No full-text available
To read the full-text of this research,
you can request a copy directly from the authors.
Do US Corporate Governance Standards Effectively Discourage Risk in the Emerging Markets?: Corporate Governance in the Emerging Markets
Abstract
This study provides an examination of the effect of various corporate governance factors on the management of the risks inherent in business and the potential divergent impact of these factors on US firms and firms in emerging countries. In particular, the study scrutinises corporate governance and corporate risk-taking behaviour across different political and socioeconomic environments. In a cross-sectional time-series setting, two-step generalised least squares regression outcomes reveal that the impact of corporate governance on corporate risk taking demonstrates similar implications for US and emerging markets firms in several ways. Nonetheless, the findings also indicate that although some of the US governance standards are effective in the emerging markets, further strengthening of governance standards may be required. Specific governance aspects of the emerging markets, such as board and committee composition, are still lacking when compared to those of the US. Regardless of these differences, the outcomes reveal that those US governance standards adopted by the firms in the emerging markets strengthen governance structures and discourage corporate risk-taking behaviour.
... Because independent directors can bring unique knowledge, skills and social relations to the enterprise, CEO duality prevent the board of directors having the capital to achieve the implementation of the enterprise's strategic goals, and ultimately harm the enterprise's performance. Some studies have shown that when the CEO serves as the chairman of the board of directors at the same time, the independence of the board of directors cannot be truly guaranteed, and the existence of independent directors may be just a symbol rather than playing an actual role [50]. To sum up, the fourth hypothesis is proposed: Hypothesis 4a. ...
... It is in the right tail of the normal curve, measured by UP (upside risk) and CuP (condition upside risk). Using the quantile of the best return in a company's history, as [50] did, UP equals the best return at the 95th percentile at the 95% confidence level, and CuP equals the average annual daily stock return above UP. Again, CuP was used for robustness testing. ...
... This is significantly higher than the 4.6% reported by [42]. As for the control variable, the mean value of board size (Bsize) is 8.794, close to the value of 8.8 reported by [50]. The mean value of firm size (Fsize) is 8.414, while the maximum value and minimum value are 1.386 and 9.449, respectively. ...
This paper selects firm downside risk and firm upside risk as proxy variables of enterprise risk, and the proportion of independent directors as a proxy variable of board governance. Using the panel data of Chinese listed companies from 2010 to 2019, a multiple linear regression model is established to empirically study the impact of supervisory function and advisory function of board governance on the downside risk and the upside risk, to test whether the two functions of the board of directors play a role in the enterprise risk management (ERM). The internal mechanism and boundary conditions of board governance that affect firm risk are also explored in this paper. It is found that the sample enterprises pay more attention to the board‘s supervisory function. At the same time, they reduce the firm’s overall risk by reducing the downside risk and the upside risk while performing this function. We also identify that boards are more likely to use meetings to communicate and strategize to prevent upside risks than to identify and control downside risks. Finally, boards are negatively affected by CEO duality in performing their oversight functions.
Risk runs through all aspects of enterprise operation, therefore, risk management is particularly important for enterprises. As the core control mechanism of corporate governance, the structural characteristics of the board of directors directly affect its ability to supervise and manage enterprise risks, and different structural characteristics may have differentiated effects on risk management. This article takes non-financial listed companies on the A-share market in China from 2009 to 2017 as samples, uses monthly return volatility as a proxy variable for corporate risk, selects board size and board independence as two characteristics, constructs a multiple linear regression model, and empirically analyzes the impact of board structure characteristics on corporate risk. The research results show that board size has a certain positive impact on corporate risk, while board independence has no significant effect on corporate risk.
This study examines the association between chief financial officers’ (CFOs) short- and long-term compensation and discretionary current and non-current accruals. The CFO's cash bonus is used as a measure of short-term incentives and shares plus options is used as a measure of long-term incentives. The results show a significant and positive association between CFOs’ short-term compensation and the absolute value of discretionary current accruals. The results also show a significant and positive association between CFOs’ long-term compensation and the absolute value of discretionary non-current accruals. STUDY provides evidence that the earnings management behaviour of CFOs is associated with type of CFO compensation.
We investigate the impact of political institutions on corporate risk-taking. Using a large sample of non-financial firms from 77 countries covering the period from 1988 to 2008, we find that sound political institutions are positively associated with corporate risk-taking, and that this relation is stronger when government extraction is higher. In a subsample of 45 countries, we also find that politically connected firms engage in more risk-taking, which suggests that close ties to the government lead to less conservative investment choices. Our results are economically significant, and are robust to alternative risk-taking measures, various political institution proxies, cross-sectional and country-level regressions, and endogeneity concerns of political institutions. Our results have important implications for governments and corporate managers by providing direct relevance of political institutions to the corporate decision-making process. To encourage investment at the firm level, and hence innovation and overall growth, governments need to undertake the necessary reforms to control corruption and enforce contracts better, and thus decrease government predation and extraction.
Manuscript Type: Review
Research Question/Issue: Convergence in corporate governance across countries has been a subject of interest and controversy in a variety of disciplines. We attempt to address a number of related research questions: (1) what constitutes convergence? (2) what are the drivers that propel corporations in different nations towards convergence? (3) what are the major impediments that stand in the way of convergence? (4) what empirical evidence do we have to suggest that we are moving towards or away from convergence? and (5) what would be some productive avenues for further research on this topic?
Research Findings/Results: Despite the vigorous intellectual position of the proponents of convergence, there is only limited evidence to indicate that such convergence is actually occurring. Even when there is ostensible convergence, much of it is convergence in form rather than substance, and governance convergence is not a context-free phenomenon.
Theoretical Implications: Our review of the past literature suggests that increasing integration of product and capital markets is leading to changes in corporate governance around the world, but there is only limited evidence that such changes constitute convergence. Governance changes seem to be primarily attributable to the quest for greater efficiency in governance and enhanced legitimacy in capital markets. However, local forces such as institutional embeddedness and politics can hinder governance changes or create “hybrid” practices.
Practical Implications: The ideal corporate governance may be institution- and firm-specific and an imposition of new practices or standards may not lead to intended policy or performance outcomes.
Using a sample of 220 large publicly held British companies, this study examines the role of the remuneration committee in British boardrooms. Some 30 per cent of the sample reported having such a committee. A reported remuneration committee seemed to be associated with higher levels of pay and made no positive impact on the incentive structure of pay.
Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. The JSTOR Archive is a trusted digital repository providing for long-term preservation and access to leading academic journals and scholarly literature from around the world. The Archive is supported by libraries, scholarly societies, publishers, and foundations. It is an initiative of JSTOR, a not-for-profit organization with a mission to help the scholarly community take advantage of advances in technology. For more information regarding JSTOR, please contact support@jstor.org.
The board of directors has been identified as a key internal control mechanism for setting CEO compensation. Theory suggests that CEOs will attempt to circumvent board control in an effort to maximize salary. This hypothesis was tested using a sample of 193 firms in a cross-section of industries. Corporate governance literature was reviewed to develop a multiple indicator measure of board control. Although, as hypothesized, CEO salaries were greater in firms with lower levels of control, CEO compensation was not significantly related to firm size or profitability.
The central legal responsibilities of the UK ‘s ‘unitary ‘ boards of directors are fairly clear, namely to manage the business collectively in accordance with its constitution for the benefit of its shareholders and to comply with the financial reporting and other disclosure requirements stipulated by company law. For UK companies then, the ‘unitary ‘ board of directors fulfils two main, and apparently incompatible, functions. First, the board is the enterprise ‘s supreme executive body. It is legally responsible for formulating and implementing business strategy on behalf of shareholders and for ensuring that all business activities are conducted in a manner which complies with company law and other legal requirements. Second, the board has crucial governance functions to perform. The board is the primary institutional mechanism by which the shareholders render the executives appointed to manage the assets on their behalf accountable for their stewardship.
Traditionally, these two functions have been reconciled in company law by relying upon the system of ‘accountability through disclosure ‘.
Recent research studying the link between law, and finance has concentrated on country-level investor protection measures, and focused on differences in legal systems across countries, and legal families. The authors extend this literature, and provide a study of firm-level corporate governance practices across emerging markets, and a greater understanding of the environments under which corporate governance matters more. Their empirical tests show that better corporate governance is highly correlated with better operating performance, and market valuation. More important, the authors provide evidence showing that firm-level corporate governance provisions, matter more in countries with weak legal environments. These results suggest that firms can partially compensate for ineffective laws, and enforcement by establishing good governance, and providing credible investor protection. The authors' tests also show that firm-level governance, and performance is lower in countries with weak legal environments, suggesting that improving the legal system, should remain a priority for policymakers.
This paper analyzes the survival of organizations in which decision agents do not bear a major share of the wealth effects of their decisions. This is what the literature on large corporations calls separation of 'ownership' and 'control.' Such separation of decision and risk bearing functions is also common to organizations like large professional partnerships, financial mutuals and nonprofits. We contend that separation of decision and risk bearing functions survives in these organizations in part because of the benefits of specialization of management and risk bearing but also because of an effective common approach to controlling the implied agency problems. In particular, the contract structures of all these organizations separate the ratification and monitoring of decisions from the initiation and implementation of the decisions.
Corporate governance can be an important defense against unethical corporate behavior (Carcello 2009). For example, a firm’s board of directors is responsible for overseeing firm management. If the board does not adequately perform this oversight, then it may be easier for managers to behave unethically. In fact, Hoffman and Rowe (2007) report that various investigations found that poor oversight of management by boards was an important factor in various corporate scandals. Two additional issues dealing with unethical corporate behavior that firms should consider when structuring their corporate governance are potential conflicts of interest between the firm and its shareholders and transparency concerning corporate activities. Possible conflicts of interest in corporate governance include whether the CEO is also the chairman of the board (often referred to as CEO duality), the independence of board members, executive compensation (including backdating of stock options), and director elections. Since all of these situations could result in directors or managers placing their interest ahead of shareholder interests, they are all ethical issues. Transparency is an ethical issue because “insiders” such as managers and directors essentially control the information that “outsiders” such as shareholders and regulators receive. As a result, “insiders” can prevent “outsiders” from learning about sub-optimal behavior (such as conflicts of interest) through less transparency. This essay discusses academic research concerning the impact of corporate governance on business ethics. Corporate governance issues discussed are board involvement in corporate ethics codes, board independence, CEO duality, executive compensation, director elections, and external auditors. The specific business ethics issues discussed are potential conflicts of interest and transparency.
This paper chose corporate governance as the starting point, combined with the characteristics of China's current board of directors of listed companies and the risk of material misstatement, and tries to find out the correlation between the two.In this paper, empirical research and normative research method are both used. The listed companies which are warned by the China Securities Regulatory Commission, Shanghai Stock Exchange, Shenzhen Stock Exchange because of irregularities are selected. The board size, proportion of independent directors, the board meetings, audit committees, etc. such the Board characterized as explanatory variable, after controlling the firm size, profitability and other factors, the Logistic regression model was constructed. The empirical results show: board size, the board meetings, audit committees and other factors at different levels of impact on risk of material misstatement.
To achieve orderly capital markets around the world, corporations must provide investors and creditors with relevant, reliable, and timely information. Accounting, auditing, and the structure of corporate governance that they operate within are essential components in the flow of information to capital market participants. However, recent accounting failures have pointed out the need for substantive improvements in these components. The academic accounting community can play a role in stimulating change aimed at enhancing market efficiency through commentary and scientific-based research that provide direction for change. The purpose of this commentary is threefold. First I review the historical development of accounting, auditing, and corporate governance in an effort to identify and understand salient features of the past that have led to the current state of affairs. I then propose changes in accounting, auditing, and governance that I believe will address the current problems with the underlying quality and integrity of the financial reporting process. The third purpose of these comments is to stimulate further debate and empirical research aimed at enhancing the future quality and integrity of the financial reporting process.
This paper is a survey of the literature on boards of directors, with an emphasis on research done subsequent to the Benjamin E. Hermalin and Michael S. Weisbach (2003) survey. The two questions most asked about boards are what determines their makeup and what determines their actions? These questions are fundamentally intertwined, which complicates the study of boards because makeup and actions are jointly endogenous. A focus of this survey is how the literature, theoretical as well as empirical, deals-or on occasions fails to deal-with this complication. We suggest that many studies of boards can best be interpreted as joint statements about both the director-selection process and the effect of board composition on board actions and firm performance.
We document that accrual-based earnings management increased steadily from 1987 until the passage of the Sarbanes-Oxley Act (SOX) in 2002, followed by a significant decline after the passage of SOX. Conversely, the level of real earnings management activities declined prior to SOX and increased significantly after the passage of SOX, suggesting that firms switched from accrual-based to real earnings management methods after the passage of SOX. We also document that the accrual-based earnings management activities were particularly high in the period immediately preceding SOX. Consistent with these results, we find that firms that just achieved important earnings benchmarks used less accruals and more real earnings management after SOX when compared to similar firms before SOX. In addition, our analysis provides evidence that the increases in accrual-based earnings management in the period preceding SOX were concurrent with increases in equity-based compensation. Our results suggest that stock-option components provide a differential set of incentives with regard to accrual-based earnings management. We document that while new options granted during the current period are negatively associated with income-increasing accrual-based earnings management, unexercised options are positively associated with income-increasing accrual-based earnings management.
This study examined the extent to which the percentage of outside directors on a corporation's board of directors, the concentration of equity ownership, and the roles of individual and institutional stockholders influence the company's R&D strategy. We found that high insider representation on a board and a concentration of equity among institutional investors positively affected corporate R&D spending.
Using a qualitative research paradigm, this study examines audit committee effectiveness from the perspective of audit committee members of New Zealand listed companies. The findings reveal that audit committee members perform a range of overlapping tasks and justify their existence in their audit committees by fulfilling the ‘expectations’ that are placed on them. Many quantitative research studies have examined the association between different dimensions of audit committee inputs and financial reporting outputs. The empirical evidence, however, is mixed and remains far from conclusive (Bédard and Gendron 2010). One of the primary reasons for the inconsistent findings is the lack of understanding of the actual process by which audit committees perform their responsibilities. Using a qualitative research paradigm, this study examines audit committee activities, processes and effectiveness from the perspective of audit committee members of New Zealand listed companies. The study argues that performing audit committee duties is an intended process, whereby audit committee members justify their actions and the effectiveness of their audit committees. The paper contributes to the limited literature on how audit committees operate and, by doing so, provides possible explanations for the inconsistent findings of the quantitative audit committee research. In particular, the paper invites further discussion on whether audit committee members can be (or should be assumed to be) independent when discharging their role of overseeing auditing and financial reporting-related matters.
Manuscript Type
Empirical
Research Question/Issue
This paper explores whether R&D investment has a mediating and/or moderating effect on the relationship between corporate governance and firm performance.
Research Findings/Insights
This empirical study of C hinese IT ‐industry listed companies during the 2007–2008 period shows that R&D investment does not moderate, but instead mediates the relationship between corporate governance and firm performance.
Theoretical/Academic Implications
This paper takes the perspective of technological innovation to empirically examine the effect of corporate governance on firm performance. This study makes a contribution to the literature by showing that technological innovation (i.e., R&D investment) mediates the effects of various governance mechanisms (i.e., ownership concentration, managerial compensation, and asset‐debt ratio) on firm performance.
Practitioner/Policy Implications
The results provide important managerial implications for the practice of corporate governance in emerging economies. Companies in emerging economies can enhance technological innovation through maintaining relatively high ownership concentration, designing effective managerial compensation systems, and optimizing capital structure. In addition, emerging economies should adopt effective public policies on technological innovation to improve the relationship between corporate governance and firm performance.
This study investigates the association between the source of funding of New Zealand public‐sector entities (PSEs) and the existence and composition of their audit committees. We examine 134 PSEs in the health, local government and tertiary sectors. Of these PSEs, 81 (60%) have an audit committee. The size of the audit committees are on average larger than recommended by best practice guidelines. However, most of the PSEs comply with guidelines recommended for audit committee independence but not financial expertise. PSEs with higher levels of government funding are more likely to establish audit committees and PSEs that rely on funding from rate payers and debt providers are more likely to have audit committees with a majority of independent members. There is no support for the association between the source of funding and the level of financial expertise on audit committees.
We examine how organizational structure influences strategies over which corporate leaders have significant discretion. Corporate philanthropy is our setting to study how a differentiated structural element — the corporate foundation — constrains the influence of individual senior managers and directors on corporate strategy. Our analysis of Fortune 500 firms from 1996 to 2006 shows that leader characteristics at both the senior management and director levels affect corporate philanthropic contributions. We also find that organizational structure constrains the philanthropic influence of board members, but not of senior managers, a result that is contrary to what existing theory would predict. We discuss how these findings advance understanding of how organizational structure and corporate leadership interact and of how organizations can more effectively realize the strategic value of corporate social responsibility activities.
Corporate research and development (R&D) investments are carefully scrutinized as indicators of competitiveness and corporate strength. The availability or lack of growth opportunities can be an important consideration in assessing the value-enhancing features of R&D investments. The investment opportunities hypothesis holds that R&D investments by fins with promising growth opportunities are generally worthwhile, whereas other R&D investments may be wasteful. Similarly, the availability or lack of free cash flow may also be an important consideration in determining the value-enhancing potential of R&D investments. The free cash flow hypothesis predicts a differential market response, depending on the firm's level of free cash flow. This study provides additional evidence that supports the investment opportunities hypothesis and shows that the market response to announced increases in R&D expenditures depends on a firm's investment opportunities. Firms with greater investment opportunities have a significantly positive stock price reaction to announcements of R&D expenditures. In contrast, firms with relatively fewer investment opportunities have a negative stock price reaction to announcements of R&D expenditures. These relationships hold even after controlling for the effect of other potentially influential variables. The evidence does not fully support the free cash flow hypothesis. No cross-sectional differences in abnormal announcement-period returns are found. However, we find tentative evidence of an interaction between free cash flow and a firm's investment opportunities. This difference between firms with high and low investment opportunities is most pronounced for firms with a low cash flow ratio. Also, the evidence shows positive effects for a firm's debt ratio and its proportion of institutional ownership. A high debt ratio implies precommitted future cash flows and greater institutional oversight, both of which can lower the expected agency costs of free cash flow. We conclude that the evidence may support a broad interpretation of the free cash flow hypothesis. We measure a firm's investment opportunities using Tobin's q, the ratio of the market value of the firm's assets to their replacement cost. Our sample of R&D increase announcements by 121 NYSE- and AMEX-listed firms between 1979 and 1992 is partitioned into high- and low-q firms (above vs. below one). A firm's free cash flow is measured by its cash flow ratio, which is operating income before depreciation minus interest expense, taxes, preferred dividends, and common dividends, divided by the book value of total assets. We also partition the sample into firms with high and low cash flow (above vs. below the sample median). Stock price reaction is measured by the two-day abnormal announcement period return using standard event-study methodology.
Purpose
This paper seeks to examine the relationship between chief executive officer (CEO) duality and firm performance and the moderating effects of the family control factor on this relationship with respect to public companies in Hong Kong.
Design/methodology/approach
This study employs publicly available data from financial databases and the annual reports of a sample of 128 publicly‐listed companies in Hong Kong in 2003.
Findings
Neither agency theory nor stewardship theory alone can adequately explain the duality‐performance relationship. The empirical evidence suggests that the relationship between CEO duality and accounting performance is contingent on the presence of the family control factor. CEO duality is good for non‐family firms, while non‐duality is good for family‐controlled firms.
Research limitations/implications
The study is based on publicly available financial data, and actual board processes are not observed.
Practical implications
The design of board leadership structure is contingent on corporate ownership and control (family control or not).
Originality/value
The paper provides empirical evidence that CEO duality is not necessarily bad for public companies in Hong Kong and would be of interest to regulatory bodies, business practitioners, and academic researchers.
This paper provides insight into financial statement fraud instances investigated during the late 1980s through the 1990s within three volatile industries—technology, health care, and financial services—and highlights important corporate governance differences between fraud companies and no-fraud benchmarks on an industry-by-industry basis. The fraud techniques used vary substantially across industries, with revenue frauds most common in technology companies and asset frauds and misappropriations most common in financial-services firms.
For each of these three industries, the sample fraud companies have very weak governance mechanisms relative to no-fraud industry benchmarks. Consistent with prior research, the fraud companies in the technology and financial-services industries have fewer audit committees, while fraud companies in all three industries have less independent audit committees and less independent boards. In addition, this study provides initial evidence that the fraud companies in the technology and health-care industries have fewer audit committee meetings, and fraud companies in all three industries have less internal audit support.
This study of more current financial statement fraud instances contributes by updating our understanding of fraud techniques and risk factors in three key industries. Auditors should consider the industry context as they evaluate the risk of financial fraud, and they should compare clients' governance mechanisms to relevant no-fraud industry benchmarks.
While studies have called the performance of socially responsible investments competitive, many investors do not choose to invest their assets in a socially responsible fashion. Part of this reluctance may relate to reduced diversification possibilities and the risk effects of application of ethical screens to portfolios. This investigation of a sample of Canadian stocks challenges the popular opinion that socially responsible investments are more volatile than conventional portfolios. Judged by two different methodologies, socially responsible companies tend to show less diversifiable risk in their stock behavior than non-socially responsible companies. These findings seem to support social investors? view that the adoption of corporate social responsibility codes of conduct can help diminish the overall business risk of a company, and even improve its long-term risk-adjusted performance.
This study examines differences in audit committee member judgments before the Sarbanes-Oxley Act ("pre-SOX") versus after the act was passed ("post-SOX") as well as audit committee member perceptions of the effects of SOX. Based on experimental materials administered to 372 public company audit committee members (131 pre-SOX from DeZoort et al. [2003a] and 241 post-SOX), we find that audit committee support for an auditor-proposed adjustment is significantly higher in the post-SOX period. Additional analyses reveal that the effect of SOX differs between audit committee members who are CPAs versus non-CPAs. Specifically, the greater audit committee member support for the proposed adjustment post-SOX Is attributable to members who are CPAs. In general, audit committee members in the post-SOX period feel more responsible for resolving the accounting issue, perceive that audit committee members have greater expertise to evaluate the accounting Issue, and also are more concerned with reporting accuracy and a need for conservative financial reporting than those in the pre-SOX period. We also find that post-SOX respondents who support the auditor's proposed adjustment have more favorable views of the benefits of SOX, and they believe more strongly that audit committees in the post-SOX period are more conservative and have more power than they did pre-SOX. We discuss Implications and avenues for future research.
Agency theory argues that shareholder interests require protection by separation of incumbency of rôles of board chair and CEO. Stewardship theory argues shareholder interests are maximised by shared incumbency of these rôles. Results of an empirical test fail to support agency theory and provide some support for stewardship theory.
Using panel data on large, publicly traded U.K. companies gathered between 1991 and 1994, we examined the role of board control and remuneration committees in determining management compensation. Board monitoring, measured in terms of the proportion of nonexecutive directors on a board and the presence of remuneration committees and CEO duality, had only a limited effect on the level of top management pay. An important conclusion was that top management pay and corporate performance are more aligned in companies with outsider-dominated boards and remuneration committees.
Purpose
This study seeks to examine the influence of board independence, CEO duality and ownership structure on the firm financial distressed status using a sample of distressed companies and a matched‐pair sample of non‐distressed companies listed on the Bursa Malaysia.
Design/methodology/approach
This study utilized publicly available data from annual reports of a sample of 86 non‐finance distressed firms listed on the Bursa Malaysia and a sample of matched 86 non‐distressed firms for a period covering the 1999‐2001 financial years.
Findings
Board independence and CEO duality are not associated with financial distressed status. Management and non‐executive directors' interests are associated negatively with financial distress. A negative association is also documented for outside blockholders. The evidence also supports the contention that ownership by non‐executive directors and outside blockholders effectively increases their incentives to monitor management in ensuring their wealth in the firms is intact.
Research limitations/implications
One limitation of this research is that it relies on publicly available data and agency theory. Future research could apply other theories, such as resource dependency and stewardship. Use of process‐oriented data could also improve the findings.
Practical implications
Independent directors need to undergo training to help them improve and be aware of their responsibilities.
Originality/value
This paper offers evidence on the extent to which distress is associated with corporate governance from a developing country. The paper should be of interest to the regulatory bodies and practitioners.
In recent years some activists have advanced proposals to reform corporate boards, notably their structure and process, to assure desirable corporate governance. the empirical question, however, is whether such formal board changes would guarantee good governance. This paper examines this issue by studying the differences in the board size and board composition of 21 pairs of failed and non-failed firms. the results suggest that the non-failed retailing firms, as compared to failed ones, tend to have bigger boards within the size range suggested by the activists. the differences in the percent of outsider directors and multiple offices held by C.E.O.s between the failed and non-failed firms were not significant. Implications of the results for the evaluation of board reforms are discussed.
This paper examines the impact of labor unemployment risk on corporate financing decisions. Theory suggests that firms choose conservative financial policies partly as a means of mitigating worker exposure to unemployment risk. Using changes in state unemployment insurance benefit laws as a source of variation in the costs borne by workers during layoff spells, we explore the connection between unemployment risk and the corporate financing decisions of public firms in the United States. We find that increases in legally mandated unemployment benefits lead to increases in corporate leverage. The impact of reduced unemployment risk on financial policy is especially strong for firms that have greater layoff separation rates, labor intensity, and financing constraints. The estimated premium required to compensate workers for unemployment risk due to financial distress is about 57 basis points of firm value for a BBB-rated firm. These findings suggest that labor market frictions have a significant impact on corporate financing decisions.
This paper studies the relationship between the governance mechanisms and the market valuation of publicly listed firms in China empirically. We construct measures for corporate governance mechanisms and measures of market valuation for all publicly listed firms on the two stock markets in China by using data from the firm's annual reports. We then investigate how the market-valuation variables are affected by the corporate governance variables while controlling for a number of factors commonly considered in market valuation analysis. A corporate governance index is also constructed to summarize the information contained in the corporate governance variables. The index is found to have statistically and economically significant effect on market valuation. The analysis indicates that investors pay a significant premium for well-governed firms in China, benefiting firms that improve their governance mechanisms.
Prior studies find that foreign firms subject to the Sarbanes-Oxley Act ("SOX") suffered significant declines in market valuation; these declines are too large to be fully explained by the increased costs of direct compliance. This paper investigates one possible source of losses - the charge that SOX discourages corporate risk-taking. I use a triple difference methodology to estimate the effect of SOX on risk-taking by SOX-exposed foreign firms. I match each foreign cross-listed firm to a similar non-cross-listed firm from the same country based on propensity to cross-list. I measure the "pair" risk - the difference between the risk of a cross-listed firm and the risk of its match (first difference). I then estimate the after-minus-before SOX change in pair risk (second difference). Finally, I compare the after-minus-before changes in pair risk for SOX-exposed pairs (where the cross-listed company is listed on level 2 or 3 and is thus subject to SOX) to the change for SOX-unexposed pairs (where the cross-listed company is listed on level 1 or 4 and is thus not subject to SOX) (third difference). I use three sets of proxies for risk: volatility of returns, financial leverage, and cash hording. I find that the risk of SOX-exposed foreign firms declined significantly after SOX on all three measures. High-Tobin's Q firms suffered larger declines in risk. Firms that were riskier before SOX lost more of their value after SOX. This evidence is consistent with the view that SOX induced cross-listed firms to take fewer risks, and placed a particular burden on riskier and better-governed firms.
This Article shows that innovation is a process that has specific characteristics, that these characteristics give rise to an important corporate governance tradeoff, and that complying with the Sarbanes-Oxley Act (SOX) likely impacts this tradeoff to the detriment of innovation.Innovation is a process that results in new goods, services, methods of production, and forms of business organization. Innovation can vastly improve the welfare of consumers, investors, firms, and the economy. Decentralization and an emphasis on strategic internal control are governance structures that facilitate innovation. The ultimate purpose of these structures is to induce managers to overcome myopia and undertake the types of long-term, risky, dynamic, and knowledge-intensive activities that result in innovation.Innovation-facilitating structures and activities may, however, also increase the ability of managers to benefit themselves at the expense of investors. Value-maximizing companies must therefore negotiate the tradeoffs between reducing myopia and preventing managerial opportunism. SOX requires all public companies to increase objective monitoring of managers by outsiders to reduce opportunism. However, a substantial portion of innovative companies likely maximize value by placing a greater emphasis on proximate monitoring by insiders than SOX permits. The law thus upsets the optimal governance balance in such companies and likely undermines their ability to provide the most value to investors and consumers.
Foundational RBV work suggests that firms possess capabilities that represent strengths and others that represent weaknesses. In contrast, contemporary research has examined capability strengths while largely ignoring weaknesses. Addressing this oversight, we examine the direct and integrated effects of sets of capability strengths and capability weaknesses on competitive advantage and its empirical correlate - relative performance. Additionally, we explore how environmental and firm-specific factors influence change in these drivers of competitive advantage over time. Results suggest that weakness sets have a negative effect on relative performance, while strength sets have an increasingly positive effect. The integrative effects of strength and weakness sets affect relative performance in a complex manner. For example, while high strength/low weakness firms perform at high levels, firms integrating high strength with high weakness perform well, but experience considerably more variance in their realized outcomes. Lastly, we find that the strength and weakness sets change significantly over time in markets where competition is more intense, thereby undermining the durability of competitive advantage. Our theory and results indicate that achieving temporary advantage is more difficult than previously thought and that the erosion of advantage occurs routinely as a result of dynamic and interactive rivalry.