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The governance impact of a changing investor landscape
Abstract
Within the backdrop of comparative corporate governance research, we draw on the managerial reporting and impression management literatures to examine how the type, level, and nature of foreign shareholders, infused with their own governance logic, influence initial managerial earnings optimism and how foreign ownership shapes earnings guidance in a stakeholder-oriented setting. Drawing on Japanese data, and addressing endogeneity concerns, our results show that under the presence of foreign owners, managers are more optimistic in their initial earnings forecasts, but that in subsequent revisions they are more likely to provide timely adjustments of their earnings forecast and avoid making last-minute adjustments. This research illustrates how foreign practices travel across borders and contributes to understanding triggers to governance and strategic changes.
... Recent literature uncovers how different types of institutional investors can have different objectives which will affect a variety of firms' strategic outcomes (Boyd & Solarino, 2016). In this line, FIOs face higher levels of information asymmetry than domestic ones due to limited familiarity with local institutional requirements, such as cultural implications, regulatory evolution, or disclosure expectations (e.g., Aguilera, Desender, Lamy, & Lee, 2017;Kim et al., 2019;Okhmatovskiy & Shin, 2019). Bena, Ferreira, Matos and Pires (2017) are an exception to the popular view that foreign investors lead firms to adopt a short-term orientation and find a positive relationship with investees' long-term investments in a sample of publicly listed firms. ...
... First, the effects of increased information asymmetries lead to an amplified aversion to risks and reinforce FIOs' interest in short-term profits versus long-term value (e.g., David, Yoshikawa, Chari, & Rasheed, 2006;Geng, Yoshikawa, & Colpan, 2016). Second, FIOs also place more emphasis on agency monitoring to reduce their information asymmetries (Aguilera et al, 2017;Kim et al., 2019). Recent evidence has shown that activist institutional investors influence voluntary environmental disclosure in firms (Flammer et al., 2021). ...
... Information asymmetries from investing abroad will particularly encourage FIOs to limit their reputational and legal environmental risks by influencing their investees to improve their environmental performance (EP). Although objective economic data may be available for any professional institutional investor, information about normative and cultural values, regulatory changes, or unexpected political developments may be more difficult to access and interpret from abroad (e.g., Aguilera et al., 2017;Kim et al., 2019;Shi et al., 2021). Consequently, FIOs may be particularly keen on highly visible environmental outputs and the related short-term initiatives to react to the demands of stakeholders, such as end-of-pipe filters, recycling initiatives, outsourcing pollution, or green certifications (Desender & Epure, 2021;Nofsinger et al., 2019). ...
Many institutional investors claim to be leaders in their commitment to sustainability, yet their real impact is undetermined. We look at the relationship between the presence of foreign institutional owners and the firm's environmental outcomes in terms of performance and innovation. We argue that foreign institutional owners seek to mitigate their exposure to reputational risks by encouraging their investee firms to move towards better environmental performance. However, these owners are less likely to engage in long-term investments derived from environmental innovations. We examine these paradoxical motivations in the context of multinational enterprises (MNEs) in the chemical industry across 33 countries in emerging and developed markets and further explore how these investee firms' international diversification affects these relationships. Our findings contribute to international corporate governance and sustainability research by uncovering that, contrary to institutional owners' popular claims, foreign institutional owners have a positive effect on their investees' environmental performance, but their influence is not statistically significant on environmental innovation. Specifically, the influence of foreign institutional owners on environmental performance is strong for MNEs with a low level of international diversification and marginal for those with a higher level of internationalization; meanwhile, domestic institutional owners are committed to advancing both environmental performance and innovation in their MNE investees. In sum, we show that environmental concerns are still quite localized.
... Internationalization is an important driver for better disclosure in MNEs because they have to attract foreign shareholders with shareholder-oriented logic (Aguilera et al., 2018). International corporate governance research has shown that shareholder-oriented systems are different from stakeholder-oriented systems in various ways (Aguilera et al., 2017;Shleifer and Vishny, 1997). In a stakeholder-oriented corporate governance system, highly internationalized MNEs tend to adopt International Financial Reporting Standards (IFRS) (Sakawa et al., 2021d). ...
... Second, firms with greater foreign shareholdings have been pressurized to mitigate the negative relation between disclosure quality of analyst forecasts and internationalization. As the disclosure pressure is stronger in firms with greater foreign shareholders (Aguilera et al., 2017), lower disclosure quality in firms with higher internationalization is mitigated. Finally, greater bank ownership would also enhance the reliance of analyst forecasts on management forecasts and mitigate the analyst forecast dispersion under stakeholder-oriented corporate governance. ...
... Second, greater foreign shareholdings enhance the disclosure quality of analyst forecasts on management forecasts in firms with higher internationalization degree. This is consistent with the previous finding that disclosure pressures from foreign shareholders are key to enhancing the credibility of management forecasts (Aguilera et al., 2017). This finding implies that disclosure pressure from foreign shareholders with shareholder-oriented logic effectively influences the stakeholder-oriented corporate governance system. ...
This paper investigates whether disclosure quality of analyst forecasts on management forecasts is measured as reliance of analyst forecasts on management forecasts and dispersion of analyst forecasts is affected by the internationalization under a unique setting of effectively mandated management forecasts in Japan. We find that higher internationalization would result in lower disclosure quality of analyst forecasts on management forecasts in Japanese corporations. This implies that firms with higher internationalization face the complexity and uncertainties. Second, greater foreign shareholdings enhance the disclosure quality of analyst forecasts on management forecasts, suggesting the effectiveness of foreign shareholders' disclosure pressure. Finally, greater bank ownership would also enhance the credibility of analyst forecasts on management forecasts under stakeholder-oriented corporate governance.
... In spite of the highlighted importance and efforts (global and local) to incorporate CG practices into firms in the form of CG codes, weak governance environments such as in emerging markets (hereinafter EMs) and notably those in Africa, have not treated the issue with the same urgency Adegbite et al., 2013;Oehmichen, 2018). In the context of this paper, and consistent with prior research (Adegbite et al., 2013;Adegbite, 2015;Cumming et al., 2017;Aguilera et al., 2017), we define weak governance/institutional environments as settings characterised by weak enforcement of laws, absence of market supporting institutions (institutional void), the prevalence of corruption, tribalism, political uncertainty and elitism. Particularly, in this context, informal negative institutional practices such as corruption and tribalism, amongst others, are more powerful in determining the governance of firms than formal or soft laws instituted in the form of CG codes (Adegbite et al., 2013;Adegbite, 2015;Tunyi and Ntim, 2016). ...
... In this section, we argue that FIIs influence firm governance quality by requiring these firms to adopt good governance practices as required by regulators and align with good CG practices from countries with strong regulatory enforcement. Due to global economic integration, there has been the movement of capital across borders (Aggarwal et al., 2011;Aguilera et al., 2017;Cumming et al., 2017;Kim et al., 2017), especially in EMs, as investors are searching for alternative investment opportunities out of the already saturated developed markets. This has motivated research examining whether such movement in capital across countries by FIIs improves investment prospects (Alvarez et al., 2018), dividend policy (Cao et al., 2017), firm valuation (Kim et al., 2017;Ferreira and Matos, 2008) and stock market informativeness (Bae et al., 2012). ...
... Nonetheless, it is unclear whether the reported effect of FIIs on the financial sustainability of firms is because of a reduction in agency cost through improved governance quality in the host country. For example, some authors have postulated that improvement in financial performance of firms may be as a result of enhanced CG standards in countries where investment is risky due to high information asymmetry and weak governance enforcement (Cumming et al., 2017;Aggarwal et al., 2011;Aguilera et al., 2017;Alvarez et al., 2018). On the other hand, recent IB research has offered avenues that reduce the riskiness of firms through improvement of governance quality by foreign directors (Miletkov et al., 2017) and cross-listing (Temouri et al., 2016). ...
We advance the practice transfer theorising of corporate governance (CG) by developing a framework that uncovers how foreign institutional investors (FIIs) improve on CG practices of firms in weak institutional environments. Using hand-collected data for 85 listed Nigerian firms covering the 2011-2016 period, we show that FIIs bypass the weak regulatory environment in emerging markets by transferring good CG standards to host countries. Furthermore, FIIs' ability to enhance the CG quality of firms in such environments is moderated by their home country's legal system, with FIIs from countries with strong legal enforcement having an enhanced ability to improve CG practices of firms in weak institutional environments. However, cultural differences between the FIIs' home and host countries negatively moderate this relationship. Our results are robust to the choice of estimation technique and various sources of endogeneity.
... Instead of assuming homogeneity of institutional investors, this study analyzed their different characteristics and classified the different types of foreign and domestic institutional investors in Japan. Foreign investors have shareholder-oriented views, unlike domestic investors who have stakeholder-oriented views [17,63]. In addition, firms with a larger percentage of foreign investors tend to support higher long-term incentive structures for executive compensation [46]. ...
... The study's next focus was on the monitoring role of foreign investors for firms with higher growth opportunities. As noted above, foreign shareholders are likely to encourage executives to focus more on profitability [63]. A larger presence of foreign shareholders can prompt corporations to take more risks because they are driven to realize higher growth [68]. ...
... In addition, stable shareholders were used as the control for stakeholder-oriented shareholders. As Aguilera et al. [63] mentioned, stakeholder-oriented shareholders, such as stable shareholders, have different views from other institutional investors Stable shareholders are regarded as "allegiant" shareholders guaranteed to vote with management [75]. "Allegiant" shareholders are "companies, banks, and insurers they do business with, are linked to by history, or have assembled precisely to protect management from any awkward minority shareholder resolutions" [76]. ...
This study aimed to reveal the role of institutional investors with shareholder-oriented scopes in a stakeholder-oriented economy such as Japan. With financial globalization, the increasing number of institutional shareholders in Japanese corporations enables us to investigate whether their shareholder-oriented perspectives are conducive to taking on effective monitoring roles under stakeholder-oriented corporate governance. This study’s sample included large listed firms of the TOPIX 500 in Japan during 2010-2016. Using 2924 firm-year observations, the effect of institutional investors on firm performance was analyzed to test the role of institutional investors in stakeholder-oriented corporate governance. Our study showed that the monitoring role of institutional shareholders, or foreign shareholders, functions effectively in Japanese corporations. In addition, we showed that the monitoring roles of these are expected to strengthen firms through higher growth opportunities. These results implied that institutional shareholders contribute to enhancing sustainable firm performance and constructing sustainable corporate governance mechanisms in a stakeholder-oriented system.
... Our paper makes several important contributions to the literature. First, we add to an emerging body of IB literature theorizing and documenting that governance does indeed travel abroad through, for example, foreign ownership, cross-border M&As, etc. (see, e.g., Aguilera, Desender, Lamy, & Lee, 2017;Cumming et al., 2017;Ellis et al., 2017;Miletkov, Poulsen, & Wintoki, 2017). We complement this literature by analyzing banks, an industry of central importance to IB regarding the stability of global trade, revealing that foreign bank ownership is another effective channel through which governance moves across borders. ...
... For example, Ferreira & Matos (2008) and Aggarwal et al. (2011) document that foreign investors from countries with strong shareholder protections significantly improve the corporate governance structures in target firms. Among Japanese firms, Aguilera et al. (2017) show that foreign investors' institutional backgrounds affect managerial discretion and optimism in earnings forecasts and subsequent revisions. Moreover, a related strand of banking literature documents that foreign owners improve bank efficiency in China, consistent with banks importing better governance systems from abroad (see, e.g., Berger et al., 2009). ...
... An issue we have not explored thus far in our study is the possibility that governance mechanisms substitute or complement one another. Prior studies analyze the interaction between internal and external governance mechanisms, such as between directors and the takeover market (Hirshleifer & Thakor, 1994), between executive compensation and the takeover market (Agrawal & Knoeber, 1998;John, Saunders, & Senbet, 2000), between the legal environment and board monitoring (e.g., Marcel & Cowen, 2014), between ownership structure and board composition (Hermalin & Weisbach, 1991), and between external audits and board monitoring (Desender, Aguilera, Ló pezpuertas-Lamy, & Crespi, 2016) (see John & Senbet, 1998;Aguilera et al. 2017). ...
This paper investigates how foreign ownership shapes bank information environments. Using a sample of listed banks from 60 countries over 1997–2012, we show that foreign ownership is significantly associated with greater (lower) informativeness (synchronicity) in bank stock prices. We also find that stock returns of foreign-owned banks reflect more information about future earnings. In addition, the positive association between price informativeness and foreign ownership is stronger for foreign-owned banks in countries with stronger governance, stronger banking supervision, and lower monitoring costs. Overall, our evidence suggests that foreign ownership reduces bank opacity by exporting governance, yielding important implications for regulators and governments.
... Although institutional approaches do not represent a single, coherent theory (e.g., Aguilera and Grøgaard 2019; Amenta and Ramsey 2010), the line of arguments used in articles based on institutional theory typically follows similar patterns. Therein, foreign owners, based on their different institutional backgrounds, are understood as shareholders whose expectations and practices differ from those of the firms in which they invest (e.g., Aguilera et al. 2017;Ahmadjian and Robbins 2005;Jiang et al. 2024). Following this basic assumption, the resulting 'clash' of institutional backgrounds between foreign owners and investees is the driver of firm outcomes that, frequently, are at odds with conventions in the investee's homecountry environment (e.g., Colpan et al. 2011;Jung et al. 2015). ...
... Instead of looking for theoretical arguments supporting the idea that foreign ownership in general drives certain firm outcomes, some authors propose that a differentiation between foreign shareholder types offers a suitable explanation with regard to why foreign ownership matters. For example, some studies distinguish between foreign corporate, foreign individual, and foreign institutional investors, arguing that different foreign owners might also pursue different goals and provide different resources to firms (e.g., Aguilera et al. 2017;L. Chen et al. 2022;Singla et al. 2017). ...
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.
... This study uses a country-level adjustment to the conventional institutional measure of Gaspar et al. (2005) in order to capture the varying degree of informational constraints in individual portfolio countries. Previous studies (Aguilera et al., 2017;Bena et al., 2017) commonly categorize institutions as being short-or long-term based on the entire portfolio (Döring et al., 2021), while we classify institutions into short-and longterm considering the fraction of their portfolio positions individually in all foreign countries. ...
... In addition, Japan is a "stakeholder-oriented" economy (Xu & Zeng, 2021). A first avenue for future research would be to test the generalizability of the 'signaling financial prospects' explanation in a "shareholder-oriented economy" setting such as the USA (Aguilera et al., 2017). Another possible avenue is to follow Heil and Henderson's (1991) suggestion to consider a firm's history of repeated signaling, which would prompt investors to react differently to the next signal through CPDR announcement depending on the reputation for signal honesty (or dishonesty) that each firm has built over time. ...
Corporate response to natural disaster in the forms of cash and/or in-kind donations (corporate philanthropic disaster response, or CPDR) is a growing form of corporate philanthropy. Through an event study methodology based on 1,775 firms listed on the Tokyo Stock Exchange, we analyze shareholder reaction to CPDR announcements after the 2016 Kumamoto earthquakes in Japan. Controlling for the possibility that the most common explanations (buying goodwill and corporate governance) are at play, our results provide an empirical test of a little-explored explanation for the positive shareholder reaction to CPDR: namely, that corporate philanthropy is a market signal to outside investors of the firm’s future financial prospects. We find this explanation to be significant. Of note are also the facts that shareholder reaction is only significantly positive in the case of cash donation (as opposed to in-kind), and is more positive when announced early. Overall, our results align with the “strategic philanthropy” view grounded in resource-dependence theory. But instead of the typical focus on non-financial stakeholders, we argue that philanthropic donations can be used to directly influence investors.
... In the early 1980s, Japanese financial markets got globally connected, big Japanese banks lost their clients and cross-shareholdings decreased (Fujiyama, Gray, & Koga, 2020). In the early 1900s, to face a prolonged deflation Japanese government embraced various financial reforms, such as 'Big Bang'; accounting and auditing standards were revised to converge with international standards (Aoki, 2007) to add, foreign investors emphasized management-monitoring, detailed corporate disclosure and firm performance (Desender, Aguilera, Lopezpuertas-Lamy, & Crespi, 2016;Aguilera, Desender, Lamy, & Lee, 2017). Consequently, the Japanese product market was globalized, industrial competition became more complex, and the main bank could not afford to monitor the affiliated firms properly anymore; hence, the external evaluation mechanism became stronger and management had to become more careful. ...
The purpose of this study is to sketch the history of the Japanese CSR and put up the determinants of its unique institutional settings by following a semi-systematic literature review. Findings suggest that Japan has a rich history of environmental reporting. It is a code-low-based country where CSR-context is voluntary and is featured with flexible guidelines, social responsibility-based corporate philosophy and internally collaborative corporate culture; these attributes are positive for the growth of CSR in Japan. However, this growth could be halted due to excessive dependency on local guidelines; additional challenges for the Japanese CSRs are environmental-heavy disclosures, dwarfed social disclosures, information overload, overlooking ESG-based targets and less integration between the financial and non-financial parts of the CSR. This paper contributes by formulating an institutional framework dedicated to the understanding of Japanese CSRs' unique attributes; CSR-focused researchers and non-financial framework/standard setters are likely to draw value from this endeavor.
... Generally, one can assume that a higher ownership stake comes with more influence on the management of the respective entity (Uno & Kamiyama, 2019). It follows that the more dispersed share ownership one company has, the more independently the management may govern the organization (Aguilera, Desender, López-Puertas & Lee, 2017). ...
This study identified the factors that could determine Global Reporting Initiative-Based Sustainability Reporting of listed Oil and Gas Firms in Nigeria and South Africa. The determinant factors which include Ownership Structure and Profitability served as proxies to the independent variable (Determinant) while Social Sustainability Reporting was used to measure Sustainability Reporting (the dependent variable). Ex-Post facto research design and content analysis method were adopted. Fourteen (14) listed Oil and Gas firms: seven (7) listed Oil and Gas firms in Nigeria and seven (7) listed Oil and Gas firms in South Africa constituted the sample size of this study for the years 2010 and 2020. Secondary data were extracted from the annual reports and accounts of the sampled firms and extracts from the annual reports were analyzed using Pearson Correlation, Panel Least Square (PLS) regression analysis through E-Views 10.0 statistical software. Findings from the empirical analysis showed that Ownership Structure, and Profitability, had significant effect on Social Sustainability Reporting, though Ownership Structure, (for Nigeria) maintained negative attitude to Social Sustainability Reporting at 5% level of significance
... We show that foreign investors from countries with strong governance practices tend to play a more effective role in deterring fraud activities, suggesting that the country origin of foreign investors matters. This is consistent with the finding that high-quality governance practice travels around the world through the cross-border investment of institutional investors (Aguilera, Desender, Lamy, & Lee, 2017;Cumming, Filatotchev, Knill, Reeb, & Senbet, 2017;Khanna & Palepu, 2004;Miletkov, Poulsen, & Wintoki, 2017). ...
This paper investigates the effect of foreign investment on corporate fraud in China. Using a sample of 2,838 firms over the period of 2004 to 2016, we find that foreign investment helps reduce the risk of corporate fraud. Specifically, foreign investment decreases the likelihood of committing fraud, the frequency of fraud, and its severity. Further evidence suggests that the effect is largely driven by foreign block investment and investment from countries with strong investor protections. Also, the effect of the phenomenon is more pronounced in state-owned enterprises than in non-state-owned enterprises. Our findings suggest that foreign investors play an active monitoring role in emerging markets.
... The presence of independent directors on the board, independent auditors, audit committees, and managerial ownership, are some control mechanisms that aim to minimize deviant behavior and asymmetric information caused by managers. Previous studies have shown that better monitoring of managerial actions and environmental information can lead to value creation through decision-making, investment opportunities, and efficient innovation (Hoepner et al. 2016;Sun and al., 2011;Kheng, Sun, and Anwar 2017;Lopez Puertas-Lamy et al. 2017;Benlemlihet and Girerd-Potin 2017). Ming-Te (2017) found that strong corporate governance leads to more investment efficiency. ...
Our study aims to investigate the impact of some governance mechanisms especially, shareholder activism, gender diversity, board independence, and board size, on investment efficiency as measured by capital expenditure (CAPEX). So, we conducted an empirical study on 626 Asian listed companies (China, Japan, South Korea, Indonesia, Thailand, and India) during the period2012–2019. To test our hypotheses, we used panel data estimation and constructed estimates using three estimation methods: GLS, NEWEY-WEST, and WLS regressions. To strengthen our results, we established a robustness test by choosing a new measure for our dependent variable: the growth rate of Property, plant, and equipment (Growth PP&E). The results of our study highlight that shareholder activism, gender diversity, and duality impact negatively and significantly the level of investment efficiency, while debt and board size have positive impact on the dependent variable. The robustness check confirmed these results
... Most notably, signified by a material increase in the role of foreign and institutional shareholders post the financial deregulation of the 2000s (Hoshi and Kashyap 2010). Indeed, the ratio of foreign institutional investors has dramatically risen since the early 1990s in Japan (Aguilera et al. 2017;Sakawa and Watanabel 2019). 1 Also, institutional investors in Japan are emerging as an influential investor group and are receiving attention with the increase in institutional foreign shareholdings in Japanese firms (Financial Times 2014). ...
Agency theory predicts that institutional ownership plays an important role in monitoring corporate risk-taking. This study examines this ownership-risk taking linkage in Japan over the period 2007 and 2019. We proxy risk through measures of idiosyncratic risk, total risk, and market beta. We show that (relational) foreign institutional shareholdings (do not) induce corporate risk-taking, thereby mitigating (preserving) the managerial ‘quiet life’ in Japanese corporations. Using 2SLS analysis, the roles of institutional shareholders are robust to endogeneity concerns. Finally, we also confirm robustness using alternative accounting-based risk proxies such as the standard deviation of Tobin’s Q and ROA. Our study implies that the monitoring of institutional shareholders is important in Japanese corporations whose top executives might be prone to seek a ‘quiet life’.
... We tested our theoretical model on acquisitions of private target firms by public firms of the United Kingdom from 2006 to 2011. 3 We collected data on M&A deals and other related variables from the SDC Thomson One database (Ragozzino and Reuer, 2009). Additionally, we used the Thomson Reuters Eikon database for extracting financial fundamentals data and annual reports of our sample firms (Aguilera et al., 2017). ...
This empirical study leverages the theoretical underpinnings of regulatory focus theory, an influential theory of self-regulation, to investigate the impact of CEOs' dispositional prevention focus on firms' deal structuring choices in mergers and acquisitions. We build on the argument that the dispositional prevention focus of individuals is associated with a higher perception of risk and a preference for non-losses. Accordingly, this study suggests a positive relationship between the intensity of an acquiring firm CEO's dispositional prevention focus and the firm's propensity to use earnouts as a post-closing risk-mitigating instrument in the deal consideration structure. Furthermore, this study accounts for the important role of contextual cues in priming disposi-tional prevention focus through the concepts of regulatory fit and misfit and examines the moderating impact of M&A deals involving foreign targets and the acquiring firm's acquisition experience on the baseline relationship. We test our predictions on a dataset comprising 217 deals from 2006 to 2011 in the United Kingdom. Building on the micro-foundations of strategy, these findings contribute to the literature on deal structuring choices in mergers and acquisitions.
... Unlike the United States, the Japanese stock exchanges request managers of listed companies to provide forecasts of annual earnings at the beginning of each annual earnings announcement period, as well as revisions of these initial forecasts at interim earnings announcement dates (Kato et al., 2009). These differences in corporate governance practices allow for the exploration of how the properties of managerial earnings forecasts evolve as corporate governance arrangements change (e.g., Kato et al., 2009) or to understand how managers respond to foreign investor pressures for greater disclosure (e.g., Aguilera et al., 2017). By looking at different corporate governance settings and studying unique features, research can provide new insights that are not only relevant to the specific setting, but may also help in our understanding of the underlying processes that lead to better corporate governance. ...
This paper draws on the articles in the Forum on Corporate Governance to discuss how corporate governance and accounting research complement each other well in explaining how companies are governed as well as properly managed from an accounting point of view. We put special attention to the cross-national differences in both corporate governance systems and accounting practice and how that affect multiple organizational outcomes ranging from financial performance to corporate social performance and reporting quality.
... As the firm's key representative, who communicates with financial stakeholders, CEOs have received increasing attention as the focal person engaging in IM (e.g., Westphal and Graebner, 2010;Whittington et al., 2016). Indeed, accounting and management scholars have already suggested that CEOs may use forecasts to positively impress investors (e.g., Aguilera et al., 2017;Hayward and Fitza, 2017;Kato et al., 2009;Rogers and Stocken, 2005). We extend this line of research by showing how the tactical considerations made when deciding to engage in IM differ between founderand non-founder-CEOs. ...
Drawing on impression management and social exchange theory, we examine the use of positively biased forecasts by (non-)founder-CEOs as an impression management tactic vis-à-vis their existing investors. Contrary to their non-founder counterparts, founder-CEOs identify more with the venture they founded and, therefore, experience greater instrumental and affective concerns about the long-term relationship with their investors. Consequently, we hypothesize that founder-CEOs will strategically provide less positively biased forecasts to their investors than non-founder-CEOs. Using two independent samples with revenue forecasts reported to different venture capital investors and a causal chain scenario study consisting of two experiments, we find consistent support for our hypothesis. Overall, this study provides new insights into the use of forecasts as a post-investment impression management tactic by distinct types of CEOs in entrepreneurial ventures.
... In a similar vein, governance is associated with choices concerning the structure of inter-firm relationships (Abdi and Aulakh, 2012;Choi and Contractor, 2016;Phene and Tallman, 2012;Zhou and Xu, 2012), sometimes within a global value chain framework (Kano, 2018). Corporate governance research, at the interface of IB and strategic management, concerns the regulation of senior management by investors, directors and other stakeholders (Aguilera et al.,2017;Cumming et al.,2017;Griffin et al.,2017;Hillier et al., 2011;Sugathan and George, 2015). ...
Purpose
This paper aims to address the relationship between critical and mainstream international business (IB) research and discuss the ways forward for the former.
Design/methodology/approach
The paper empirically maps critical IB scholarship by analysing more than 250 academic articles published in critical perspectives on international business ( cpoib ) from 2005 to 2017. The paper also includes a citation analysis that uncovers how critical IB research is recognized and discussed in mainstream IB studies.
Findings
The extant critical IB research can be broken into five main topical clusters: positioning critical IB research, postcolonial IB studies, effects of international business activities, financialization and the global financial crisis and “Black IB” and corporate social responsibility. The citation analysis demonstrates that critical IB research is rarely recognized in mainstream IB academic outlets.
Originality/value
This paper is the first to empirically map critical IB research and to measure its impact on mainstream IB research. Based on these insights, as well as discussions of the more critical voices within mainstream IB studies and the debate over critical performativity in critical management studies, ways of developing critical IB research are examined.
... Importantly, how the MSCI ACWI is constructed (i.e. via a mechanical logic) provides for arguably exogenous variation in foreign institutional ownership. As Bena et al. (2017: 129-130) point out: -because index membership is determined by the mechanical rule that firms are included depending on their market capitalization ranking, the variation in foreign institutional ownership 12 This instrument has been extensively used in recent finance and accounting research on foreign institutional ownership (Aggarwal et al., 2011;Aguilera et al., 2017;Bena et al., 2017;Dyck et al., 2019). 13 Source: Official MSCI ACWI website: https://www.msci.com/acwi. ...
Research Summary
The benefits of foreign institutional ownership (FIO) have been amply researched, but there are also potential downsides to such ownership. High FIO can subject a firm to heightened regulatory scrutiny and compliance, increasing its political dependence. Drawing on resource dependence theory, we argue that firms can manage the political dependence that arises from FIO by engaging in corporate political spending (CPS). We derive two moderating conditions from our theoretical argument, positing that the strength of the positive relationship between FIO and CPS hinges on the intensity of a firm’s government contracting and on the political sensitivity of the industry. Our study advances strategic ownership research by highlighting that U.S. firms may need to manage the potential liabilities associated with FIO through nonmarket strategy.
Managerial Summary
Research suggests that firms can reap many benefits from equity investments made by foreign institutional investors. However, such investments may also have potential downsides. We posit that high levels of foreign institutional ownership may subject a firm to increased political and regulatory scrutiny, and that firms can manage this increased exposure to government by engaging in corporate political activities that allow them to monitor and influence the political landscape. To explore this question, we analyzed a large sample of publicly‐traded U.S. firms and find empirical support for our arguments. Our study highlights an unintended “liability” of foreign institutional ownership that firm executives should be aware of and has practical implications for how firms manage their investors and allocate resources between market and nonmarket strategies.
... Similarly, Zaheer (1995) shows the reliance of foreign subsidiaries of banks on organizational practices from their own home country. Theory and evidence further shows that FIIs influence corporate diversification strategies and restructuring (Ahmadjian & Robbins, 2005;David et al., 2010;Kavadis & Castañer, 2014), as well as the export intensity of firms (Filatotchev, Stephan, & Jindra, 2008), board-monitoring practices (Desender et al. 2016), the dismissal of underperforming CEOs (Aggarwal et al., 2011), and earnings forecasts ( . ...
We examine the interplay between local institutional forces in emerging markets and the role foreign investors in reinforcing or counteracting these. Exemplifying this in relation to gender representation on corporate boards, we examine the extent to which foreign investors may import their country-of-origin beliefs about gender equality when making corporate governance decisions in their stakes in emerging markets. Against this backdrop, we propose that the tendency to counteract local institutional forces will be most evident when there is a misalignment between foreign investors’ gender-related beliefs and the host market’s enduring gender-related beliefs. Based on a longitudinal sample of firms from six emerging markets in Asia (China, India, Indonesia, Malaysia, the Philippines, and Thailand) during 2007–2016 and drawing on the UN’s Gender Inequality Index, we corroborate the intuition that (1) higher local country-level gender inequality is reflected in lower representation of women on corporate boards in emerging markets. Building on this baseline, we find that (2) greater stake of foreign investors stemming from countries with lower gender inequality will tend to weaken the local country baseline effect; contrariwise, (3) greater stake of foreign investors from countries with higher gender inequality will tend to reinforce the local country baseline effect. We discuss implications for cross-institutional tensions in governance choices in emerging economies, foreign investors as drivers of social change, contextualization of gender in international corporate governance theory, and the staffing the corporate board in emerging markets.
... In a similar vein, governance is associated with choices concerning the structure of inter-firm relationships (Abdi and Aulakh, 2012;Choi and Contractor, 2016;Phene and Tallman, 2012;Zhou and Xu, 2012), sometimes within a global value chain framework (Kano, 2018). Corporate governance research, at the interface of IB and strategic management, concerns the regulation of senior management by investors, directors and other stakeholders (Aguilera et al., 2017;Cumming et al., 2017;Griffin et al., 2017;Hillier et al., 2011;Sugathan and George, 2015). ...
Purpose
Modern slavery is a problem that international business (IB) research can no longer ignore. Multinational enterprises (MNEs) are often contributors to the persistence of modern slavery, by virtue of the regulatory challenge they pose to states and their insufficient oversight of supply chains. The purpose of this paper is to show that governance inadequacies with respect to modern slavery will be lessened if IB scholars give more attention to MNEs’ governing role within and beyond global value chains.
Design/methodology/approach
A set of arguments is presented in support of intensified effort in IB research with respect to studying the role of MNEs in transnational labour governance. The paper draws inspiration from IB theory and the conceptualisation of the MNE in neighbouring disciplines that regard it as a bearer of duties toward labour, consistent with its role in multilevel governance. Insights from the literature on global and multi-level governance are utilised.
Findings
The paper construes modern slavery as a multi-level governance challenge and argues that MNE capabilities and responsibilities with respect to labour governance and the deterrence of slavery exceed those identified on the margins of IB literature. MNEs are underappreciated as governors within the multilevel transnational labour governance system. The IB discipline is in a strong position to develop our understanding of the MNE’s different roles in governance and thereby contribute to the reduced incidence of modern slavery.
Originality/value
This paper represents an attempt to mobilise the IB academy to help eliminate slavery from workplaces that rely on MNE patronage or where labour rights abuses are made possible by MNE diversion of governance resources. It places particular emphasis on the use and abuse of MNEs’ governance capabilities in the sphere of international relations and calls attention to over-simplification of the MNE, IB’s primary unit of analysis.
... In the context of cross-national corporate governance, initial research centered around the effects of foreign ownership, and on how foreign corporate governance practices were lost in translation by either being rejected, reinterpreted or decoupled (Ahmadjian & Robbins, 2005;Fiss & Zajac, 2004;Sanders & Tuschke, 2007). More recent studies reflect the globally greater demands for corporate transparency and show that the degree of Anglo-American institutional investors' ownership of Japanese firms has led them to adopt foreign corporate governance practices such as increasing board monitoring with higher external audit fees (Desender et al., 2013) and to conduct better adjustments on earnings management (Aguilera, Desender, López-Puertas Lamy, & Lee, 2017;Desender, Aguilera, López-Puertas Lamy, & Crespi, 2016). A core idea in this research is that corporate governance practices are not universally applied. ...
In this article, we review four decades of research about the corporate governance of multinational corporations (MNCs), which we label International Corporate Governance (ICG). We identify and discuss three main streams of research that draw on different conceptualizations and theoretical lenses of (corporate) governance. After synthesizing their respective findings, we propose several avenues for future research that integrate these three streams of research with the goal of developing a more nuanced understanding of ICG. We hope this review article will inspire international business scholars to continue examining how corporate governance can be an effective tool for MNC success.
... In the context of cross-national corporate governance, initial research centered around the effects of foreign ownership, and on how foreign corporate governance practices were lost in translation by either being rejected, reinterpreted or decoupled (Ahmadjian & Robbins, 2005;Fiss & Zajac, 2004;Sanders & Tuschke, 2007). More recent studies reflect the globally greater demands for corporate transparency and show that the degree of Anglo-American institutional investors' ownership of Japanese firms has led them to adopt foreign corporate governance practices such as increasing board monitoring with higher external audit fees (Desender et al., 2013) and to conduct better adjustments on earnings management (Aguilera, Desender, López-Puertas Lamy, & Lee, 2017;Desender, Aguilera, López-Puertas Lamy, & Crespi, 2016). A core idea in this research is that corporate governance practices are not universally applied. ...
In this article, we review four decades of research about the corporate governance of multinational corporations (MNCs), which we label International Corporate Governance (ICG). We identify and discuss three main streams of research that draw on different conceptualizations and theoretical lenses of (corporate) governance. After synthesizing their respective findings, we propose several avenues for future research that integrate these three streams of research with the goal of developing a more nuanced understanding of ICG. We hope this review article will inspire international business scholars to continue examining how corporate governance can be an effective tool for MNC success.
... (1), with an additional variable controlling for peer effects on disclosure. Forecast Characteristics ¼ b research focused on the financial globalization and international mobility of corporate governance practices (e.g., Aguilera, Desender, Lamy, & Lee, 2017;Cumming, Filatotchev, Knill, Reeb, & Senbet, 2017;Ellis, Moeller, Schlingemann, & Stulz, 2017). Following this line of research, an interesting question is to what extent the increased flow of cross-border investments can lead to a global convergence of voluntary disclosure practices. ...
Using a comprehensive sample hand-collected from the original texts of management earnings forecasts from 27 countries, we provide descriptive evidence on the country-level institutional determinants and economic consequences of forecast characteristics. Using principal component factors constructed from a number of country-level institutional variables, we find that forecast disaggregation, frequency, precision, and attribution vary significantly with the business and accounting environment of a country. We further document that better quality management forecasts are generally associated with stronger stock market reactions and higher investment efficiency. Together, our findings suggest that country-level institutions play a vital role in voluntary disclosure characteristics.
Research Summary
This study examines the role of foreign institutional investors in shaping acquiring firms' equity share decisions in cross‐border mergers and acquisitions (M&As). We argue that foreign institutional ownership (FIO) from a given country is positively associated with the share of equity sought in the target firm in this country because foreign institutional investors can help reduce information asymmetry between the acquiring and target firms. Moreover, this positive relationship is stronger if target firms are in countries with weaker institutional development because acquiring firms suffer from higher information asymmetry and thus are more inclined to rely on foreign institutional investors for information. Findings from a sample of 4166 cross‐border M&As by US firms lend support to our arguments.
Managerial Summary
Can foreign institutional investors influence acquiring firms' equity share decisions in cross‐border M&As? We posit that local knowledge and information foreign institutional investors provide to acquiring firms can reduce uncertainty in the M&A process. Using data on cross‐border M&As by US firms, we find that high levels of FIO are positively associated with the equity sought in target firms by acquirers. This effect is stronger when target firms are located in countries with weak institutions. Our study highlights the beneficial role of FIO that firm executives should be aware of and has practical implications for how firms manage the M&A process.
The international bond market is the largest component of the international capital markets. Previous research shows that the liability of foreignness (LOF) imposes significant costs on international debt contracting. The purpose of this study is to examine the impact of foreign institutional shareholders (FISs) on the costs of international debt contracting. While the presence of FISs could lead to a reduction in LOF-related costs, it can also lead to an increase in the costs arising from agency conflicts between shareholders and bondholders. We examine the impact of FISs on the prevalence of restrictive bond covenants using a sample of 956 Yankee bonds from 26 countries over the period 2001–2019. We find a significantly negative relationship between FIS ownership and bond covenants. This inverse relationship is strongest for U.S. institutional ownership, and for covenants designed to mitigate opportunistic behavior such as claim dilution and wealth transfers. We also show that the inverse relationship between U.S. institutional ownership and bond covenants is moderated by variables related to corporate governance, information asymmetry, and agency costs of debt. Additional analyses show that U.S. institutional ownership has a significant pricing effect on Yankee bond investors by lowering an issuer’s cost of borrowing.
This study examines the influence of acquiring firm CEOs' psychological attributes on the geographic distance of target firms in cross-border acquisitions. Drawing on the regulatory focus theory, we argue that CEOs with a higher dispositional prevention focus are more vigilant and loss-aversive, avoiding target firms at a greater geographic distance in cross-border acquisitions. Furthermore, building on the concept of regulatory misfit, we examine the moderating effect of acquiring firm CEOs' context-specific experience and the munificence of acquiring firms' industries in priming the dispositional prevention focus. In a sample of 218 cross-border acquisitions by public firms from the United Kingdom from 2006 to 2014, we find support for our hypotheses. This study emphasizes the role of micro-foundations in cross-border acquisitions and deepens the understanding of cross-border acquisition location choice decisions.
Using an international data set that quantifies corporate environmental costs, we analyze the influence of institutional investor ownership, particularly investment horizon and investor origin, on the monetized environmental impact generated by their investee firms. Institutional investor ownership is negatively related to corporate environmental costs. This effect is driven by long‐term foreign institutional investors, especially investors from advanced economies. Corporate environmental costs are negatively correlated with firm valuation and positively correlated with the cost of equity. Since corporate environmental costs are not reflected in environmental, social and governance ratings, our results shed new light on the role of institutional investors in shaping corporate environmental impact.
Corporate governance research is often limited in its ability to employ within-firm estimators, which address time-invariant endogeneity, when the variables of interest exhibit low time variation (for example, ownership and board independence). The problem is further exacerbated if data for multiple points in time needs to be hand-collected. We offer simulation-based methodological guidance to improve the statistical power of within-firm estimators in the presence of low time variation. We illustrate the usefulness of our simulation results by replicating two influential studies on ownership and board independence and extending them with a within-firm estimator. Based on widely used databases as well as a novel granular database, we document the different degrees and nature of time variation of ownership and board independence across jurisdictions and subgroups by listed status, family control and complexity of ownership structure. Researchers can use our findings to optimize the hand-collection and pre-processing of governance data and thereby increase statistical power and/or to distinguish whether lack of significance is due to low time variation as opposed to absence of a true relationship between their governance variable of interest and the respective outcome.
Although studies show that organizations engaged in controversial actions often aim to minimize the release of threatening information, scholars know relatively little about what may prompt organizations to increase transparency in these situations. In this study, we focus on support from public opinion as a condition that may influence the disclosure of sensitive performance information to the public. Using the second Iraq War as an empirical context, we focus on the extent to which public officials—Pentagon spokespersons—release and frame information about war performance. This outcome is critical because the way in which organizations communicate their performance to outsiders has often been regarded as a key defensive impression management tactic. We hypothesize that high public support for the war will increase the likelihood that Pentagon officials release information about sensitive combat performance indicators in their press briefings and identify contingencies, such as adversity and organizational spokespersons’ power, that moderate this relationship. We also explore whether high public support decreases the strategic use of alternate performance frames that emphasize metrics that signal progress toward a desirable end state. Using a unique data set based on the coding of press briefings, public opinion data, and other public sources, we find support for several of our hypotheses. We discuss implications for understanding the relationship between public opinion and impression management and highlight the importance of extending this research to nongovernmental organizations.
Supplemental Material: The online appendix is available at https://doi.org/10.1287/orsc.2022.1598 .
Although recent research shows that there is mounting pressure on firms to achieve earnings expectations of securities analysts, firms are far from being passive conformers; many firms proactively manage such pressure, particularly with earnings management tools. Yet why does the pressure to meet analyst expectations persist despite firms’ efforts to reduce it? To address the question, we develop an intertemporal model of the mutually reinforcing relationships between analyst expectations and firms’ strategic response, combining the behavioral theory of the firm and the concept of expectations trap. We argue that firms’ efforts to meet analyst expectations strengthen their salience as a predominant performance benchmark and, in doing so, ironically put them under greater pressure from analysts in three sequentially related steps—escalating future earnings expectations, imposing more severe penalties for failure to meet heightened expectations, and generating compensatory action for missed expectations. Our analysis, using data on more than 700 of the largest listed U.S. firms between 1986 and 2015, supports our arguments. Our study expands the scope of the behavioral theory of the firm, by demonstrating the increasing importance of performance feedback based on analyst expectations. Our study also contributes to the research on earnings pressure, by illuminating why the pressure persists despite firms’ efforts to reduce or evade it, and finally to the literature on strategic management of external expectations, by elaborating its unintended, long-term consequences.
Supplemental Material: The e-companion is available at https://doi.org/10.1287/orsc.2021.1569 .
This study investigates the effects of foreign return-oriented shareholders and domestic relational shareholders of Japanese companies on the earnings management behavior of their invested firms when stock option pay is adopted. We theorize that foreign shareholders seek short-term returns and do not engage in close monitoring due to an information disadvantage while domestic shareholders prevent managerial behavior that distorts information disclosure. Our findings show that managers of firms that use stock option pay engage in earnings management to increase their private financial benefits and meet capital markets’ expectations, which allows them to enhance their own reputation. However, this managerial behavior is contingent on the firm’s ownership structure. Our results show that while foreign shareholders enhance the positive impact of stock options on earning management, domestic shareholders and affiliated directors mitigate this positive effect. Our empirical analyses support the argument that ownership heterogeneity is a key determinant of managerial propensity to engage in earnings management when Japanese firms adopt stock option pay.
While boards around the globe are becoming more international, the reasons behind this internationalization are not fully understood. In this study, we suggest that foreign ownership increases the presence of foreign directors on boards. Based on resource dependence theory, we argue that the dependence on foreign owners makes foreign nationals an important resource for firms. Using data from large Japanese stock market firms and employing logistic regression analysis, we find empirical evidence that greater dependence on foreign, i.e. gaijin, owners is associated with a higher probability to have foreign directors on the board. We also demonstrate that the link between foreign ownership and foreign directors is positively moderated by a firm’s foreign market exposure. We conclude that firms consider foreign directors a viable response to the deviant expectations of foreign owners.
What drives organizational nonconformity to global corporate governance norms? Despite the prevalence of such norms and attendant conformity pressures, many firms do not adhere to them. We build on a political view of corporate governance to explore how different national institutional contexts and organizational conditions combine to produce over- and underconformity to global board independence norms. Using configurational analyses and data from banks in OECD countries, we identify multiple equifinal combinations of conditions associated with over- and underconformity. We also find that over- and underconformity have different drivers. We conjecture that while overconformity is associated with a shareholder–management coalition in liberal market economies, underconformity results from multiple complex combinations of national and organizational conditions that often include dominant blockholders, strong labor rights, and small organizational size. We leverage these findings to abduct theoretical insights on nonconformity to global corporate governance norms. Doing so sheds light on the role of power in conditioning the adoption of global practices and contributes to research on international corporate governance by informing discourse surrounding the globalization of markets.
Corporate governance (CG) reformists typically presume better-governed companies are more transparent to investors. We focus on CG and transparency in Japan, where CG has been an ongoing issue. Using local ratings of Japanese companies’ CG and data on corporate disclosures and their associated stock returns, we do find better-governed Japanese companies have made more frequent and timelier disclosures, and their share prices have reflected value-relevant information earlier. While these results hold for good news, they do not hold for bad. Consequently, governance guidance in Japan may not have resulted in both timelier and more balanced release of newsworthy information.
ABSTRACT
The aim of the paper is to indicate that hybridization is a process that has been going on for decades in Japan, contributing to the improvement of Japanese corporate governance, and that the regulations regarding board of directors are a good example of the hybridization process.
To achieve that aim the changes of corporate governance system and their determinants are pointed out. The three main waves of hybridization of Japanese regulations and corporate governance are characterized. Then, the three functioning structures of Japanese boards will be summarized underlining their strong and weak points. The Company with statutory auditors (Company with Kansayaku Board), a company with Three Committees - nomination, audit, and remuneration, and a company with an Audit and Supervisory Committee will be presented as evidence of the hybridization process. The paper tries to answer the research question - why hybridization rather than convergence is used to improve Japanese corporate governance.
The work mainly uses the method of critical analysis of the subject sources of literature, legal acts and corporate governance regulations. The article should contribute to reducing the research gap existing in Polish literature in the field of Japanese corporate governance, especially with respect to the Japanese boards.
Keywords: corporate governance, systems, board of directors, board of statutory auditors.
JEL classification codes: G30, G34, G38, K20, M14
Using a comprehensive dataset of firms from 34 countries, we study the effect of institutional investors’ investment horizons on firm valuation around the world. We find a positive relation between institutional ownership and firm value that is driven by short-horizon institutional investors. Accounting for the interaction between investors’ investment horizon and nationality, we show that foreign short-horizon institutions, which are more likely to discipline managers through the threat of exit rather than engaging in monitoring made costly by the liability of foreignness, are the investor group with the strongest effect on firm value. Reinforcing the threat of exit channel, we find that the value-enhancing effect of short-horizon investors is stronger in the presence of multiple short-horizon investors, who are more likely to engage in competitive trading. The positive valuation effect of short-horizon investors is stronger when stock liquidity is high, which makes the exit threat more credible, and in firms prone to free cash flow agency problems. Overall, our results are consistent with short-horizon institutional investors, especially foreign institutional owners, affecting firm value by disciplining managers through a credible threat of exit.
We examine whether foreign investors influence a local firm's income smoothing, using a sample of Korean firms from 2000 to 2013. We hypothesize that given innate informational difficulties of overseas investments, foreign investors demand less noisy and more sustainable earnings, and to satisfy this demand, managers have strong incentives to smooth earnings. We find that foreign investors' ownership is positively related to the level of earnings smoothing. We also find that earnings smoothing improves earnings informativeness in the presence of high foreign investor ownership, consistent with the notion that foreign investors play an important role in local firms' information environments.
JEL Classifications: M41; M43; J53.
We review four decades of research about the corporate governance of multinational corporations (MNCs), which we label International Corporate Governance (ICG). We identify and discuss three main streams of research that draw on different conceptualizations and theoretical lenses of (corporate) governance. After synthesizing their respective findings, we propose several avenues for future research that integrate these three streams of research with the goal of developing a more nuanced understanding of ICG. We hope this review article will inspire international business scholars to continue examining how corporate governance can be an effective tool for MNC success.
This study examines the relation between management forecasts and analysts' forecasts to determine whether a moderating role exists for credibility. Management credibility is evaluated by management's prior forecasting ability and the firm's underlying corporate governance structure. Analyst credibility on the other hand is assessed using their prior forecasting ability only. Using Structural Equation Modelling, we find management credibility affects how much reliance analysts place upon information contained in management initial earnings forecasts when making their own forecasts. We also show a moderating role for analyst credibility in the relation between analysts' consensus initial forecasts and management forecast revisions. Our findings highlight the importance of reputation in the dissemination of earnings information.
Prior research documents that analysts produce less biased forecasts for stocks with high institutional ownership. We show that this result holds only for long-term institutional investors. In the presence of short-term institutional investors, such as hedge funds, analysts strategically bias their forecasts, specifically, they issue optimistic target prices, but not earnings forecasts. Analysts bias target prices, but not earnings estimates, because this strategy reduces the likelihood the market will recognize their catering behavior. Correspondingly, we find that the market fails to see through analyst incentives and reacts favorably to target price revisions for stocks with high short-term ownership. Short-term institutional investors take advantage of temporary stock overpricing to offload their holdings to retail traders. They also reward brokers engaging in catering with higher future trades channeled through the broker. Together, our results identify a new source of conflicts of interest in analyst research that originates from the ownership composition of a stock.
In this article we develop a conceptual model to examine the influence of quality of country-level governance infrastructure and corporate governance effectiveness on profit shifting. We empirically test propositions derived from the model with a unique firm-level data set and using multiple indicators of governance infrastructure quality and corporate governance mechanisms. We estimate that on average about 6% of total pre-tax income is shifted out of foreign-owned firms in India. We show that governance infrastructure that improves collective action and transparency in both the foreign- and host-country reduces shifting. On the other hand, secure property rights and efficient contracting in the foreign country increases shifting. We also find that monitoring by foreign institutional investors restricts shifting.
In this study, we hypothesize that institutions invest more heavily in companies with strong corporate social performance. Analysis indicated a significant, positive relationship between social performance and the number of institutions holding the shares of a company and a positive but insignificant relationship between social performance and the percentage of shares held by institutions. We conclude that improving a company's corporate social performance invokes no penalty in institutional ownership.
Researchers have assumed that large ownership stakes held by institutional investors grant them power to influence R&D investments, We found that ownership alone was insufficient and that institutions resorted to activism to influence R&D investments. Institutional activism increased R&D inputs over both the short and long terms. The nature of the activism and the strategic context of the R&D investment moderated the relationship. Further, R&D inputs mediated the effect of activism on R&D outputs.
Shareholder activism has become a dynamic institutional force, and its associated, rapidly increasing body of scholarly literature affects numerous disciplines within the organization science academy. In addition to equivocal results concerning the impact of shareholder activism on corporate outcomes, the separation of prior research into financial and social activism has left unanswered questions critical for both the scholarly discourse on shareholder activism and the normative debate on shareholder empowerment. The heterogeneity of factors in shareholder activism, such as the firm, activist, and environmental characteristics that promote or inhibit activism, along with the breadth of activism’s issues, methods, and processes, provide a plethora of theoretical and methodological opportunities and challenges for activism researchers. Our multidisciplinary review incorporates the financial and social activism streams and explores shareholder activism heterogeneity and controversy, seeking to provide an impetus for more cohesive conceptual and empirical work in the field.
The effects of intangible assets on organizational outcomes remain poorly understood. We compare the effects of two intangible assets-firm reputation and celebrity-on (1) the likelihood that a firm announces a positive or negative earnings surprise, and (2) investors' reactions to these surprises. We find that firms that have accumulated high levels of reputation ("high- reputation" firms) are less likely, and firms that have achieved celebrity (celebrity firms) more likely to announce positive surprises than firms without these assets. Both high-reputation and celebrity firms experience greater market rewards for positive surprises and smaller market penalties for negative surprises than other firms.
Scandals at Enron and WorldCom have thrust debates concerning corporate governance and corporate social performance (CSP) to the forefront of the minds of shareholders, managers, and public policy makers. Relying on the theory of stakeholder salience, the authors suggest that institutional owners’ investment horizons, as well as the frequency and coordination of institutional owners’ activism, moderate the institutional ownership -CSP relationship. Data collected in 1995 and 2000 from the Fortune 500 firms show that long-term institutional ownership is positively associated with CSP and that the frequency and coordination of activism interact with long-term institutional holdings to positively affect CSP 3 years later.
Laws that regulate the employment relation tend to set forth broad and often ambiguous principles that give organizations wide latitude to construct the meaning of compliance in a way that responds to both environmental demands and managerial interests. Organizations respond initially by elaborating their formal structures to create visible symbols of compliance. As organizations construct and institutionalize forms of compliance with laws, they mediate the impact of those laws on society. The author uses data from a nationwide survey of 346 organizations to develop models of the creation and institutionalization of organizationally constructed symbols of compliance following the 1964 Civil Rights Act.
ABSTRACT Through a series of three inductive and deductive studies, I describe how spokespersons from the California cattle industry constructed and effectively used verbal accounts to manage perceptions of organizational legitimacy following controversial events. Findings of Study 1 suggest that organizational accounts are constructed by linking two forms of accounts: acknowledgments,or denials, with two contents of accounts: references to institutionalor technical characteristics of the organization. Findings of Studies 2 and 3 suggest that, in protecting organizational legitimacy (1) acknowledgments are more effective than denials, (2) references to institutionalized characteristics are more effective than references to technical characteristics,and (3) accounts combining acknowledgments,with references to institutionalized characteristics are more effective than accounts with only one of these components. Effectiveness appears to depend on audiences' perceptions of the controversy, expertise in the area of controversy, and expectations of organizational responses. Overall, findings suggest that concepts from institutional and impression management theories may be combined,to improve our understanding of organizational accounts and thus enhance models of symbolic management. • 3
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.
Prior work on the performance consequences of corporate diversification has treated all powerful owners as seeking the same benefits from diversification (i.e, higher profit rather than growth) and therefore limiting value appropriation by other stakeholders such as employees and managers. In contrast, we distinguish between domestic "relational" owners and foreign "transactional" owners in Japanese corporations. Although transactional owners do indeed prioritize profitability when diversifying, relational owners primarily seek growth rather than profits from diversification. Furthermore, relational owners also allow managers and employees to appropriate more of the rents arising from diversification than do transactional owners.
The effectively mandatory provision of management forecasts of earnings is a unique feature of Japan's financial disclosure system. The first objective of this study is to identify the determinants of systematic bias in management forecasts using a sample of more than 36 000 one-year-ahead earnings forecasts announced by Japanese firms at the beginning of a fiscal year over the period 1979 to 2005. The examination of ex post management forecast errors shows that financial distress, firm growth, firm size and prior forecast errors are all associated with bias in management forecasts. The second objective of this study is to investigate whether analysts are aware of these factors that are found to be related to systematic bias in management earnings forecasts. The examination of analysts' forecasts issued subsequent to the announcement of management forecasts reveals that analysts take account of these factors when they issue their own earnings forecasts. The overall findings suggest that analysts are to some extent aware of the determinants of systematic bias in management forecasts.
Recent research has documented large differences among countries in ownership concentration in publicly traded firms, in the breadth and depth of capital markets, in dividend policies, and in the access of firms to external finance. A common element to the explanations of these differences is how well investors, both shareholders and creditors, are protected by law from expropriation by the managers and controlling shareholders of firms. We describe the differences in laws and the effectiveness of their enforcement across countries, discuss the possible origins of these differences, summarize their consequences, and assess potential strategies of corporate governance reform. We argue that the legal approach is a more fruitful way to understand corporate governance and its reform than the conventional distinction between bank-centered and market-centered financial 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 paper challenges the view that foreign investors lead firms to adopt a short-term orientation and forgo long-term investment. Using a comprehensive sample of publicly listed firms in 30 countries over the period 2001–2010, we find instead that greater foreign institutional ownership fosters long-term investment in tangible, intangible, and human capital. Foreign institutional ownership also leads to significant increases in innovation output. We identify these effects by exploiting the exogenous variation in foreign institutional ownership that follows the addition of a stock to the MSCI indexes. Our results suggest that foreign institutions exert a disciplinary role on entrenched corporate insiders worldwide.
This paper challenges the view that foreign investors lead firms to adopt a short-term orientation and forgo long-term investment. Using a comprehensive sample of publicly listed firms in 30 countries over the period 2001-2010, we find instead that greater foreign institutional ownership fosters long-term investment in tangible, intangible, and human capital. Foreign institutional ownership also leads to significant increases in innovation output. We identify these effects by exploiting the exogenous variation in foreign institutional ownership that follows the addition of a stock to the MSCI indexes. Our results suggest that foreign institutions exert a disciplinary role on entrenched corporate insiders worldwide.
This paper explores both the role of institutional investors in firms’ corporate social responsibility choices and the impact of social norms on these investors. Using a decade of firm-level environmental and social (E&S) performance data from 41 countries, we find that institutional ownership is positively associated with firm-level E&S performance, with multiple tests suggesting a causal relationship. The impact of institutional investors on firms’ E&S commitments is greatest for foreign investors based in countries with strong social norms regarding E&S, which are predominantly European. Tests that segment by investor type show that these social norm effects hold even for institutional investor types that are subject to market discipline, such as investment advisors. Overall, our results indicate that institutional investors transplant their social norms into the firms they hold around the world.
As domestic sources of outside finance are limited in many countries around the world, it is important to understand factors that influence whether foreign investors provide capital to a country's firms. We study 4,409 firms from twenty-nine countries to assess whether and why concerns about corporate governance result in fewer foreign holdings. We find that foreigners invest less in firms that reside in countries with poor outsider protection and disclosure and have ownership structures that are conducive to governance problems. This effect is particularly pronounced when earnings are opaque, indicating that information asymmetry and monitoring costs faced by foreign investors likely drive the results. (JEL G11, 015, 032, G34)
We examine cross-border syndication in investments led by foreign venture capitalists (VCs) focusing on the potential correlation between cultural differences and the formation of VC syndicates. Contrary to the risk-sharing motive, we find that a greater cultural disparity between the countries of investors and their companies is actually associated with smaller VC syndicates. This is driven largely by lesser local investor representation in foreign VC-led syndicates. However, certain cultural disparity-related syndication strategies, such as the involvement of locally experienced foreign VCs or syndicate members from culturally similar countries, are associated with greater presence of local VCs who provide valuable monitoring services. We further show that these culture-linked syndication approaches are significantly correlated with VC financing and monitoring strategies in cross-border investments and their eventual success.
We extend research on social evaluations and crisis management by explicating the sociocognitive mechanisms that influence how an organization and its external evaluators perceive and respond to the onset of a crisis. Specifically, we highlight the role of social approval-evaluators' general affinity toward an organization-not only as a critical outcome of crisis management but also as an important antecedent.We first identify the distinct aspects of social approval and explain why it is an important perception in a crisis context. We then detail how managers attempt to limit the probability and magnitude of social approval losswhen responding to a crisis, and how an organization's existing endowment of social approval affects this decision. We theorize that social approval will serve as either a buffer or a burden in influencing evaluators' crisis sensemaking and attributions. As a result, we argue, organizations endowed with higher and lower levels of social approvalmay be motivated to take less responsibility at the onset of a crisis than has been previously theorized. We conclude with a discussion of the broader managerial and social implications of our theory and how it expands our understanding of the crisis management process.
We investigate how state capacity—the administrative ability to formulate and implement policy—affects the institutional adoption of new policies and the decoupling of those policies from their original purpose in the face of pressures from professions, multilateral agencies, and imitation among countries. We expect state capacity to reduce the effect of professional and imitation influences, to increase the impact of coercive effects by multilateral agencies, and to lessen decoupling between policies’ adoption and desired outcomes. We tested these predictions using a unique longitudinal dataset on the adoption of minority shareholders’ legal protections and the development of the stock market in 78 countries between 1970 and 2011. We found evidence consistent with the moderating effects of state capacity on institutional adoption and on lessening policy–practice decoupling. Our findings suggest that the strength of state capacity influences which policy models policymakers select and adopt, whether they implement them effectively, and what the consequences of such adoption are.
Hedge fund activism is an expression of shareholder primacy, an idea that has come to dominate discussion of corporate governance theory and practice worldwide over the past two decades. This book provides a thorough examination of public and often confrontational hedge fund activism in Japan in the period between 2001 and the full onset of the global financial crisis in 2008. In Japan this shareholder-centric conception of the company espoused by activist hedge funds clashed with the alternative Japanese conception of the company as an enduring organisation or a ‘community’. By analysing this clash, the book derives a fresh view of the practices underpinning corporate governance in Japan and offers suggestions regarding the validity of the shareholder primacy ideas currently at the heart of US and UK beliefs about the purpose of the firm.
We examine the effects of institutional ownership on firms' information and trading environments using the annual Russell 1000/2000 index reconstitution. Characteristics of firms near the index cutoffs are similar, except that firms in the top of the Russell 2000 have discontinuously higher proportional institutional ownership than firms in the bottom of the Russell 1000 primarily due to indexing and benchmarking strategies. We find that higher institutional ownership is associated with greater management disclosure, analyst following, and liquidity, resulting in lower information asymmetry. Overall, indexing institutions' predilection for lower information asymmetries facilitates information production, which enhances monitoring and decreases trading costs.
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.
Research summary : We investigate why J apanese firms have adopted executive stock option pay, which was developed with shareholder‐oriented institutional logic that was inconsistent with J apanese stakeholder‐oriented institutional logic. We argue that J apanese managers have self‐serving incentives to leverage stock ownership of foreign investors and their associated institutional logic to legitimize the adoption of stock option pay. Our empirical analyses with a large sample of J apanese firms between 1997 and 2007 show that when managers have elite education, high pay inequality with ordinary employees, and when firms experience poor sales growth, foreign ownership is more likely associated with the adoption of stock option pay. The study shows the active role of managers in facilitating the diffusion of a new governance practice embodying new institutional logic .
Managerial summary : Why have J apanese firms adopted stock option pay for executives? Inconsistent with J apanese stakeholder‐oriented tradition in corporate governance, such pay has been believed to prioritize managerial attention to the interests of shareholders over those of other stakeholders. However, to the extent that shareholders' interests are legitimate in the J apanese context, executives who have self‐serving incentives to adopt such pay can leverage the need to look after shareholders' interest in their firms to legitimize their decisions. In a large sample of J apanese firms, we find that foreign ownership (representing shareholders' interests) is more likely to be associated with the adoption of stock option pay when managers are motivated to receive such pay, such as when they have elite education, high pay inequality with ordinary employees, or poor sales growth . Copyright © 2015 John Wiley & Sons, Ltd.
As a new perspective for understanding firm responsiveness to stakeholder concerns, we propose a strategic cognition view of issue salience that is, the degree to which a stakeholder issue resonates with and is prioritized by management. Specifically, we explain how a firm's cognitive structures of organizational identity and strategic frames use different core logics to influence managerial interpretation of an issue as salient. We then present a typology of firm responsiveness and suggest that firms will respond more substantially to those issues perceived as salient to both cognitive logics and more symbolically to those issues perceived as salient to only one logic. This article fills key gaps in our understanding of how firms manage and respond to stakeholders by focusing on the salience of the issue and incorporating strategic cognition as a key mediating mechanism.
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.
This paper examines how shareholder investment horizons influence payout policy choices. The authors infer institutional shareholders'
investment horizons using the churn rate of their overall stock portfolios prior to the payout decision. The authors find
that the frequency and amount of repurchases increases with ownership by short-term investors to the detriment of dividends.
They also find that the market reacts less positively to repurchase announcements made by firms held by short-term institutions.
These findings are consistent with a model in which undervalued firms signal their value through repurchases, but firms held
by short-term investors make repurchases more often because those investors care mostly about the short-term price reaction.
Hence, the market rationally discounts the signal provided by such repurchases. Our findings suggest that shorter shareholder
investment horizons might be one contributing factor to the increasing popularity of buybacks.
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.
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.
The balance sheet accumulates the effects of previous accounting choices, so the level of net assets partly reflects the extent of previous earnings management. We predict that managers' ability to optimistically bias earnings decreases with the extent to which the balance sheet overstates net assets relative to a neutral application of GAAP. To test this prediction, we examine the likelihood of reporting various earnings surprises for 3,649 firms during 1993-1999. Consistent with our prediction, we find that the likelihood of reporting larger positive or smaller negative earnings surprises decreases with our proxy for overstated net asset values.
We study management forecasts in Japan, where forecasts are effectively mandated but managers have considerable latitude over the numbers they release. We find that managers’ initial earnings forecasts for a fiscal year are systematically upward-biased but that they revise their forecasts downward during the fiscal year so that most earnings surprises are non-negative. Managers’ initial forecast optimism is inversely related to firm performance, and is more pronounced for firms with higher levels of insider ownership, for smaller firms, and for firms with a history of forecast optimism. The fact that managers’ forecasts tend to be consistently optimistic suggests that reputation effects are insufficient to ensure managerial forecast accuracy. We also find that the information content of managers’ forecasts is related to proxies for whether market participants view the forecasts as credible.
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.
In recent years, quarterly earnings guidance has been harshly criticized for inducing managerial short-termism and other ills. Managers are, therefore, urged by influential institutions to cease guidance. We examine empirically the causes of such guidance cessation and find that poor operating performance - decreased earnings, missing analyst forecasts, and lower anticipated profitability - is the major reason firms stop quarterly guidance. After guidance cessation, we do not find an appreciable increase in long-term investment once managers free themselves from investors' myopia. Contrary to the claim that firms would provide more alternative, forward-looking disclosures in lieu of the guidance, we find that such disclosures are curtailed. We also find a deterioration in the information environment of guidance stoppers in the form of increased analyst forecast errors and forecast dispersion and a decrease in analyst coverage. Taken together, our evidence indicates that guidance stoppers are primarily troubled firms and stopping guidance does not benefit either the stoppers or their investors.
Recent reports in the business press allege that managers take actions to avoid negative earnings surprises. I hypothesize that certain firm characteristics are associated with greater incentives to avoid negative surprises. I find that firms with higher transient institutional ownership, greater reliance on implicit claims with their stakeholders, and higher value-relevance of earnings are more likely to meet or exceed expectations at the earnings announcement.
I also examine whether firms manage earnings upward or guide analysts' forecasts downward to avoid missing expectations at the earnings announcement. I examine the relation between firm characteristics and the probability (conditional on meeting analysts' expectations) of having (1) positive abnormal accruals, and (2) forecasts that are lower than expected (using a model of prior earnings changes). Overall, the results suggest that both mechanisms play a role in avoiding negative earnings surprises.
This paper investigates whether a firm's disclosure practices affect the composition of its institutional investor ownership and, hence, its stock return volatility. The findings indicate that firms with higher AIMR disclosure rankings have greater institutional ownership, but the particular types of institutional investors attracted to greater disclosure have no net impact on return volatility. However, yearly improvements in disclosure rankings are associated with increases in ownership primarily by "transient" institutions, which are characterized by aggressive trading based on short-term strategies. Firms with disclosure ranking improvements resulting in higher transient ownership are found to experience subsequent increases in stock return volatility.
It has been alleged that firms and analysts engage in an earnings guidance game where analysts first issue optimistic earnings forecasts and then 'walk down' their estimates to a level firms can beat at the official earnings announcement. We examine whether the walk-down to beatable targets is associated with managerial incentives to sell stock after earnings announcements on the firm's behalf (via new equity issuance) or from their personal accounts (through option exercises and stock sales). Consistent with these hypotheses, we find that the walk-down to beatable targets is most pronounced when firms or insiders are net sellers of stock after an earnings announcement. These findings provide new insights on the impact of capital market incentives on communications between managers and analysts.
This study investigates security analysts' reactions to public management guidance and assesses whether managers successfully guide analysts toward beatable earnings targets. We use a panel data set between 1995 and 2001 to examine the fiscal-quarter-specific determinants of management guidance and the timing, extent, and outcomes of analysts' reactions to this guidance. We find that management guidance is more likely when analysts' initial forecasts are optimistic, and, after controlling for the level of this optimism, when analysts' forecast dispersion is low. Analysts quickly react to management guidance and are more likely to issue final meetable or beatable earnings targets when management provides public guidance. Our evidence suggests that public management guidance plays an important role in leading analysts toward achievable earnings targets.
Purpose
The paper aims to study the effect of tenure on the structure of CEO compensation. The relation between CEO compensation and CEO tenure provides a good testing bed for many effects: the managerial power effect, the portfolio consideration effect, the learning effect, and the career concern effect.
Design/methodology/approach
Tobit regressions were run of the percentage of equity‐based compensation on CEO tenure and the effect of tenure compared between inside CEOs and outside CEOs.
Findings
It was found that the percentage of equity‐based compensation increases during the early years of tenure for outside CEOs, and decreases during the later years of tenure for inside CEOs. Before they are tenured, outside CEOs have significantly higher and faster growing percentage of equity‐based compensation than inside CEOs. Furthermore, the portfolio consideration effect and the learning effect are the major effects in explaining the effect of tenure on the compensation structure.
Practical implications
The evidence that boards of directors take into account the CEOs’ holdings of equity incentives, the types of CEOs, and their years on tenure to adjust the structure of CEO compensation indicates that firms should, and do, try to optimize their CEO compensation structure on the basis of firm‐specific or CEO‐specific characteristics. It is suggested that there is no simple formulaic approach to governance reform.
Originality/value
The paper contributes to the literature by studying and explaining the different patterns of compensation structure over CEO tenure between inside CEOs and outside CEOs.
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 paper investigates how the investment horizon of a firm's institutional shareholders impacts the market for corporate control. We find that target firms with short-term shareholders are more likely to receive an acquisition bid but get lower premiums. This effect is robust and economically significant: Targets whose shareholders hold their stocks for less four months, one standard deviation away from the average holding period of 15 months, exhibit a lower premium by 3%. In addition, we find that bidder firms with short-term shareholders experience significantly worse abnormal returns around the merger announcement, as well as higher long-run underperformance. These findings suggest that firms held by short-term investors have a weaker bargaining position in acquisitions. Weaker monitoring from short-term shareholders could allow managers to proceed with value-reducing acquisitions or to bargain for personal benefits (e.g., job security, empire building) at the expense of shareholder returns.
We investigate firms that stop providing earnings guidance (“stoppers”) either by publicly announcing their decision (“announcers”) or doing so quietly (“quiet stoppers”). Relative to firms that continue guiding, stoppers have poorer prior performance, more uncertain operating environments, and fewer informed investors. Announcers commit to non-disclosure because they (i) do not expect to report future good news or (ii) have lower incentives to guide due to the presence of long-term investors. The three-day return around the announcement is negative. Stoppers subsequently experience increases in analyst forecast dispersion and decreases in forecast accuracy but no change in return volatility or analyst following.
The purpose of this paper is two-fold. First, I attempt a taxonomy of the extant accounting literature on disclosure: that is, a categorization of the various models of disclosure in the literature into well-integrated topics. With regard to the taxonomy, I suggest three broad categories of disclosure research in accounting. The first category, which I dub “association-based disclosure”, is work that studies the effect of exogenous disclosure on the cumulative change or disruption in investors’ individual actions, primarily through the behavior of asset equilibrium prices and trading volume. The second category, which I dub “discretionary-based disclosure”, is work that examines how managers and/or firms exercise discretion with regard to the disclosure of information about which they may have knowledge. The third category, which I dub “efficiency-based disclosure”, is work that discusses which disclosure arrangements are preferred in the absence of prior knowledge of the information, that is, preferred unconditionally. Then, in the final section of the paper, I recommend information asymmetry reduction as one potential starting point for a comprehensive theory of disclosure. That is, I recommend information asymmetry reduction as a vehicle to integrate the efficiency of disclosure choice, the incentives to disclose, and the endogeneity of the capital market process as it involves the interactions among individual and diverse investors.
We examine whether institutional investors affect corporate governance by analyzing portfolio holdings of institutions in companies from 23 countries during the period 2003–2008. We find that firm-level governance is positively associated with international institutional investment. Changes in institutional ownership over time positively affect subsequent changes in firm-level governance, but the opposite is not true. Foreign institutions and institutions from countries with strong shareholder protection play a role in promoting governance improvements outside of the U.S. Institutional investors affect not only which corporate governance mechanisms are in place, but also outcomes. Firms with higher institutional ownership are more likely to terminate poorly performing Chief Executive Officers (CEOs) and exhibit improvements in valuation over time. Our results suggest that international portfolio investment by institutional investors promotes good corporate governance practices around the world.