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The governance impact of a changing investor landscape

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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.

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... 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). ...
Article
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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.
... 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). ...
Article
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.
... 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]. ...
Article
Full-text available
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.
... 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. ...
Article
Full-text available
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.
... Second, although Anglo-American governance mechanisms, such as CEO compensation arrangements and board independence, have increasingly spread across the globe (e.g., Aguilera, Desender, López-Puertas Lamy, & Lee, 2017;Khanna & Palepu, 2004;Oxelheim & Randøy, 2005), the characteristics and requirements of board independence still vary widely by country. Indeed, while several countries, including India, Korea, and the United States, require that firms' boards include a majority of independent directors, other countries, such as New Zealand and Luxembourg, have minimal or no independence requirements (OECD, 2015). ...
... Our findings concerning the moderating influence of corruption on the relationship between board independence and misconduct suggest that the increasingly popular governance practice of increasing board independence-in its various forms-is subject to the influence of the broader social and societal context within which directors are inserted. For instance, while many Anglo-American governance practices and mechanisms have spread globally in recent years (e.g., Aguilera et al., 2017;Khanna & Palepu, 2004;Oxelheim & Randøy, 2005), our study provides evidence that their impact on organizational outcomesnamely, corporate misconduct-differs cross-nationally, even in countries similar to the United States in terms of legal and other formal institutions, because other institutional forces, such as corruption, may usurp such practices. As such, our study importantly suggests that dominant theories applied to study the influence of directors and other governance mechanisms on organizational outcomes (e.g., agency theory, resource dependence theory, upper echelons theory) alone may not adequately explain the relationship between governance mechanisms and organizational outcomes. ...
Article
Although increased board independence is a commonly offered solution to curbing corporate misconduct, scholars have expressed skepticism about its effectiveness, and empirical evidence is mixed. We argue that the relationship between board independence and corporate misconduct is likely nuanced—and may vary by the type of independence (e.g., independence on the whole board or on the audit committee) and by national context. We conducted a meta-analysis of 135 studies spanning more than 20 countries. We find that the board independence–corporate misconduct relationship (a) is generally negative, (b) varies based on the implementation form that independence takes on (i.e., independence of the whole board, on the audit committee, or between the roles of CEO and board chair), and (c) is more strongly negative in countries with less corruption. We advance corporate governance theory and research by demonstrating that the popular governance practice of increasing board independence must both account for the manner in which independence is implemented and consider the powerful influence of firms’ broader societal context to clearly understand its effect. Further, based on our review of the literature, we uncover opportunities for the advancement of corporate governance and corporate misconduct research.
... 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. ...
Article
Full-text available
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.
... 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). ...
Article
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.
... 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. ...
Article
Full-text available
We aim to add to the entrepreneurial forecasting literature by examining forecast rationality in the context of venture capital-backed companies. In this setting, entrepreneurs’ forecasts of future venture performance may not only be influenced by cognitive biases such as overconfidence or optimism (Cassar, 2010), but also by strategic incentives of entrepreneurs to present themselves more favorably to their venture capitalists, trying to ensure continued support and funding at better terms from their investors (Smith and Smith, 2002). Therefore, we argue that initial forecasts of entrepreneurs in venture capital-backed companies are likely to suffer from overestimation. Further, we will examine a previously unaddressed aspect of forecasting bias in entrepreneurial settings, namely their evolution. Venture capitalists are known to monitor their portfolio companies and hold them accountable when expectations are not met (Parhankangas and Landstrom, 2006). Combined with an increased tendency to internalize venture capitalists’ concerns, resulting in reduced overconfidence (Forbes, 2005), one would expect entrepreneurs’ forecasting biases to shrink as investment duration increases.
... CEO does not play a dual role), as stronger governance constraints management optimism (e.g. Aguilera et al., 2017). Two empirical analyses are performed to test this association. ...
Article
Purpose The purpose of this paper is to examine the effect of managerial ability on the tone of earnings announcements and on the market response to the tone. Design/methodology/approach This study constructs a model of the determinants of earnings announcement tone in order to examine whether managerial ability plays a significant role in determining earnings announcement tone. Further, to test whether the market response to the tone of earnings announcements is affected by managerial ability, this study also examines the interactive term between earnings announcement tone and managerial ability. The tone of earnings announcements is measured using the spread in the proportion of positive and negative words. Managerial ability is measured using the managerial ability rank developed by Demerjian et al. (2012). Findings More able management teams use a more positive tone in their earnings announcements. Stock markets have more pronounced positive reactions to positive tones in the earnings announcements issued by companies with more able management teams. Originality/value This study identifies managerial ability as a previously unrecognized determinant of tone in earnings announcements and of the stock price reaction to earnings announcements.
... 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). ...
... By full activation, we refer to the transition from simply adopting a practice, maybe symbolically, to fully enacting or internalizing the practice. In the case of independent directors, Aguilera et al. (2017) show for instance that in Japan, companies had adopted independent boards for a long time, yet these boards did not pursue monitoring until firms had a certain amount of pressure from foreign institutional investors. It was the significant exposure to international governance practices that activated their independent role. ...
Article
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Emerging economies are oftentimes characterized by state capitalism, concentrated ownership and constrained resources, where firms face underinvestment due to resource misappropriation. The adoption of Anglo-American corporate governance practices may result in sub-optimal outcomes. We draw on the multiple agency perspective and research on cross-national governance to examine how independent directors, as agents with multiple roles, might mitigate blockholder appropriation. Using unique panel data from Russian publicly traded firms where the government and the business elite are predominant blockholders, we find that independent directors in private firms are less effective in mitigating blockholder appropriation than in state-owned enterprises. We further investigate board independence effects driven by the exposure to three international governance boundary conditions, namely Russian Multinational Enterprises, foreign listings of Russian firms, and foreign independent directors on Russian boards. Our study focuses on the agents that might assuage principal-principal conflicts, explores when ineffective governance can be minimized, and contributes to research on how governance practices developed in advanced economies get translated in emerging market economies.
... (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. ...
Article
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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.
... 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. ...
Article
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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. ...
Article
Full-text available
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 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). ...
Article
Full-text available
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.
... 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 ( . ...
Conference Paper
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.
... 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. ...
Article
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.
... 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. ...
Article
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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.
... 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). ...
Article
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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
... 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. ...
Article
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This paper draws on the articles in the Forum on Corporate Governance to discuss how corporate governance and accounting research complement each other well in explaining how companies are governed as well as properly managed from an accounting point of view. We put special attention to the cross-national differences in both corporate governance systems and accounting practice and how that affect multiple organizational outcomes ranging from financial performance to corporate social performance and reporting quality.
... 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). ...
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... 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). ...
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... 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). ...
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... 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. ...
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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.
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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.
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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.
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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.
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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.
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We investigate why Japanese firms have adopted executive stock option pay, which was developed with shareholder-oriented institutional logic that was inconsistent with Japanese stakeholder-oriented institutional logic. We argue that Japanese 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 Japanese 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 SummaryWhy have Japanese firms adopted stock option pay for executives? Inconsistent with Japanese 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 Japanese 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 Japanese 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.
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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.
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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.
Article
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.
Article
This article examines the clash between stakeholder- and shareholder-based business systems resulting from an increase in foreign portfolio investment in the Japanese economy during the 1990s. An analysis of 1,108 firms between 1991 and 2000 shows that as foreign institutional investors, who were more interested in investment returns than in long-term relationships, replaced domestic shareholders, one fundamental pillar of Japan's stakeholder capitalism began to crack. Japanese firms began to adopt downsizing and asset divestiture, practices more characteristic of Anglo-American shareholder economies. The influence of foreigners, however, was weaker in firms more deeply embedded in the local system through close ties to domestic financial institutions and corporate groups. Thus, foreign investors were influential primarily in firms less embedded in the existing stakeholder system. This research contributes to debates on globalization and convergence of business systems, institutional change, and corporate governance systems.
Article
This study examines the role of downsizing in the deinstitutionalization of permanent employment among publicly listed companies in Japan between 1990 and 1997. We found that although economic pressure triggered downsizing, social and institutional pressures shaped the pace and process by which downsizing spread. Large, old, wholly domestically owned, and high-reputation Japanese firms were resistant to downsizing at first, as were firms with high levels of human capital, as reflected by high wages, but these social and institutional pressures diminished as downsizing spread across the population. We argue that this breakdown of social constraints was due to a safety-in-numbers effect: as downsizing became more prominent, the actions of any single firm were less likely to be noticed and criticized, and the effect of the institutional factors that once constrained downsizing diminished.
Article
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.
Article
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.
Article
Corporate governance practices are arguably diffusing across the world. This paper examines the adoption of the committee‐based governance system (i.e. audit, nomination, and remuneration) in Japanese firms, a practice common in Anglo‐American capitalism but potentially contestable in Japan. The study finds that firms that are internationally exposed through cross listing are more likely to adopt the committee system. Moreover, more experienced and highly cross‐held firms, with larger proportions of foreign ownership, are more likely to adopt the committee system. On the other hand our study finds partial support for the hypothesis that larger proportions of bank ownership are negatively associated with the adoption of the committee system, suggesting a gradual withdrawal by banks from the traditional monitoring of firms. This paper adds to the longstanding debate on the convergence on or persistent divergence from the Anglo‐American corporate governance system. The study thus provides insights into corporate governance changes in non‐Anglo/American countries that face a struggle between global capital market forces for change and deep‐seated institutional practices of continuity.
Article
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.
Article
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.
Article
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.
Article
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.
Article
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.
Article
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.
Book
Japan’s economy has long been described as network-centric. A web of stable, reciprocated relations among banks, firms, and ministries, is thought to play an important role in Japan’s ability to navigate smoothly around economic shocks. Now those networks are widely blamed for Japan’s faltering competitiveness. This book applies structural sociology to a study of how the form and functioning of this network economy has evolved from the prewar era to the late 90s. It asks whether, in the face of deregulation, globalization, and financial disintermediation, Japan’s corporate networks - the keiretsu groupings particularly - have ‘withered away’, losing their cohesion and their historical function of supporting member firms in hard times. Using detailed quantitative and qualitative analysis, this book‘s conclusion is a qualified ‘yes’. Relationships remain central to the Japanese way of business, but are much more subordinated to the competitive strategy of the enterprise than the network economy of the past.
Article
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.
Article
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.
Article
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.
Article
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.