residual-risk bearing decoupling, and (c) heterogeneous shareholder interests. Our critique draws out the challenges that contemporary shareholder practices pose for corporate governance and highlights the need for strategic corporate governance, or governance policies and practices that prioritize the sustainable competitive advantage of the firm.
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What drives organizational nonconformity to global corporate governance norms? Despite the prevalence of such norms and attendant conformity pressures, many firms do not adhere to them. We build on a political view of corporate governance to explore how different national institutional contexts and organizational conditions combine to produce over- and underconformity to global board independence norms. Using configurational analyses and data from banks in OECD countries, we identify multiple equifinal combinations of conditions associated with over- and underconformity. We also find that over- and underconformity have different drivers. We conjecture that while overconformity is associated with a shareholder–management coalition in liberal market economies, underconformity results from multiple complex combinations of national and organizational conditions that often include dominant blockholders, strong labor rights, and small organizational size. We leverage these findings to abduct theoretical insights on nonconformity to global corporate governance norms. Doing so sheds light on the role of power in conditioning the adoption of global practices and contributes to research on international corporate governance by informing discourse surrounding the globalization of markets.
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Our study investigates the effects of board acquisition experience on value creation in cross-border acquisitions and the dependence of this relationship on acquirer and target country institutions. We draw on cross-border acquisition research and institution-based corporate governance research to argue that the effect of board acquisition experience depends on the institutional characteristics of the acquirer and target countries and on cultural differences between these two countries. Based on 1775 cross-border acquisitions of U.S. and European acquirers, we show a positive effect of board acquisition experience on the announcement returns of cross-border acquisitions, which is even stronger when the target country’s takeover regulations are less friendly and when the target and acquirer countries are culturally more distant.
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List of Figures ix List of Tables xi Preface xiii CHAPTER ONE Problems of Institutional Analysis 1 CHAPTER TWO The Problem of Change 31 CHAPTER THREE The Problem of Mechanisms 62 CHAPTER FOUR The Problem of Ideas 90 CHAPTER FIVE The Problem of Globalization 124 CHAPTER SIX Where Do W Go from Here? 172 APPENDIX Analysis of Tax Levels and Structures for Country Subgroups 191 References 205 Index 239
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Previous studies generally suggest that internal control and external auditing can substitute for each other, so that better internal control will be associated with lower audit fees. However, their empirical results do not support this view. In contrast, previous studies of the interaction between corporate governance and external audit services often assume that they are complementary, and that improved governance is associated with higher audit fees, although the evidence about this issue is also mixed. We examine whether the ‘substitution’ or ‘complementary controls’ views apply. We find that measures of internal auditing, corporate governance, and concentration of ownership are all positively related to audit fees, consistent with the explanation that controls are complementary. The study makes a contribution by assisting regulators in understanding the effects of regulation of corporate governance, and by showing auditors and auditing standard setters that the view that internal controls can substitute for external auditing may not be helpful. We also find that these relationships hold only in a relatively less regulated environment.
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Organizations face institutional complexity whenever they confront incompatible prescriptions from multiple institutional logics. Our interest is in how plural institutional logics, refracted through field-level structures and processes, are experienced within organizations and how organizations respond to such complexity. We draw on a variety of cognate literatures to discuss the field-level structural characteristics and organizational attributes that shape institutional complexity. We then explore the repertoire of strategies and structures that organizations deploy to cope with multiple, competing demands. The analytical framework developed herein is presented to guide future scholarship in the systematic analysis of institutional complexity. We conclude by suggesting avenues for future research.
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Considers structural inertia in organizational populations as an outcome of an ecological-evolutionary process. Structural inertia is considered to be a consequence of selection as opposed to a precondition. The focus of this analysis is on the timing of organizational change. Structural inertia is defined to be a correspondence between a class of organizations and their environments. Reliably producing collective action and accounting rationally for their activities are identified as important organizational competencies. This reliability and accountability are achieved when the organization has the capacity to reproduce structure with high fidelity. Organizations are composed of various hierarchical layers that vary in their ability to respond and change. Organizational goals, forms of authority, core technology, and marketing strategy are the four organizational properties used to classify organizations in the proposed theory. Older organizations are found to have more inertia than younger ones. The effect of size on inertia is more difficult to determine. The variance in inertia with respect to the complexity of organizational arrangements is also explored. (SRD)
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We evaluate and summarize the large body of audit fee research, and use meta-analysis to test the combined effect of the most commonly used independent variables. The perspective provided by the meta-analysis allows us to reconsider the anomalies, mixed results and gaps in audit fee research. We find that, while many independent variables have very consistent results, there are also several where there is no clear pattern to the results and others where significant results have been found only in certain periods or particular countries. These variables include a loss by the client and leverage, which have become significant in comparatively recent studies; internal auditing and governance, both of which have mixed results; auditor specialization, regarding which there is still some uncertainty; and the audit opinion, which was a significant variable before 1990 but not in more recent studies.
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This book uses comparative institutional analysis to explain differences in national economic performance. Countries have their own rules for corporate governance and they have different market arrangements; and these differences in rules and organization affect the way firms behave. Countries also tend to develop conventions of organizational architecture whether their hierarchies are functional, horizontal, or decentralized. This affects the way in which they process information, and information management is increasingly seen as being of crucial importance to a firm's performance. This book accords more importance to these factors than to the factors conventionally used in applying a neoclassical model of economic efficiency. It applies game theory, contract theory, and information theory. By describing the rules and norms in Japan, the USA, and the transitional economies, the book shows how firms can achieve competitive advantage in international markets if these conventions and rules are well suited to the industrial sector in which the firms operate. The book is particularly concerned with how Japan, with its main bank and lifelong employment systems, as well as information-sharing firm organizational structure, might reform its institutions to maintain competitive advantage in the world economy.
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This paper is a survey of the literature on boards of directors, with an emphasis on research done subsequent to the Benjamin E. Hermalin and Michael S. Weisbach (2003) survey. The two questions most asked about boards are what determines their makeup and what determines their actions? These questions are fundamentally intertwined, which complicates the study of boards because makeup and actions are jointly endogenous. A focus of this survey is how the literature, theoretical as well as empirical, deals-or on occasions fails to deal-with this complication. We suggest that many studies of boards can best be interpreted as joint statements about both the director-selection process and the effect of board composition on board actions and firm performance.
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This study offers a sociopolitical perspective on the international spread of corporate governance models. We unpack the heterogeneity of interests and preferences across and within types of shareholders and senior managers over time in an analysis of the adoption of a share-holder value orientation among contemporary German firms. Using extensive data on more than 100 of the largest publicly traded German companies from 1990 to 2000, we find that the influence of major shareholder groups (e.g., banks, industrial corporations, governments, and families) and senior manager types (differing educational backgrounds and ages) can be clearly observed only after redefining these key actors according to common interests and preferences. We also find evidence that German firms engage in decoupling by espousing but not implementing a shareholder value orientation but show that the presence of more powerful and more committed key actors reduces the likelihood of decoupling. We discuss the implications of our findings for research on symbolic management, the diffusion of corporate practices, and the debate over the convergence of national governance systems.
Article
The authors studied the effect of ownership structure on human capital investments as indicated by wage intensity, defined as the ratio of expenditure on employee wages to sales, in a sample of 996 Japanese manufacturing firms during their economic recession of 1998-2002. They found that domestic shareholders, with interests beyond financial considerations, enhance wage intensity, especially when performance is low, and thereby safeguard human capital investments. Foreign shareholders with sole interest in financial returns have an opposite effect; they reduce wage intensity when firm performance is low.
Article
This paper investigates the causes and consequences of competitive inertia in the U.S. airline industry. Competitive inertia is defined as the level of activity that a firm exhibits when altering its competitive stance in areas such as pricing, advertising, new product or service introductions, and market scope. Inertia is argued to be driven by managers' incentives to act, their awareness of action alternatives, and the constraints on their capacity to act. These three sources of inertia were assessed, respectively, by past performance and market growth; by competitive experience and the diversity of the market environment; and by company age and size. We found that good past performance contributed to competitive inertia, whereas a diversity of markets discouraged it. Antecedents for inertia differed in tactical versus strategic actions, the former being driven more by performance and market diversity, the latter by growth in markets. These results suggest the operation of two distinct models of organizational learning, one reactive, the other experimental. Although inertia in strategic actions had mildly positive implications for near-term performance, the benefits from inertia in all kinds of actions diminished with increases in market diversity.
Article
Boards of directors serve two important functions for organizations: monitoring management on behalf of shareholders and providing resources. Agency theorists assert that effective monitoring is a function of a board's incentives, whereas resource dependence theorists contend that the provision of resources is a function of board capital. We combine the two perspectives and argue that board capital affects both board monitoring and the provision of resources and that board incentives moderate these relationships.
Article
When a firm's chief executive officer is also the chairperson of its board, directors have opposing objectives. According to organization theory, such CEO duality establishes strong, unambiguous leadership. But according to agency theory, duality promotes CEO entrenchment by reducing board monitoring effectiveness. We developed a contingency framework to resolve these perspectives. Sampling three industries to enhance generalizability, we found that board vigilance was positively associated with CEO duality. Duality was less common, however, when CEOs had high informal power and when firm performance was high.
Article
This article examines the clash between stakeholder- and shareholder-based business systems resulting from an increase in foreign portfolio investment in the Japanese economy during the 1990s. An analysis of 1,108 firms between 1991 and 2000 shows that as foreign institutional investors, who were more interested in investment returns than in long-term relationships, replaced domestic shareholders, one fundamental pillar of Japan's stakeholder capitalism began to crack. Japanese firms began to adopt downsizing and asset divestiture, practices more characteristic of Anglo-American shareholder economies. The influence of foreigners, however, was weaker in firms more deeply embedded in the local system through close ties to domestic financial institutions and corporate groups. Thus, foreign investors were influential primarily in firms less embedded in the existing stakeholder system. This research contributes to debates on globalization and convergence of business systems, institutional change, and corporate governance systems.
Article
Given governance breakdowns, an important issue is whether auditors are sensitive to a client's governance structure. The purpose of the study is to examine how the roles played by the board affect auditors' risk assessments and program planning decisions. An agency role of the board emphasizes monitoring corporate management while a resource dependence role focuses on helping a firm cope with environmental uncertainty, gain access to external resources, and establish sound business strategies. Sixty-eight audit partners and managers evaluated a case where the roles of the board were manipulated: agency role (stronger or weaker) and resource dependence role (stronger or weaker). Results indicate that auditors' inherent risk assessments were not significantly affected by the resource dependence role, but control risk assessments were higher when the board played either a weak agency or weak resource dependence role than for the parallel strong condition. Further, audit program planning judgments were significantly affected by both the agency and the resource dependence variables. Finally, exploratory analysis indicates that when the board was stronger on both the agency and resource dependence dimensions, control risk assessments were the lowest and auditors decreased planned audit effort, while audit effort was increased for all other conditions.
Article
The Journal of Japanese Studies 32.1 (2006) 239-244 For much of the last 50 years, social scientists have grappled with the question of why the Japanese economy performed so well from roughly 1950 through the 1980s. Economists, political scientists, and sociologists all brought different analytical tools to this question. Economists, for example, have tended to view the corporation as simply a black box, an institution that converts inputs into outputs in a measurable way, while sociologists have been much more interested in the institutional and human details of both the inner workings of the corporation and the interaction among corporations. Michael Gerlach and James Lincoln are two sociologists at the University of California, Berkeley, who have labored long in this vineyard. This new study looks at a very specific aspect of corporate behavior: the existence and meaning of networks of long-term business relationships among firms, known as keiretsu. This volume is both an analytical expansion and an update of a previous book by Gerlach—Alliance Capital (University of California Press, 1992). While the authors spend some time dealing with vertical keiretsu (the vertical production chains linking finished product producers and their parts suppliers), the bulk of the analysis deals with the horizontal keiretsu. Their focus is mainly on the six broad, informal business groups that have been so visible in the economic landscape in the last half-century—Mitsui, Mitsubishi, Sumitomo, Sanwa, Fuyo, and DKB. While most of these groupings have prewar zaibatsu antecedents, they are not conglomerates in the usual sense of the word, since no lead firm has controlling ownership stakes in the other members of the group, but these groups have been characterized by a distinctive pattern of minority-stake cross-shareholding. Members of a group also use the group bank as their main bank (that is, the bank from which the firm has its largest single loan), and core members belong to presidents clubs that meet once or twice a month. After an introductory chapter and an initial historical chapter that provides a fairly standard review with little new information, the guts of the book come in three lengthy statistical chapters. These rely on a data set covering the 259 largest corporations, including some financial institutions and trading companies as well as manufacturing firms and others, over the period from 1968 to 1997. Chapter three establishes support for the hypothesis that keiretsu ties (both horizontal and vertical) exist but weakened in some respects over the period covered. Chapter four establishes how equity connections and dispatch of directors is connected to trading ties among firms—establishing that there is a real business impact of keiretsu ties. Chapter five asks what the implications of these ties are for corporate performance, lending support to the hypothesis that member firms gain stability at the expense of profitability. That is, firms that belong to keiretsu are less profitable on average than independent firms, but they have less variability in their profits over time, as weak firms are pulled up and leading firms constrained. None of the conclusions reached by this analysis is particularly startling, but they should be reassuring to readers who have believed that keiretsu have had real implications for corporate behavior. The data set for these chapters is explored in many ways—including analyses over time, by industry, and by individual horizontal keiretsu. Indeed, the statistical analysis is so thorough and technical that those readers without a background in quantitative analysis will find these chapters heavy going. The one major limitation of their data set, which the authors acknowledge, is that many of their variables are binary (1 or 0). For example, company A owns stock in company B, or it does not. This means that a great deal of potential richness in the analysis is lost by not measuring the strength of various linkages. Even without that richness, though, the data seem to provide adequate support for the various hypotheses put forth by the authors. Despite the thoroughness of the analysis, however, I find myself rather dissatisfied with this...
Article
Based on predictions from agency theory and a theory of managerial hegemony, this study compares the board structure of 53 companies that privately repurchased stock at a premium above the market place-i.e., paid greenmail-and 57 companies that resisted greenmail. The decision to pay greenmail is used as a proxy for the board's ineffectiveness, which is defined as the inability of the board's outside directors to prevent management from making decisions-such as paying greenmail-that are in conflict with stockholders' interests. Boards that effectively resisted greenmail were found to have more outside directors, more directors with executive experience, and more directors who represented interorganizational transactions than boards of companies that paid greenmail.
Article
This study examines the role of downsizing in the deinstitutionalization of permanent employment among publicly listed companies in Japan between 1990 and 1997. We found that although economic pressure triggered downsizing, social and institutional pressures shaped the pace and process by which downsizing spread. Large, old, wholly domestically owned, and high-reputation Japanese firms were resistant to downsizing at first, as were firms with high levels of human capital, as reflected by high wages, but these social and institutional pressures diminished as downsizing spread across the population. We argue that this breakdown of social constraints was due to a safety-in-numbers effect: as downsizing became more prominent, the actions of any single firm were less likely to be noticed and criticized, and the effect of the institutional factors that once constrained downsizing diminished.
Article
This article investigates the effects of the changing institutional environment on strategic orientations of Japanese electronics firms during the 1990s. We examine the effects of three different types of shareholders on strategic directions of their invested firms. The first one, foreign portfolio investors, characterizes the emerging influence that pressed for change in corporate strategies. The two domestic shareholders, corporate investors and financial institutions, represent the conventional forces for continuity. Between the two domestic forces, though, while corporate investors attempted to maintain status quo, financial institutions have shifted towards market-oriented behaviour of investment. Specifically, we explore: (1) the influence of each type of shareholder on a firm's diversification strategy and capital commitment; and (2) the moderating effects of firm performance on the relationships between ownership structure and strategic choices. The results suggest that foreign investors prefer the focused product portfolio and conservative capital commitment. They also prefer the reduction of capital investment when the financial performance of their invested firms is poor. Domestic financial institutions are now similarly sensitive to the performance of their invested firms when those firms make strategic investments. By contrast, domestic corporate shareholders remain indifferent to performance, while they aim to maintain relational business ties with invested firms.
Article
Using data spanning the 1996-98 fiscal years of 247 of Japans largest manufacturers, we empirically evaluate the extent to which a firms investment behaviour and financial performance are influenced by its ownership structure. To do so, we examine six distinct categories of Japanese shareholders: foreign investors, investment funds, pension funds, banks and insurance companies, affiliated companies and insiders. Our findings strongly indicate that the relationship between the equity stakes of a particular category of investor and a firms financial performance and investment behaviour is considerably more complex than is depicted in simple principal-agent representations. Such a result emphasizes the importance of making finely grained and contextually relevant distinctions when modelling and evaluating corporate governance relations. [PUBLICATION ABSTRACT]
Article
This paper contributes to multiple agency theory by examining how the compensation schemes awarded to outside directors and the CEO jointly affect firm-level risk taking. Using data of the S&P 1500 firms from 1997 to 2006, we find support for earlier arguments that providing the CEO, the outside directors, or both with stock options increases risk taking. More importantly, we find that compensating outside directors with stock options has significantly stronger effects than CEO stock options. Finally, contrary to what one would expect, we find that these effects are mutually substituting; that is, if both the outside directors and the CEO are provided with stock option compensation, outside directors' incentives weaken the effect of the CEO's incentives on firms' risk taking. Copyright © 2010 John Wiley & Sons, Ltd.
Article
Research on the determinants and effects of various governance mechanisms typically assumes that these mechanisms operate independently. However, since a variety of mechanisms are used to achieve alignment of the interests of shareholders and managers, we propose that the level of a particular mechanism should be influenced by the levels of other mechanisms which simultaneously operate in the firm. We examine the substitution effects between alternative internal governance mechanisms for a sample of 81 bank holding companies in the postderegulation period. Specifically, we consider the relationship between monitoring by outside directors and the following mechanisms: monitoring by large outside shareholders, mutual monitoring by inside directors, and incentive effects of shareholdings by managers. Our results provide evidence consistent with the substitution hypothesis. We examine the implications of our findings for future research in the area of corporate governance.
Article
We extend agency theory with the notion that boards have distinct incentives and abilities to monitor management and develop a contingency approach to explain how firm ownership influences the monitoring function of the board — measured as the magnitude of external audit fees contracted by the board. Analyzing Continental European companies, our results demonstrate that while audit services and board independence are complementary when ownership is dispersed, this is not the case when ownership is concentrated. This suggests that ownership concentration and board composition become substitutes in terms of monitoring management. Additional analysis shows that the relationship between board composition and external audit fees is also contingent upon the identity of the controlling shareholder. We uncover that the influence of board characteristics on audit fees is larger for family and non-financial controlled firms than for bank controlled firms, relative to firms with dispersed ownership. In total, we find that board monitoring is contingent on the firm’s ownership structure, which demonstrates that board strategic behavior is contextually dependent. We argue that theory and empirical research in corporate governance should progress to a more context dependent analysis, which, in turn, will prove useful for practitioners and policy makers.
Article
Corporate governance practices are arguably diffusing across the world. This paper examines the adoption of the committee‐based governance system (i.e. audit, nomination, and remuneration) in Japanese firms, a practice common in Anglo‐American capitalism but potentially contestable in Japan. The study finds that firms that are internationally exposed through cross listing are more likely to adopt the committee system. Moreover, more experienced and highly cross‐held firms, with larger proportions of foreign ownership, are more likely to adopt the committee system. On the other hand our study finds partial support for the hypothesis that larger proportions of bank ownership are negatively associated with the adoption of the committee system, suggesting a gradual withdrawal by banks from the traditional monitoring of firms. This paper adds to the longstanding debate on the convergence on or persistent divergence from the Anglo‐American corporate governance system. The study thus provides insights into corporate governance changes in non‐Anglo/American countries that face a struggle between global capital market forces for change and deep‐seated institutional practices of continuity.
Article
Considering that the ownership structure of Japanese corporations has changed dramatically in the 1990s, this paper address a series of questions related to these changes: Why is cross-shareholding, which has been in place for almost three decades, now beginning to unwind (and what are the mechanisms of the unwinding)? What explains the increasing diversity in the patterns of cross-shareholding among Japanese firms? Lastly, what are the implications of the changing ownership structure on firm performance? Using detailed and comprehensive data on ownership structure including individual cross-shareholding relationships and other variables (Tobin's q) developed by Nissai Life Insurance Research Institute and Waseda University, we highlight the determinants of the choice between holding or selling shares for both banks and firms. We show that profitable firms with easy access to capital markets and high foreign ownership prior to the banking crisis have tended to unwind cross-shareholdings, while low-profit firms with difficulty accessing capital markets and low foreign ownership in the early 1990s have tended to keep their cross-shareholding relationships with banks. We also show that high intuitional shareholding and, somewhat surprisingly, block shareholding by corporations have positive effects on firm performance, while bank ownership has had a consistently negative effect on firm performance since the mid-1980s. We use these findings to address some policy implications and to provide some perspectives on the future of the ownership structure of Japanese firms.
Article
The fact of a small number of hostile takeover bids in Japan the recent past, together with technical amendments of the Civil Code that would allow a poison pill-like security, raises the question of how a poison pill would operate in Japan should it be widely deployed. This paper reviews the U.S. experience with the pill to the end of identifying what institutions operated to prevent the poison pill from fully enabling the target board to block a hostile takeover. It then considers whether similar ameliorating institutions are available in Japan, and concludes that with the exception of the court system, Japan lacks the range institutions that proved to be effective in the United States. As a result, the Japanese courts will have a heavy responsibility in framing limits on the use of poison pills.
Article
Foundational RBV work suggests that firms possess capabilities that represent strengths and others that represent weaknesses. In contrast, contemporary research has examined capability strengths while largely ignoring weaknesses. Addressing this oversight, we examine the direct and integrated effects of sets of capability strengths and capability weaknesses on competitive advantage and its empirical correlate - relative performance. Additionally, we explore how environmental and firm-specific factors influence change in these drivers of competitive advantage over time. Results suggest that weakness sets have a negative effect on relative performance, while strength sets have an increasingly positive effect. The integrative effects of strength and weakness sets affect relative performance in a complex manner. For example, while high strength/low weakness firms perform at high levels, firms integrating high strength with high weakness perform well, but experience considerably more variance in their realized outcomes. Lastly, we find that the strength and weakness sets change significantly over time in markets where competition is more intense, thereby undermining the durability of competitive advantage. Our theory and results indicate that achieving temporary advantage is more difficult than previously thought and that the erosion of advantage occurs routinely as a result of dynamic and interactive rivalry.
Article
This paper investigates the effect of foreign ownership on strategic investments in Japanese corporations. Foreign owners are typically portfolio investors who frequently buy and sell shares and hold diversified portfolios of small stakes in many firms. Prior research has presented two conflicting perspectives on the role of such investors: (a) their frequent trading leads to pressure for short-term returns that fosters underinvestment; (b) their active trading fosters appropriate investments. We investigated the relationship between foreign ownership and strategic investments using dynamic panel data analysis of a sample of 146 Japanese manufacturing firms from 1991 to 1997. We found that foreign ownership enhances strategic investments (in R&D and capital intensity) to a greater extent when firms have growth opportunities than when they lack such opportunities. We conclude that foreign ownership fosters appropriate investment. Copyright © 2006 John Wiley & Sons, Ltd.
Article
This study examines the association between audit committee characteristics and the ratio of nonaudit service (NAS) fees to audit fees, using data gathered under the Securities and Exchange Commission's (SEC's) fee disclosure rules. Issues related to NAS fees have been of concern to practitioners, regulators, and academics for a number of years. Prior research suggests that audit committees possessing certain characteristics are important participants in the process of managing the client-auditor relationship. We hypothesize that audit committees that are independent and active financial monitors have incentives to limit NAS fees (relative to audit fees) paid to incumbent auditors, in an effort to enhance auditor independence in either appearance or fact. Our analysis using a sample of 538 firms indicates that audit committees comprised solely of independent directors meeting at least four times annually are significantly and negatively associated with the NAS fee ratio. This evidence is consistent with audit committee members perceiving a high level of NAS fees in a negative light and taking actions to decrease the NAS fee ratio.
Article
The UK is the only major country within the European Union the majority of whose listed companies have formed audit committees composed of non-executive directors to monitor financial reporting, the external auditors, and internal control strength. The adoption of audit committees in contrast to the approach in Europe has arisen despite the lack of evidence on their effectiveness even in the USA and Canada, where they have been mandatory since the 1970s. This paper seeks to establish whether audit committees are effective in ensuring audit quality by protecting the auditors from fee cuts which might affect audit quality, and signal tighter internal controls which help to reduce audit time and hence audit fees. The problem is that the audit committee may be expected to exert a two-way pressure on audit fees. To the extent that audit committees should enhance audit quality, partly by ensuring that audit hours are not reduced, an audit committee may be expected to increase total audit fees. At the same time, an audit committee may reasonably be thought to be a proxy for internal control strength. Ceteris paribus, companies with strong internal controls may be expected to pay lower audit fees than those with weak internal controls. Our paper argues that the 'quality' aspect of the audit can be captured through a dummy firm size variable, whilst the internal control aspects can be captured through dummy risk and complexity variables. The hypotheses examined are that size related audit fees are higher in companies with an audit committee; and that risk- and complexity-related audit fees are lower in companies with audit committees. The hypotheses are tested by developing a regression model for audit fees of a sample of the companies which comprise the FT-SE 500, with variables being included for the presence or absence of an audit committee. The results show that the relationship between size-related audit fees and the presence of an audit committee is positive and statistically significant, but that although there is a negative relationship between risk- and complexity-related audit fees and the presence of an audit committee, the relationships are not conclusively significant. The findings provide support for the contention that audit committees are at least partially effective in preventing reductions in the audit fee to levels where the quality of the audit may be compromised.
Article
Recent research and public discourse on executive compensation and corporate governance suggests a growing consensus that firms can and should increase their control over top managers by increasing the use of managerial incentives and monitoring by boards of directors. This study departs from this consensus by offering an alternative perspective that considers not only the benefits, but also the costs of both incentives and monitoring in large corporations. The study develops and tests a contingency cost/benefit perspective on governance decisions as resource allocation decisions, proposing how and why the observed levels of managerial incentives and monitoring may vary across organizations and across time. Specifically, the study suggests that: (1) firms that are more risky face greater costs when using incentive compensation contracts for top managers, thus reducing the expected level of incentive compensation use for such firms; (2) firms facing this problem of low incentive compensation use can realize greater benefits from higher levels of board monitoring, and thus are likely to rely more on board monitoring; and (3) firms with more complex comporate strategies face higher costs in using board monitoring, and are thus likely to rely less on board monitoring as a source of controlling top management behavior. The study also proposes that within this contingency perspective there may be diminishing ‘behavioral returns’ to increases in monitoring and incentives. These hypotheses are tested using extensive longitudinal data from over 400 of the largest U.S. corporations. The supportive findings suggest that maximal levels of incentives and monitoring are not necessarily optimal, and that a firm's strategy may not only have significant product/market implications, but also corporate governance implications.
Book
Japan’s economy has long been described as network-centric. A web of stable, reciprocated relations among banks, firms, and ministries, is thought to play an important role in Japan’s ability to navigate smoothly around economic shocks. Now those networks are widely blamed for Japan’s faltering competitiveness. This book applies structural sociology to a study of how the form and functioning of this network economy has evolved from the prewar era to the late 90s. It asks whether, in the face of deregulation, globalization, and financial disintermediation, Japan’s corporate networks - the keiretsu groupings particularly - have ‘withered away’, losing their cohesion and their historical function of supporting member firms in hard times. Using detailed quantitative and qualitative analysis, this book‘s conclusion is a qualified ‘yes’. Relationships remain central to the Japanese way of business, but are much more subordinated to the competitive strategy of the enterprise than the network economy of the past.