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A Clash Of Governance Logics: Foreign Ownership And Board Monitoring
Strategic Management Journal
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.
... For instance, the studies by Gillan and Starks (2003) and Aggarwal, Erel, Ferreira, and Matos (2011) have found that foreign investors when compared with local investors are more effective when it comes to corporate governance. They have also been found to be indispensable, especially in emerging economies where shareholders protection and corporate governance are weak (Baba, 2009;Desender, Aguilera, Lópezpuertas-Lamy, & Crespi, 2016;Jeon, Lee, & Moffett, 2011). Through their financial and investment qualities they can influence and contribute to the corporate governance mechanism Tran (2022), and also enhance it (Han, Ding, Zhang, & Finance, 2022). ...
... Ali et al., 2022;Chatterjee & Bhattacharjee, 2021;Tran, 2022;Waheed & Malik, 2019). Some have also looked at how ownership has helped in weak corporate governance Desender et al. (2016), and how this is effective in oversight, (Aggarwal et al., 2011;Gul, Kim, & Qiu, 2010). These studies have mostly focused on the developed economies. ...
... Abad, Lucas-Pérez, Minguez-Vera, and Yagüe (2017) in their study also found a positive connection between foreign ownership and gender board presence. S. Ali, Ur Rehman, Yuan, Ahmad, and Ali (2021), Pombo and De La Hoz (2021) andGulzar, Cherian, Hwang, Jiang, and Sial (2019), found that foreign investors would engage more with firms with gender diverse board (Baba, 2009;Desender et al., 2016;Jeon et al., 2011) have also shown that foreign investors can help firms, especially in economies where the protection of shareholders and corporate governance is weak. However, some studies have expressed doubts as to the efficacy of foreign ownership in engendering corporate governance (Firth, Fung, Rui, & policy, 2007); (Lai, Tam, & Accounting, 2017). ...
... We assess BCCG using a composite measure that includes the presence of a cybersecurity policy, a board IT committee, and IT expertise among board members. Unlike prior studies relying on single attributes, this approach captures the board's collective judgment (Desender et al., 2016;Jain & Zaman, 2020). Each element contributes to the BCCG score, reflecting a firm's overall commitment to cybersecurity. ...
... To capture the extent of board commitment in overseeing and reporting on cybersecurity risks and practices, we employed a composite measure that integrates various cybersecurity and IT-related board attributes. This approach contrasts with studies that focus on single board attributes, as it evaluates the collective judgment of the board (Desender et al., 2016;Jain & Zaman, 2020). Our composite measure includes elements such as the existence of a cybersecurity policy, a board IT committee, and the IT expertise of board members, with a particular emphasis on female and independent directors possessing IT expertise (e.g., Higgs et al., 2016;Lankton et al., 2021;Smaili et al., 2023;Wilkin & Chenhall, 2020). ...
Synopsis
The Research Problem
This study investigates the relationship between board commitment to cybersecurity governance (BCCG) and corporate cybersecurity disclosures (CSD) in the UK. It focuses on how the UK's Network and Information Systems (NIS) 2018 regulation influences this relationship, considering cyber threats’ rising complexity and frequency.
Motivation
With the digital age’s escalating cybersecurity threats, strong cybersecurity governance and transparent disclosure practices have become crucial. The study seeks to understand whether a board's commitment to cybersecurity, particularly in the context of the NIS regulation, affects the extent of a company's CSD.
The Test Hypotheses
This study tests two hypotheses. The first hypothesis posits a positive association between BCCG and the extent of CSD. The second hypothesis contends that the UK's NIS 2018 regulation positively moderates the relationship between board commitment and CSD.
Target Population
This study should be of interest to boards of directors, policymakers, regulators, and various stakeholder groups.
Adopted Methodology
The study employed textual analysis using Python to analyze corporate disclosures, fixed effect regressions, Difference-in-Differences (DID), and Propensity Score Matching analyses.
Analyses
We examined the relationship between BCCG and CSD against the backdrop of the UK's NIS 2018 regulation. We first assessed the extent of CSD in the UK FTSE 350 firms using Python-based textual analysis. Then, we conducted a regression analysis to assess the impact of BCCG on CSD and the moderating effect of the NIS regulation. This was complemented by a DiD analysis to evaluate the changes in CSD before and after the introduction of the NIS regulation.
Findings
We find that BCCG is positively associated with the extent of CSD, and that the NIS regulation positively moderates this relationship. Our evidence suggests that firms with a greater focus on cybersecurity governance at the board level (e.g., directors with IT expertise, the presence of IT committees and cybersecurity policies) demonstrate a higher commitment to managing and reporting cybersecurity risks and solutions. Moreover, using DiD analysis, we find a significant increase in CSD levels among firms subjected to NIS regulation compared to control firms, post-NIS regulation. Overall, our study suggests that the interplay of BCCG and macro-social factors, such as NIS regulation, enhances firms’ sensitivity to institutional and stakeholder pressures, leading them to increase their corporate CSD.
Keywords: Cybersecurity disclosure, board commitment, NIS regulation, Python, Textual analysis, UK.
... Furthermore, findings consistently suggest that foreign investors foster transparency in the firms in which they invest by improving the quality and amount of information disclosure (e.g., Bose et al. 2024). This notion is particularly reflected in studies that underline the propensity of foreign-invested firms to employ high-quality auditing firms (Desender et al. 2016;El-Dyasty and Elamer 2021;Guedhami et al. 2009;He et al. 2014;Kim et al. 2019). Moreover, research shows that foreign owners positively influence the likelihood of firms holding shareholder conference calls (Liang et al. 2012) or improve the chance that firms will correct overly optimistic earnings forecasts in a timely manner . ...
... Considering the rapid internationalization of capital markets and the rise of powerful investors with global reach (TAI 2024), the increased academic interest in foreign ownership in the recent past appears to be an unsurprising concomitant. At the same time, many institutional and cultural differences across countries persist and result in a 'clash' of expectations and practices between shareholders and investees (Ahmadjian and Robbins 2005;Desender et al. 2016). It is the nature of this potential conflict (and its outcomes) that distinguishes foreign owners from their domestic counterparts and emphasizes the relevance of research with a distinct foreign ownership focus. ...
Over the past three decades, the globalization of capital markets has flourished and seems unaffected amidst recent discussions around a deglobalization of the world economy. As a consequence, ownership structures of firms around the world have changed. The emergence of foreign investors as a distinct and powerful group of owners raises questions concerning the impact an increasingly diverse shareholder structure has on firms. Scholars have begun to shed light on the far-reaching consequences of foreign ownership for the organization and strategy of the firm. However, existing research on foreign ownership is scattered, partially because it stems from different disciplines. To map the state of this emerging research field, we present a systematic literature review spanning three decades. Specifically, we investigate foreign ownership’s impact on firms’ organization and strategy by identifying the most prominent themes discussed in the literature. Furthermore, we show that differentiating several types of foreign owners, and considering their origins, is crucial for understanding how their ownership influences firms. We also review the theoretical lenses dominating the research field. Based on our analyses, we develop a framework that synthesizes the state of the art and points at future research avenues to further unravel the multifold consequences of foreign ownership.
... We investigate how independent directors make sense of their director role when they face different role expectations or role conflicts. We explore this question in the Japanese context where stakeholder, rather than shareholder, interests are often prioritized and independent directors have not played an effective managerial monitoring role (Ahmadjian & Robbins, 2005;Desender, Aguilera, Lamy, & Crespi, 2016). Even though independent directors may be appointed to monitor the chief executive officer (CEO), represent shareholders, and act according to a board model based on shareholder-oriented CG, they are also embedded in an established local business and social system. ...
... Traditional board practices, however, were under pressure for reform because of rising institutional investor ownership, especially by foreign institutions that followed a shareholder-oriented model (Ahmadjian & Robbins, 2005;Desender et al., 2016;Geng et al., 2016), and reform initiatives led by change agents. Former Prime Minister Abe promoted CG reforms to revitalize the domestic economy when he took over in 2012 and advocated such reforms as a key measure to achieve economic growth. ...
Research Question/Issue: In the Japanese context of shareholder voting in director elections, this study examines how regulatory signals differently influence shareholder dissent depending on their resource dependence relationship with regulatory bodies.
Research Findings/Insights: We find that the effect of a regulatory change in the disclosure of voting records on shareholder dissent is strengthened as shareholdings by domestic institutional investors increase, while it is mitigated as shareholdings by
foreign institutional investors increase. Moreover, we find that this effect is pronounced under conditions where directors seemingly fail to fulfill or to qualify for their role.
Theoretical/Academic Implications: This study develops a resource dependence perspective of shareholder dissent and argues that shareholder dissent can be shaped by regulatory signals from regulatory bodies who provide them with legitimacy. This study enriches the existing insights on corporate governance role of institutional investors by focusing on their resource dependence on regulatory bodies.
Practitioner/Policy Implications: This study sheds light on the dynamic nature of shareholder behavior and suggests that shareholder preferences are not only heterogeneous but also mutable over time in response to regulatory signals. This implies that managers need to pay attention not only to current shareholder preferences but also to future anticipated shareholder preferences to successfully manage their relationships with shareholders.
... We investigate how independent directors make sense of their director role when they face different role expectations or role conflicts. We explore this question in the Japanese context where stakeholder, rather than shareholder, interests are often prioritized and independent directors have not played an effective managerial monitoring role (Ahmadjian & Robbins, 2005;Desender, Aguilera, Lamy, & Crespi, 2016). Even though independent directors may be appointed to monitor the chief executive officer (CEO), represent shareholders, and act according to a board model based on shareholder-oriented CG, they are also embedded in an established local business and social system. ...
... Traditional board practices, however, were under pressure for reform because of rising institutional investor ownership, especially by foreign institutions that followed a shareholder-oriented model (Ahmadjian & Robbins, 2005;Desender et al., 2016;Geng et al., 2016), and reform initiatives led by change agents. Former Prime Minister Abe promoted CG reforms to revitalize the domestic economy when he took over in 2012 and advocated such reforms as a key measure to achieve economic growth. ...
How do individual independent directors make sense of their director role? We examine this question in the context of competing expectations among key corporate governance actors during the onboarding process of independent directors. This study explores how independent directors navigate these expectations, which stem from both external change agents, such as government agencies and the media, and internal actors, especially management. Given the inherent ambiguity of their roles, which involve multiple board tasks and lack explicit definition, independent directors often face role conflicts. Our findings reveal that independent directors resolve these conflicts by adopting one of three role orientations: external adaptive, organizational alignment, or provisional balancing. Through this process, they construct their director role by coping with the expectations of key governance actors. This study contributes to the micro-foundations of corporate governance research by shedding light on the individual-level dynamics that shape how independent directors interpret and enact their roles. Acknowledgments: The authors would like to express their gratitude to Christina Ahmadjian for her constructive comments on the early draft, and to Emily Chung for her valuable advice on the research methodology.
... In the context of innovation output, monitoring is critical to ensure the effective creation and deployment of new goods, processes, or services. As a result, boards of directors are in charge of assessing the achievements of innovation endeavors (Desender et al., 2016). A robust monitoring system ensures that the organization's innovation activities remain synchronized with market demands, promoting long-term growth and competitiveness (Faleye et al., 2011). ...
... UET focuses on the functions that mostly require directors' active involvement in overseeing and advising on resource acquisition and utilization (Bankewitz, 2018;Faleye et al., 2011). Monitoring helps identify and address resource gaps, ensuring the organization maintains its resource base (Desender et al., 2016). Inclusivity enhances this process by demanding effective oversight, especially with women on the board (Zalata et al., 2019). ...
Research on strategic leadership's role in achieving superior performance in technological innovation is still evolving, particularly regarding the effects of female directors and the contextual factors that enhance their effectiveness. This study provides a comprehensive view of female directors' influence on R&D initiatives, innovation outputs, and innovation efficiency. Using Upper Echelons Theory and Agency Theory as the theoretical framework, the study employs fixed-effect regression for baseline outcomes, addressing endogeneity with prediction modeling, propensity score matching, and an instrumental variable approach on panel data from Chinese listed firms (2008-2021). Findings indicate that female directors not only enhance R&D investment but their presence on the board achieves higher innovation outcomes and ensures innovation efficiency. Findings also reveal that the interaction with CEOs is crucial, as newly appointed CEOs moderate the advisory role of female directors, while CEO power influences their monitoring role. The study also shows that female directors are more effective when they constitute a critical mass on the board rather than merely having token representation. These findings suggest that including women on the board is essential for superior innovation outcomes, especially when resource efficiency is a firm's priority.
... Foreign investors also contribute to the development of local markets and facilitate risk-sharing between domestic and foreign shareholders. Due to the threat of divesting their shareholdings, foreign owners improve the monitoring capacity of directors, thus mitigating managerial opportunism (Chung et al., 2004;Desender et al., 2016). In this regard, the knowledge spillover hypothesis suggests that foreign owners bring valuable expertise, knowledge, and access to international markets, which can benefit the invested enterprises and enhance earnings quality (Guo et al., 2015). ...
... The existing studies support the notion that foreign ownership can serve as an essential control mechanism to restrict opportunistic managerial behavior associated with REM (Al-Duais et al., 2021;Debnath et al., 2021;Guo et al., 2015;Shayan-Nia et al., 2017). Foreign owners improve the monitoring capacity of directors, thus mitigating managerial opportunism (Chung et al., 2004;Desender et al., 2016). However, the COVID-19 crisis has raised concerns among foreign investors regarding the accuracy of publicly available financial records and the true economic impact of the pandemic (Alharasis, 2023). ...
This study investigates the impact of foreign ownership (FOR) on the relationship between CEO features and real earnings management (REM) practices, including abnormal cash flow from operating (ACO), abnormal discretionary expenses (ADIET), abnormal production costs (APRC), and aggregate REM. Using the Feasible Generalized Least Squares (FGLS) method, regressions were performed using 685 enterprise-year observations of enterprises listed on the Amman Stock Exchange from 2017 to 2021. The findings reveal that female CEOs restrict REM (APRC), while CEOs with prior experience engage more in REM by manipulating sales, reducing discretionary expenses, and engaging in aggregate REM to establish a positive reputation. Additionally, it was found that CEOs with longer tenures are less likely to engage in REM (ADIET and APRC). Furthermore, enterprises with older CEOs have a mitigating effect on aggregate REM practices, although they are more inclined to engage in REM by reducing discretionary expenses. Consistent with the knowledge spillover hypothesis, foreign ownership acts as a constraint on the practice of REM. Specifically, when combined with CEO tenure, foreign ownership limits REM (ACO and aggregate REM). However, in line with the information asymmetry hypothesis, the study reveals that foreign ownership, in combination with CEO gender, increases REM (ACO). Moreover, foreign ownership increases REM (ADIET) when combined with CEO experience. Additionally, the results indicate that foreign ownership intensifies REM (ACO and aggregate REM) when combined with CEO age. This study provides new insights into the impact of foreign ownership (FOR) on the relationship between CEO features and REM practices, demonstrating that foreign ownership can either limit or intensify REM practices depending on the specific combination of CEO features, such as gender, experience, tenure, and age. These findings will benefit practitioners, investors, and regulators by enhancing their understanding that enterprises with significant FOR and longer CEO tenure tend to demonstrate higher financial reporting quality (FRQ) and employ lower levels of REM.
... Hence, a PE investor's monitoring and value-adding efforts may be unevenly distributed across its portfolio firms, and instead depend on a PE investor's varying incentives to be involved. Moreover, the influence to direct management can also vary significantly within a PE investment team (e.g., Desender et al., 2016;Goodstein et al., 1994). 2 Combined, within-owner heterogeneity in incentives and influence to govern managerial actions may significantly influence the relationship between performance feedback and distinct types of strategic change across the portfolio firms of a PE investor. ...
... However, having board representation alone-which is standard in the PE industry due to PE investors' significant ownership stakes-does not guarantee effective influence. Board effectiveness relies heavily on the board's ability to direct management (Desender et al., 2016;Goodstein et al., 1994), which varies significantly based on board members' human capital, that is, their context-specific experience and skills (Forbes & Milliken, 1999;Johnson et al., 1996;Kroll et al., 2008;Stevenson & Radin, 2009). Given that formal voting is rare in boardrooms, there is significant power in expertise (Finkelstein, 1992). ...
Research Summary
Private equity (PE) investors invest in a portfolio of firms, setting new, ambitious performance aspirations and providing monitoring and value‐adding services to help management attain these aspirations. Integrating a behavioral theory of the firm and corporate governance perspective, this study investigates how portfolio firms respond to performance feedback, considering heterogeneity in PE investors' incentives and influence toward a given portfolio firm's strategic actions. Using unique data from a PE investor including direct aspirations measures, we find that (1) portfolio firms' performance relative to aspirations, and (2) the PE investor's relative investment amounts and experience of PE‐appointed board members, interact to affect the distinct growth strategies (i.e., internal capital investments or external acquisitions) its portfolio firms pursue.
Managerial Summary
A PE investor may guide its portfolio firms differently. Incentives to intervene should be larger in case of larger investments, and influence should be more extensive in case of more senior PE board representatives. In this study, we examine how a PE investor's varying incentives and influence affect how PE‐backed firms strategically react to underperformance and overperformance. We find that a PE investor pushes for capital investments but deters acquisitions as performance shortfalls increase in a portfolio firm, when they have made larger investments and appointed more senior board members. In case of overperformance, a PE investor pushes toward acquisitions (and against capital investments) when they have invested more. Surprisingly, the opposite holds in case of more senior board members.
... Governments and institutional blockholdings are also controlled, given that they have access to firm information for better monitoring (Liu et al., 2018). We also control for the foreign ownership of firms (Desender et al., 2016;Liu et al., 2018). To address an institutional-level factor, we control for South Korea's Corruption Perception Index (CPI) published annually by Transparency International. ...
... We specifically focus on the context of BGs in South Korea; thus, our results might not be generalizable to contexts other than East Asia. For example, in the U.S., BGs are not the prevalent form of business organization; instead, the dominant form is individual firms with diffuse ownership (Desender et al., 2016). Our findings may reflect a Korean-specific situation in which the government with a particular ideology takes a stance (friendly or unfriendly) toward BGs or even the business community at large. ...
Are business groups more likely to commit financial fraud when they are politically connected? Many past studies and anecdotal evidence have pointed out that business groups may behave more opportunistically when they are politically connected. However, the nature of the business group-government relationship evolves amid governance reform in many countries, making it difficult for business groups to abuse their political connections. In this research, we examine the business group-government relationship through the lens of social exchange and find a deterring effect of political connections on a connected business group’s propensity to commit fraud. Our results indicate that business groups are less likely to commit financial fraud when the extent of their political connection is high. By doing so, politically connected firms can prove themselves as legitimate business partners for the government and can more effectively secure a position to leverage their political connections. We additionally find that such an exchange relationship is weakened under a business group-unfriendly government due to their hostile relationships.
... However, increasing globalization and market liberalization underscore the need to examine common ownership effects in globally competing, publicly listed companies (Dunning & Lundan, 2008;Rugman & Verbeke, 2004) Note: For further discussions of the mechanisms, see Schmalz (2021) and Shekita (2022). and in markets with growing foreign investor presence (Desender et al., 2016;Ferreira & Matos, 2008;Steinberg et al., 2023). We now build on this global perspective to theorize how and when common owners influence the competitive dissimilarity among their firms. ...
Research Summary
Research highlights that common institutional ownership (an investor owning publicly traded shares in two rival firms) can reduce rivals' incentives to compete. So far, this literature focused on domestic market competition. However, competition also arises in global markets, and common owners invest outside their home countries. We integrate the perspectives of global market competition and cross‐national distance into a model of shared principals with rival agents and argue for a positive effect of common ownership on rivals' competitive dissimilarity in global markets. Moreover, we argue that the competitive intensity in joint regions amplifies, and the cross‐national distance between common owners and their firms mitigates this effect. We find support for our theorizing using a multi‐industry dataset with 1574 of the largest firms worldwide.
Managerial Summary
When investors hold shares in two competing companies, it can reduce how aggressively those rivals compete. To avoid direct competition, these companies often adopt divergent strategic actions. Our research shows that this dynamic extends to how competitors behave in international markets. We also identify key boundary conditions to this effect: The effect weakens when competition within shared markets decreases and when the distance between the owned rivals and their common investor increases. For managers of globally operating companies, this highlights the need to consider not just competitors' strategies but also their ownership structure. Overlapping ownership could significantly influence competitive dynamics in global markets by shaping competitors' strategic approaches.
... This study emphasizes the monitoring roles of foreign ownership, which is often represented by institutional blockholders. They are relatively independent and free from the conventional norms of the society where they invest (Desender et al., 2016;Fiss and Zajac, 2004). Foreign ownership is thus more effective in monitoring a firm's strategic decisions, compared with outside directors or big-4 audit firms that are controlled in this study, most of whom have domestic backgrounds (Yoo and Koh, 2014). ...
Extending the literature investigating the relationship between turbulent firms and employee wage volatility, this study examines how volatile wages could affect firm performance. Further, this study analyzes various conditions under which the impact of wage volatility on firm performance could be varied. This study draws on the roles of governance mechanisms, particularly foreign ownership, and the firm’s growth opportunity. Based on 4,594 firm-year observations of Korea from 2012 to 2019, the fixed-effect panel data analysis shows that wage volatility negatively affects firm performance. Nevertheless, the negative effects turn positive with the increase of foreign ownership. The positive change is particularly conspicuous when a firm’s growth opportunity is high. Overall, the findings of this study suggest that although wage volatility generally leads to poor firm performance, it would be able to improve the performance under certain circumstances such as growth firms with a proper governance mechanism (foreign ownership). Received: 3 October 2024 / Accepted: 4 January 2025/ Published: 11 January 2025
... Corporate governance literature differentiates between shareholder-based systems and stakeholder-based systems. Shareholder-based systems are characterized by dispersed ownership, agency costs, and a preference for market transactions (Desender et al. 2016). In contrast, stakeholder-based systems are characterized by concentrated ownership, a focus on long-term benefits for various stakeholders, and support for relational transactions (Luo, Jeong, and Chung 2019). ...
Research Questions/Issues
Scholarly interest in family firm governance and its strategic decision‐making has increased since the invention of socioemotional wealth (SEW). However, the widespread use of the SEW concept raises concerns on its reification and tautology. To address these concerns, we propose analyzing the social embeddedness of family firms to shed light on SEW‐driven governance practices and decision‐making.
Research Findings
Our two‐step method reviewed 85 papers utilizing social network perspectives, institutional theory, and SEW concepts. Our analysis demonstrates that integrating social embeddedness into SEW can help clarify the origins of SEW and its impact on decision‐making and governance and practices within family firms. Nonetheless, our analysis also highlights research gaps that future studies should address.
Theoretical Implications
By integrating the social embeddedness perspective with SEW, we offer a novel framework that systematically illustrates the social rationales underpinning diverse SEW‐driven behaviors and the evolution of governance practices in family firms. This framework, drawing from social network and institutional theory, elucidates the formation of SEW as driven by multidimensional social motivations, thus reconciling mixed findings from previous SEW research. Furthermore, our review provides a comprehensive research agenda for future studies in family business and corporate governance, encouraging exploration of multiple institutional logics, social networks, and their confounding effects on the SEW of family businesses.
Practical Implications
Our findings guide financial investors and nonfinancial stakeholders to better comprehend family firms' economic and noneconomic concerns, their distinct strategic behaviors from other firms, and their hybrid governance practices. Our discussion suggests practitioners incorporating social context of controlling families into decision.
... Additionally, foreign directors have a more significant governance role when the institutional environment is poorer, i.e., foreign directors act as a substitute for the institutional environment (Ghosh et al., 2021). In companies suffering from poor performance, higher levels of risk, or without large local shareholders (Desender et al., 2016), the influence of foreign directors is even greater. Given the three roles of foreign directors (knowledge disseminator, compliance facilitator, and top manager), we thus suggest: ...
Despite the increasing prevalence of foreign directors and the rapid development of corporate social responsibility (CSR) in China, it remains unclear how foreign directors influence CSR reporting. This paper investigates the role of foreign directors in CSR reporting in the institutional context of China. We address the three corporate governance roles of foreign directors as knowledge disseminators, compliance facilitators, and top managers. Given the influence of the institutional environment, we further examine the effects of direct and indirect institutional pressures. The results show that foreign directors promote the quality of CSR reporting in China, and institutional pressures strengthen the influence of foreign directors. The CSR regulations of the State-Owned Assets Supervision and Administration Commission (SASAC), the mandatory CSR reporting policy, and director networks all strengthen foreign directors’ influence on CSR reporting. This paper deepens the extant studies on the relationship between board diversity and CSR reporting and provides references for firms and governments in developing countries to advance the CSR progress of Chinese firms. Developing countries should actively introduce foreign investment, expand the influence of foreign directors in CSR decision-making, and improve CSR regulations to advance quality CSR reporting.
... On the one hand, firms that emit more greenhouse gases are likely to have their stock returns discounted by the market during announcements of corporate restructuring activities, leading to a negative effect of emissions on returns around corporate restructuring announcements. On the other hand, corporate restructuring activities may be the outcome of pressure from investors, with the view to increasing productivity and value-creation (Morin 2000;Desender et al. 2016). Hence, firm emissions are likely not to impact stock returns during corporate restructuring announcements. ...
The call for greener and more sustainable corporate practices triggered a surge in corporate restructuring. In this study, we investigate the impact of carbon emissions on the market reaction to announcements of corporate restructuring activities. Using a sample of US firms, we find that investors discount the value of corporate restructuring announcements when firms have higher levels of carbon emissions. Our results indicate that emissions are negatively associated with cumulative abnormal returns (CAR), cumulative total returns (CTR), and buy and hold abnormal returns (BHAR) around announcements. This effect is more pronounced for firms with a lower risk of bankruptcy, those financially constrained, and those with lower growth opportunities. We also find that high emissions at announcements are negatively associated with post-restructuring financial and market performance. Overall, our results highlight the growing implications of firm-level carbon emissions for corporate market valuations, especially amongst firms undertaking restructuring.
... In practice, independent non-executive directors are relatively uncommon, often sourced from within the same business family. Auditors within Japanese corporations hold the responsibility of monitoring the impartiality of the board of directors (Desender et al. 2016). They play a critical role Content courtesy of Springer Nature, terms of use apply. ...
This study investigates the influence of corporate governance mechanisms on debt service obligations within the context of 34 automobile companies listed on the Tokyo Stock Exchange from 2006 to 2021, utilizing a purposive sampling approach. Employing a range of statistical models including the random effect model, fixed effect model, and the generalized method of moments (GMM), the study yields several key findings. Firstly, it reveals a significant and positive correlation between the presence of independent board members and the debt service obligations of Japanese automobile firms. Secondly, a noteworthy negative association is uncovered when the CEO holds a dual role, impacting debt service obligations negatively. Thirdly, the inclusion of non-executive board members on corporate boards is found to be linked to a significant and adverse effect on debt service obligations among these firms. Finally, the study underscores the positive impact of board members' knowledge, skills, and the frequency of meetings on the debt service obligations of automobile companies in Japan.
... First, we examined multiple specifications of the learning measures (summarized in Appendix S1). Besides establishing that the results are robust to various specifications of the adaptation experience and vicarious adaptation learning measures, these 10 We follow existing work in including control variables, but not the variables on which the sample splits are based, in the estimation models (e.g., Barber & Diestre, 2022;Desender et al., 2016;Tandon et al., 2023). Since some studies include the variables used to split the sample as control variables (e.g., Toh & Ahuja, 2022), we checked the robustness of our findings including these variables. ...
Research Summary
When can a firm make fine‐grained adjustments to misaligned subsidiary governance? We examine whether and under what conditions a firm will adapt the equity stake it owns in a subsidiary, enabling improved alignment of the stake with the uncertainty in the local environment. We predict that the rate of adaptation of misaligned equity stakes depends on the experiential and vicarious learning from which the firm can draw, and that these learning effects are contingent on possessing fungible slack resources, specifically cash. Using a sample of 726 Japanese‐foreign subsidiaries established in 38 host countries over a 21‐year period, we find support in line with our predictions. Overall, this study explicates heterogeneous adaptability in subsidiary governance and similar strategic tasks.
Managerial Summary
Whether due to suboptimal choices or changing conditions, firms must sometimes change how they relate with and control their subsidiaries. Whereas much research has addressed adaptation in the form of discrete changes in ownership mode, we examine under what conditions a firm can make fine‐grained adjustments to misaligned subsidiary governance. We argue that a firm can learn to make such adjustments, not only from its own experience but also vicariously by observing other firms in the same foreign environment. Furthermore, we consider whether cash is a valuable resource for this purpose. Overall, this study shows how firms can pursue strategic adaptation in subsidiary governance and related tasks.
... As an exogenous instrumental variable, we use the industry peers' average percentage of internationalization (excluding the focal firm) based on the two-digit Korean Standard Industrial Classifications (KSIC). We multiply this instrumental variable with the presence of multi-stakeholder initiatives to generate the second instrument for the interaction term between internationalization and multi-stakeholder initiatives and include it in the first stage of our IV-GMM model (Desender, Aguilera, Lópezpuertas-Lamy, & Crespi, 2016;Wooldridge, 2002). Additionally, we include the industry peers' average GRI sustainability reporting-the ratio of the number of listed companies publishing a GRI sustainability report to the number of total listed companies in the same industry-for securing the model to be overidentified (Bascle, 2008). ...
Previous scholars have assumed that multinational enterprises (MNEs) can reduce the liability of foreignness and raise profitability by investing in corporate social responsibility (CSR). However, empirical validation of this assumption has rarely been attempted. This study provides empirical evidence that the adoption of multi-stakeholder initiatives, which are globally recognized as signals of CSR, help MNEs increase profits from internationalization. Specifically, this study examines the moderating role of multi-stakeholder initiatives in the internationalization–firm performance relationship by drawing on signaling and stakeholder theories. Results suggest that the signaling effect of multi-stakeholder initiatives can help MNEs overcome the liability of foreignness and hence profit from overseas markets.
Park, S.-B. 2023. Internationalization and firm performance: Moderating role of multi-stakeholder initiatives. Multinational Business Review, 31(4): 518-544.
... based on the Modified Wald test for groupwise heteroskedasticity). As a consequence, and similar to previous governance research (e.g., Desender et al., 2016), we estimated Huber-White robust standard errors, clustered at firm level, to control the lack of independence among observations and limit the potential influence of heteroskedasticity (Baltagi & Wu, 1999). Finally, we performed a FE regression analysis with the appropriate robust standard errors by firm to account for within-firm error correlations and year FE to capture any time trend that could potentially affect our study. ...
While independent directors focus on preserving the shareholders' interests, their
individual preferences may differ with regard to how environmental innovations have
to be considered. A growing importance of shareholders' environmental activism has
sought to influence firms' environmental practices through public proposals and private
negotiations with executives. Using a sample of 7111 firms listed in the S&P
1500 index between 2006 and 2019, we examine how the visibility of shareholders'
environmental proposals moderates the relationship between board independence
and environmental innovations. Our findings show that public and private shareholder
activism related to community issues and external reporting reinforces the
positive influence of independent directors on firms' environmental innovations.
However, private dialogues between executives and environmental activists focused
on emissions from company operations diminish the influence of independent directors.
Our study sheds light on how the external visibility of the topics involved in the
activists' environmental proposals reinforces the interest of independent directors in
advancing environmental innovations.
... Nevertheless, scholars argue that board designs conducive to high board monitoring vary across firms (Desender et al., 2016;Federo & Saz-Carranza, 2020). It is hard to assume a one-size-fits-all bundle of conditions, especially in firms from Latin American countries with different institutional pressure and settings compared to developed countries Brenes et al., 2020). ...
Firms are facing an increasing pressure to conform to a globally-accepted good governance norm that is largely based on developing economies in order to increase board monitoring. However, many Latin American firms deviate from a set of recommended corporate governance practices by adopting board designs with practices associatedwith low board monitoring. We attribute this deviation to the interplay of capacity and willingness to bear the high costsof board designswith few barriers to board monitoring. In this study, we usea configurational approach to inductively identify the board designs of publicly listed Brazilian firms. Our findings uncover a typology of board designscorrespondingto particular levels of firmsʼ capacity and willingness to bear the costsof board governance practices that conform to the good governance norm. We discuss our studyʼs implications for strategic corporate governance.
Family firm owners who were once employed by publicly owned companies are likely left with the imprint of the public economy. This study argues that this imprint is an essential factor influencing family firm owners’ attitude toward external equity, leading to lower foreign shares. Using a fixed-effect panel dataset from China, we found that family firm owners with public economy career experience tend to avoid foreign equity infusion. Furthermore, this relationship is more pronounced for firms that receive more government subsidies and diminishes with higher family ownership. We propose that family firm owners’ early career experience affects their attitude toward foreign equity and suggest that historical factors impact owners’ preference regarding external equity.
Research Question/Issue
This paper reviews key theories on the governance role of institutional investors, examines institutional ownership trends globally, and highlights recent research on their evolving impact on corporate governance. The paper also incorporates insights from select Special Issue articles dedicated to understanding the role of institutional investors worldwide.
Research Findings/Insights
We show that while most existing research focuses on the United States, recent evidence highlights significant global growth in institutional ownership. However, research examining the role of institutional investors outside the United States remains limited, despite some recent progress.
Theoretical/Academic Implications
Institutional investors are increasingly shaping global capital markets and corporate governance through growing ownership, increased shareholder activism, and rising passive investment strategies. We provide recommendations for relevant topics to guide future research, including the governance preferences of institutional investors (i.e., voice vs. exit) across different investor types and international settings, as well as the collective influence of multiple institutional investors on corporate governance practices and outcomes.
Practitioner/Policy Implications
There is a meaningful need for future studies to address the influence and effectiveness of institutional investors on corporate governance practices around the world. A better understanding of their role in different settings should improve their impact on corporations and, more broadly, on society.
JEL Classification
G32, G34
Purpose
This paper aims to examine the impact of ownership structure on the accounting-based performance of listed Nigerian deposit money banks (DMBs) on Nigerian Exchange Group (NGX) from 2011 to 2020.
Design/methodology/approach
The study adopts ex post facto research design, using initially “the panel fixed and random effects regression analysis and Hausman specification test and thereafter, the IV Generalised method of moments (GMM) to check for endogeneity issues and strengthen the robustness of the results.
Findings
The one lagged value result reveals that ownership structure of DMBs in Nigeria has cumulative significant impact to influence corporate financial performance of the banks in the future. Overall, CEO, board/managerial, family, government and foreign ownership structures in DMBs in Nigeria do not have significant influence on accounting-based corporate financial performance of the banks. However, the study reveals that board/managerial ownership could significantly improve market value/growth of DMBs in Nigeria.
Practical implications
Policy makers, investors (both local and foreign), academics, corporate governance administrators, and the government could apply the study's findings to the management of banking operations in Nigeria.
Originality/value
The paper highlights the impact of five ownership structures on the accounting-based performance of DMBs in Nigeria from 2011 to 2020, providing valuable insights into the influence of stockholding categories on corporate financial performance, which is a shift from extant literatures with limited insights.
This Study examines whether and how gender diversity at the board and top management team (TMT) level, as well as commitment to the UN's Sustainable Development Goal on Gender Equality (SDG5), influences financial reporting quality by studying the independent auditors' assessment of the risk of material misstatement. Employing a large global dataset, they find a positive relationship between board gender diversity and audit fees, which is consistent with an active monitoring role by the board. In contrast, we do not find a significant effect of TMT gender diversity, nor for the firm's commitment to the SDG Goal on Gender Equality. In addition, we find that the relationship between board gender diversity and audit fees is mainly driven by firms in countries without mandatory board gender quotas, and that the results are especially strong in settings where there is a lower perception of corruption and a greater representation of females in parliament.
The study investigates the correlation between foreign ownership and corporate risk at 147 listed firms in Vietnam from 2015 to 2019. Quantile regression and fuzzy-set Qualitative Comparative Analysis (fsQCA) technique method are applied to examine this relationship. Although the findings reveal that foreign ownership has an impact on corporate risk, the direction of this impact varies depending on the specific conditions. These empirical results have significant implications for firms in managing risks through effective policies related to foreign ownership. The findings will also enable foreign investors to assess the risk level of their investments when analyzing the current situation of a given firm, thereby adjusting their investment capital appropriately.
Purpose
The paper analyzes socially embedded antecedents of sustainability and compares the results between two distinct contexts of Russia and Italy. Specifically, the paper identifies which forms of embeddedness (network, family and virtual) are associated with proactive environmental sustainability in SMEs.
Design/methodology/approach
The data for the study were gathered from the World Bank Enterprise Survey dataset and include observations of 1,106 Russian SMEs and 663 Italian SMEs. Given the dichotomous nature of the dependent variable “proactive environmental sustainability”, the study utilizes a binary logistic regression and test regression models on the Russian and Italian data.
Findings
Network embeddedness positively influences proactive environmental sustainability among SMEs in Italy, but not in Russia. Value chain environmental pressure positively impacts proactive environmental sustainability among SMEs in Russia and Italy. Network embeddedness negatively moderates the relationship between value chain environmental pressure and proactive sustainability in Russia, but not in Italy. Virtual embeddedness positively impacts proactive environmental sustainability practices among SMEs in Russia but not in Italy, while family embeddedness positively impacts proactive environmental sustainability practices in Italy, but not in Russia.
Originality/value
We employ social embeddedness theory to determine to what extent certain forms of embeddedness contribute to proactive environmental sustainability among SMEs originating from two very distinct national contexts, a developed economy and a transition (emerging) economy. Our comparative approach allows us to challenge the “traditional” assumptions about SMEs’ sustainability antecedents, by showing the key role of different forms of social embeddedness.
Purpose
Research on the effect of executive equity incentives is equivocal. Based on agency theory, some scholars take the convergence of interest logic to highlight the benefits of executive equity incentives. In contrast, others adopt the entrenchment logic to emphasize the increased agency costs. This study attempts to reconcile the debate on executive equity incentives and integrates the opposing views to unveil how executive equity incentives impact corporate social responsibility (CSR) performance.
Design/methodology/approach
Using the panel dataset of Chinese A-share listed firms from 2006 to 2022, this study integrates the convergence of interest and entrenchment logic to examine how executive equity incentives affect CSR performance.
Findings
We find that the relationship between executive equity incentives and CSR performance follows an inverted U-shaped form. According to the convergence of interest logic, executive equity incentives reduce agency costs when allocating resources to engage in CSR activities and enable firms to increase their CSR investments, ultimately realizing increased CSR performance. After a threshold, however, the accumulation of extensive equity incentives causes the entrenchment effect, resulting in declined CSR performance. Our empirical results also shed new light on its contingent perspective – the inverted U-shaped relationship is attenuated when firms’ stock liquidity is high.
Originality/value
This study attempts to reconcile the debate on executive equity incentives and integrates the opposing views to unveil the inverted U-shaped relationship between executive equity incentives and CSR performance. Our study opens promising avenues for further research on corporate governance and CSR strategies.
This paper finds that investors evaluate cash holdings differently based on the source of cash flows. Using cash flows from related‐party sales as a proxy for diverse sources, we find that shareholders discount the value of cash holdings for firms with higher cash flows from related‐party sales. We find that firms use related‐party sales cash flows differently; cash flows from related‐party sales are more likely to be retained as internal cash reserves or distributed as dividends, rather than utilised for necessary investments. We further document a negative valuation of investments for firms with more related‐party sales.
This study investigates the relationship between academic directors and corporate Eco-innovation in Chinese A-listed firms in the context of the growing urgency of climate change. Based on the argument that academic directors bring advanced knowledge, skills, experience, and expertise to a corporate board, and are more socially responsible and ethical, we hypothesized that academic directors would have a positive influence on corporate Eco-innovation. We also examine how this nexus moderated by pollutant firms and firms having qualified foreign institutional investors (QFIIs). Our results suggest that academic directors have a positive and significant impact on corporate Eco-innovation. The findings remain robust even after employing alternate proxies for both independent and dependent variables, minimizing reverse causality and endogeneity concerns, and addressing self-selection bias through the entropy balancing method. Additionally, our study reveals that the positive nexus between academic directors and Eco-innovation is more pronounced in pollutant firms and firms having QFIIs. This study contributes to the literature on corporate governance, Eco-innovation, and emerging markets by providing evidence of the positive influence of academic directors on Eco-innovation, highlighting the importance of their contribution to enhancing corporate governance mechanisms to promote environmentally-friendly activities and sustainability practices. Furthermore, our findings offer insight into the role of QFIIs in strengthening the positive association between academic directors and Eco-innovation, suggesting that foreign investors can support and encourage firms to adopt environmentally friendly practices for long-term benefits.
Purpose
This study investigates the relationship between foreign ownership, earnings quality and overinvestment in Japanese zombie firms.
Design/methodology/approach
The study makes use of data from Japanese firms listed on the first section of the Tokyo Stock Exchange from 2009 to 2019. The study employs logistic and multinomial logistic models to test whether the overinvestment behavior of zombie firms is mitigated by foreign shareholdings and earnings quality.
Findings
The results show that (1) zombie firms tend to overinvest; (2) an increase in foreign ownership mitigates the overinvestment of zombie firms and (3) the mitigation of zombie firms' overinvestment by foreign ownership is stronger with higher earnings quality.
Originality/value
This study extends the discussion of earnings quality and investment efficiency to the zombie firm setting. Previous studies in accounting suggest that high earnings quality enhances firms' investment efficiency. The findings suggest that both a change in ownership structure and high-quality accounting information are necessary to mitigate the inefficiency of zombie firms.
Trenden att använda styrelser som styrform inom och mellan offentliga organisationer utgör nya utmaningar för de folkvalda politiker som ofta innehar uppdragen som styrelseledamöter. De träder nu in i styrelserum och leder offentligt ägda bolag som verkar enligt en marknadsbaserad logik. I den här litteraturstudien granskar vi forskning om bolagsstyrning för att utröna vilka nya roller detta kan medföra. Tre styrelseroller diskuteras: övervakare, mentorer och länkare till externa resurser. Vi granskar även vilka metoder forskare använt för att studera bolagsstyrning och finner en påtaglig dominans av kvantitativa metoder. Vilket dels kan ha påverkat vilka teoretiska modeller som har skapats, dels pekar det på möjliga luckor som forskningen framåt kan fylla. Analysen visar även att roller som härrör från bolagsstyrning inte behöver stå i strid med klassiska politikerroller-de skulle kunna komplettera dem. Studien bygger på 129 artiklar publicerade i 4 topptidskrifter under 2010-2019.
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
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.
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.
In recent years, a market-oriented corporate culture increasingly has been considered a key element of superior corporate performance. Although organizational innovativeness is believed to be a potential mediator of this market orientation - corporate performance relationship, much of the evidence to date remains anecdotal or speculative. In this context, a systematic framework is presented to test the postulated market orientation-innovation-performance chain. To this end, the direct causality assumption of market orientation on organizational performance is examined with Narver and Slater's (1990) market orientation framework. Moreover, a componentwise approach is taken, and an examination is conducted of how the 3 core components of market orientation affect the 2 core components organizational innovativeness en route to affecting corporate performance. Using banking industry data, innovation's mediating role in the market orientation-corporate performance relationship is empirically tested and substantiated.
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.
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.
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)
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.
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 shareholder 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.
Applying the new economics of organization and relational theories of the firm to the problem of understanding cross‐national variation in the political economy, this volume elaborates a new understanding of the institutional differences that characterize the ‘varieties of capitalism’ found among the developed economies. Building on a distinction between ‘liberal market economies’ and ‘coordinated market economies’, it explores the impact of these variations on economic performance and many spheres of policy‐making, including macroeconomic policy, social policy, vocational training, legal decision‐making, and international economic negotiations. The volume examines the institutional complementarities across spheres of the political economy, including labour markets, markets for corporate finance, the system of skill formation, and inter‐firm collaboration on research and development that reinforce national equilibria and give rise to comparative institutional advantages, notably in the sphere of innovation where LMEs are better placed to sponsor radical innovation and CMEs to sponsor incremental innovation. By linking managerial strategy to national institutions, the volume builds a firm‐centred comparative political economy that can be used to assess the response of firms and governments to the pressures associated with globalization. Its new perspectives on the welfare state emphasize the role of business interests and of economic systems built on general or specific skills in the development of social policy. It explores the relationship between national legal systems, as well as systems of standards setting, and the political economy. The analysis has many implications for economic policy‐making, at national and international levels, in the global age.
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.
This paper examines the relations between three board characteristics (independence, diligence, and expertise) and Big 6 audit fees for Fortune 1000 companies. To protect its reputation capital, avoid legal liability, and promote shareholder interests, a more independent, diligent, and expert board may demand differentially higher audit quality (greater assurance, which requires more audit work) than the Big 6 audit firms normally provide. The audit fee increases as the auditor's additional costs are passed on to the client, such that we expect positive relations between audit fees and the board characteristics examined. We find significant positive relations between audit fees and board independence, diligence, and expertise. The results persist when similar measures of audit committee "quality" are included in the model. The results add to the growing body of literature documenting relations between corporate governance mechanisms and various facets of the financial reporting and audit processes, as well as to our understanding of the determinants of audit fees.
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.
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.
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.
Corporate governance research has largely focused on internal governance mechanisms (i.e., the board of directors, controlling owners, and managerial incentives). However, much of this work ignores the role that external corporate governance practices play in preventing managers from engaging in activities detrimental to the welfare of shareholders, and the overall firm. In this essay, we first review and organize current research on external governance mechanisms and integrate this siloed body of work within the broader corporate governance equation. We explicitly focus on six external governance mechanisms: the legal environment, the market for corporate control, external auditors, stakeholder activism, rating organizations and the media. We discuss findings showing how external governance mechanisms act both as independent forces as well as in conjunction with internal corporate governance mechanisms. We conclude the review by mapping an agenda for future research on corporate governance that better integrates internal and external governance mechanisms. Our review suggests that studying different configurations of external and internal governance mechanisms will help us to better understand what factors and conditions lead to effective corporate governance.
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.
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.
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.
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.
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...
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.
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.
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.
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]
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
This article examines the differences in the concept of the corporation and their possible implications for corporate performance, between Japan on the one hand and the United States and Europe (Germany, UK and France) on the other. The Japanese concept is used as the standard against which the other models are compared. The concept of the corporation is defined here as the answer to the question: ‘In whose interest should the firm be managed?’1 This is the foundation on which corporate governance and the monitoring system for the CEO is built. The analysis is focused on large publicly-held corporations with widely diffused ownership.
This paper investigates the determinants of appointments of outsiders — directors previously employed by banks (bank directors) or by other nonfinancial firms (corporate directors) — to the boards of large nonfinancial Japanese corporations. Such appointments increase with poor stock performance; those of bank directors also increase with earnings losses. Turnover of incumbent top executives increases substantially in the year of both types of outside appointments. We perform a similar analysis for outside appointments in large U.S. firms and find different patterns. We conclude that banks and corporate shareholders play an important monitoring and disciplinary role in Japan.
This paper conducts the first empirical assessment of theories concerning risk taking by banks, their ownership structures, and national bank regulations. We focus on conflicts between bank managers and owners over risk, and we show that bank risk taking varies positively with the comparative power of shareholders within the corporate governance structure of each bank. Moreover, we show that the relation between bank risk and capital regulations, deposit insurance policies, and restrictions on bank activities depends critically on each bank's ownership structure, such that the actual sign of the marginal effect of regulation on risk varies with ownership concentration. These findings show that the same regulation has different effects on bank risk taking depending on the bank's corporate governance structure.
This paper studies stock ownership in Japanese firms by non-Japanese investors from 1975 to 1991. Existing models predicting that foreign investors hold national market portfolios or portfolios tilted towards stocks with high expected returns are inconsistent with our evidence. We document that foreign investors hold disproportionately more shares of firms in manufacturing industries, large firms, and firms with good accounting performance, low unsystematic risk, and low leverage. Controlling for size, there is evidence that small firms that export more firms with greater share turnover, and firms that have ADRs have greater foreign ownership.
This paper develops an organizational approach to corporate governance and assesses the effectiveness of corporate governance and implications for policy. Most corporate governance research focuses on a universal link between corporate governance practices (e.g. shareholder activism, board independence) and performance outcomes, but neglects how interdependences between the organization and diverse environments lead to variations in the effectiveness of different corporate governance practices. In contrast to such 'closed systems' approaches, we propose a framework based on 'open systems' approaches to organizations which examines these organizational interdependencies in terms of the costs, contingencies and complementarities of different corporate governance practices. These three sets of organizational factors are useful in analyzing the effectiveness of corporate governance in diverse organizational environments. We also explore how costs, contingencies and complementarities impact approaches to policy such as 'soft-law' or 'hard law', and their effectiveness in different contexts.