Showing papers in "Corporate Governance: An International Review in 2018"

Equity Crowdfunding in Germany and the UK: Follow-up Funding and Firm Failure

Abstract: Manuscript type. Empirical. Research question/issue. Today, startups frequently obtain financing via the Internet through many small contributions of nonsophisticated investors. Yet, little is known whether these startups can ultimately build enduring businesses. This study investigates the determinants of follow‐up funding and firm failure after an equity crowdfunding campaign has taken place. Research findings/insights. We use hand‐collected data from 13 different equity crowdfunding portals and 413 firms that ran at least one successful equity crowdfunding campaign in Germany or the United Kingdom between 2011 and 2016. Our findings show that German firms that received equity crowdfunding stood a higher chance of obtaining follow‐up funding through business angels or venture capitalists but also had a higher likelihood of failure. The number of senior managers and the number of initial venture capital investors both had a positive impact on obtaining postcampaign financing, whereas the average age of the senior management team had a negative impact. The number of initial venture capital investors and the valuation of the firm were significant predictors increasing the hazard of firm failure, whereas the number of senior managers and the amount raised during previous equity crowdfunding campaigns had a negative impact. Theoretical/academic implications. This study provides some first empirical evidence regarding the firm and campaign characteristics that determine follow‐up funding and firm failure after an equity crowdfunding campaign has taken place. Given the absence of research on this topic so far, this study inevitably remains original and exploratory to some extent. The empirical findings suggest various avenues of research for human capital theory, organizational ecology, and the comparative corporate governance literature. Practitioner/policy implications. Identifying influencing factors of follow‐up funding and firm survival is important to make this new and potentially welfare enhancing form of entrepreneurial finance more predictable by decreasing the risk of individual investments. Furthermore, this study offers insights to policy makers, which are currently expected to implement appropriate regulations for this new market segment. In addition, it provides important insights for portal managers as well as firms raising capital via equity crowdfunding, which may learn about their chances to build an enduring business.

Equity crowdfunding, shareholder structures, and firm performance

Abstract: Research question/issue. This paper provides a first‐time glimpse into the postcampaign financial and innovative performance of equity‐crowdfunded (ECF) and matched nonequity‐crowdfunded (NECF) firms. We further investigate how direct and nominee shareholder structures in ECF firms are associated with firm performance. Research findings/insights. We find that ECF firms have 8.5 times higher failure rates than matched NECF firms. However, 3.4 times more ECF firms have patent applications than matched NECF firms. Within the group of ECF firms, we find that ECF firms financed through a nominee structure make smaller losses, whereas ECF firms financed through a direct shareholder structure have more new patent applications, including foreign patent applications. Theoretical/academic implications. Our findings suggest that there are important adverse selection issues on equity crowdfunding platforms, although these platforms also serve as a catalyst for innovative activities. Moreover, our findings suggest that there is a more complex relationship between dispersed versus concentrated crowd shareholders and firm performance than currently assumed in the literature. Practitioner/policy implications. For policy makers and crowdfunding platforms, investor protection against adverse selection will be important to ensure the sustainability of equity crowdfunding markets. For entrepreneurs and crowd investors, our study highlights how equity crowdfunding and the adopted shareholder structure relate to short‐term firm performance.

State ownership reinvented? Explaining performance differences between state‐owned and private firms

Abstract: Manuscript Type. Empirical. Research Question/Issue. This study aims to understand the implications of the corporate governance arrangements in state‐owned enterprises (SOEs) that are publicly listed in terms of firm performance relative to that of private firms. Research Findings/Insights. Using a new database of 477 large, listed SOEs observed between 1997 and 2012 in 66 developed and emerging countries, we use matching techniques to show that these firms do not underperform similar private firms, except when the former face shocks that prioritize their social and political objectives, such as during severe recessions. These findings demonstrate the need to revise existing theories of SOE underperformance. Theoretical/Academic Implications. We expand the traditional agency view of SOEs by introducing principal–principal conflicts that prevail in publicly traded firms. We argue that governments try to steer SOEs to pursue social and political objectives, which can lead to inefficiencies, but they also provide them rents and protection, factors that should lead them to perform as well or better than similar private firms. Thus, our theory of state ownership argues that their advantage or disadvantage over similar private firms cannot be identified from the theory and thus needs an empirical test. Practitioner/Policy Implications. We modify the simplistic view that SOEs are inefficient and highlight that SOEs that compete with private firms may have advantages that give them a competitive edge. This has implications not only for firm‐level strategy, but also for competition policy worldwide.

Fintech venture capital

Abstract: We document a notable change in the pattern of fintech VC investments around the world relative to other types of investments after the global financial crisis. We argue that the spike in fintech VC in certain countries is attributable to differential enforcement of financial institution rules amongst start-ups versus large established financial institutions after the financial crisis. Consistent with this regulatory arbitrage view, we show the marked increase in fintech is more pronounced in countries without a major financial center. Also, we show the fintech boom is more pronounced for smaller private limited partnership VCs that likely have less experience with prior VC booms and busts. These fintech VC deals are less likely to be successfully exited as IPOs and acquisitions, and substantially more likely to be liquidated, especially when located in countries without a major financial center.

New methods of entrepreneurial firm financing: Fintech, crowdfunding and corporate governance implications

Abstract: Starting in May of 2016, small businesses and start‐ups were permitted to sell shares to the general public in the United States on crowdfunding portals. The U.S. Securities and Exchange Commission has defined rules that make equity crowdfunding a legal means by which firms are able to raise seed capital online. The crowdfunding phenomenon is now slowly spreading to other countries (Barbi & Bigelli, 2017). These developments have given rise to a veritable explosion of new research on crowdfunding, financial technology (fintech), and other alternative methods of start‐up financing (Cumming & Hornuf, 2018; Short, Ketchen, McKenny, Allison, & Ireland, 2017). This work has emerged in a variety of fields that include but are not limited to entrepreneurship, finance, marketing, information systems, law, and strategy (Ahlers, Cumming, Günther, & Schweizer, 2015; Mollick, 2014; Newman, Schwarz, & Ahlstrom, 2017; Steinhart, Gao, & Fan, 2017). The emergence of fintech and crowdfunding has also given rise to unique and pronounced concerns with information asymmetries between insiders and outsiders, along with related agency and other governance concerns (Vismara, 2016). As with IPOs, for instance, the ownership base of entrepreneurial ventures raising capital in crowdfunding has been opened up for the first time to external shareholders. Moreover, crowdfunding platforms that allow fundraising from a pool of online backers will also need to cope with collective action problems (Olson, 1965) as crowd‐investors have neither the ability nor the incentive, because of their relatively small investments, to devote adequate resources to due diligence. While collective action problems limit investors' monitoring incentives, entrepreneurs can be tempted to shirk and engage in self‐dealing and opportunistic behavior. Against that background, this special issue of Corporate Governance: An International Review (CGIR) sought to attract scholarly submissions from a wide variety of disciplinary and methodological approaches to examine the governance causes and consequences of the emerging fintech and crowdfunding arenas. Altogether, we received over 50 manuscripts that dealt with questions around five key themes introduced in the call for papers. First, what are the governance problems arising from agency issues such as the separation between ownership and control (principal‐agent) and between controlling and minority shareholders (principal‐principal; Jensen & Meckling, 1976; Young, Peng, Ahlstrom, Bruton, & Jiang, 2008) in crowdfunding

Do talented managers invest more efficiently? The moderating role of corporate governance mechanisms

Abstract: Manuscript type. Empirical. Research question/issue. The main objective of this paper is to examine the influence of managerial ability on investment efficiency. Using a sample of 2185 firms from 24 countries for the period 2006–2015, we hypothesize a positive association between investment efficiency and managerial ability and suggest that able managers make fewer over‐ and underinvestment decisions. As a unique and helpful feature of this study, we also employ a model to capture the different interactions between internal and external corporate governance mechanisms and managerial ability. Research findings/insights. Our results show that managerial ability is an economically relevant determinant of investment efficiency, resulting in lower levels of underinvestment and overinvestment. Additionally, our findings note that the benefits of able managers for investment efficiency are reinforced when companies are located in countries with better board effectiveness, superior investor protection, and better legal enforcement, suggesting that governance mechanisms are effective complementary measures to constrain inefficient investment decisions. The results also indicate that the advantages of having able managers are especially noticeable during a financial crisis and under conditions of greater information asymmetry. Theoretical/academic implications. Our findings suggest that governance mechanisms are effective complementary measures to constrain inefficient investment decisions. Specifically, our results highlight the relevance of the monitoring role of the board, noting that the efficiency of this internal control mechanism complements the effect that able managers have on investment efficiency. Practitioner/policy implications. The paper has relevant implications. First, boards of directors must be aware that, although the access to financial resources is a determinant of firms' financial success, the individual ability to manage them is essential in making efficient investment decisions, which should be considered when recruiting new managers and establishing compensation schemes. Second, the paper shows that managerial ability is reinforced when the company is in a country with strong corporate governance mechanisms, implying that regulators should be aware of the relevance of investor protection, legal enforcement, and board effectiveness to improve the benefits of managerial attributes and therefore the financial efficiency of firms.

The influence of board chairs on director engagement: A case-based exploration of boardroom decision-making

Abstract: Research Question/Issue This study seeks to better understand how board chairs, as leaders and equals, shape the context for other directors to engage in their governance roles. Research Findings/Insights Using a combination of video-taped board meetings and semi-structured interviews with directors at three corporations, we found a generalized and negative association between chair involvement and directors’ engagement during board meetings. Theoretical/Academic Implications Our empirical results suggest that the chair’s role can be viewed as a paradox requiring both (i) strong leadership to counter managerial power, and (ii) a more subtle orientation as peer to fellow directors that enables other board members to contribute to boardroom decision-making. Moreover, our study revealed the transitory nature of both chair contributions and directors’ engagement during meetings, highlighting the potential and need for further unpacking of the temporal dimensions of boardroom decision-making processes. Practitioner/Policy Implications Our analysis suggests a revision of the implicit prescription in the literature for board chairs to be active leaders who lead from the front. Given that chair involvement appears to reduce director engagement during meetings, our research hints at the need for a more supportive role of the chair during boardroom decision-making that is in line with non-traditional leadership models.

The effects of politically connected outside directors on firm performance: Evidence from Korean chaebol firms

Abstract: Manuscript Type Empirical Research Question/Issue While most prior studies on the value of political connections focus on the political connections of controlling shareholders and top management, we examine the performance impact of appointing politically connected outside directors (PCODs) in Korean chaebol firms. Research Findings/Insights Using a manually collected sample of PCODs in Korean chaebol firms, we find that larger, high-performing, less volatile firms with a larger board and higher divergence between voting rights and cash flow rights are more likely to appoint PCODs in the next year. We also report that firms with a high number of PCODs exhibit better operating performance and enjoy lower risk. On the other hand, we find evidence of weak monitoring ability by PCODs. Overall, we suggest that the number of PCODs correlates positively with firm performance, and that the value effect of PCODs increases with the importance of internal trade among group affiliates, the existence of inside directorship by controlling shareholders, and potential settlements from pending litigation. We further differentiate between PCODs and find that former government officials as PCODs drive our findings. Theoretical/Academic Implications This study contributes to corporate governance knowledge by revealing the relationship between PCODs and firm performance via an empirical inquiry into the role of PCODs on the board. As the controlling shareholders of Korean chaebol firms obtain greater private benefits of control, and such firms may face active government involvement in curbing controlling shareholders’ rent extraction, we examine the role and effects of PCODs in these situations and find evidence of the PCOD's value-enhancing effect. We also complement and extend prior studies by providing more direct mechanisms through which PCODs can add value above and beyond firms’ ownership structure. Additionally, we expand the concept of political connection by analyzing outside directors’ human and social capital from the resource dependence theory perspective. Our attempt complements prior research's exclusive focus on connections of large shareholders or top executives to political parties and is more comprehensive in illustrating the firm's dynamic business environment. Practitioner/Policy Implications The results of our study are potentially useful to regulators, who will benefit from an understanding of how the presence of PCODs on boards affects firm performance. In particular, our results suggest that in countries where recent reforms aim to improve minority investor protection and market confidence, regulators should consider the composition of outside directors as well as explicit board independence. The results of our study may also be useful to investors, financial analysts, and auditors, as they highlight the importance of considering specific features of board composition when assessing firms’ future operating performance and risk mechanisms.

Risk governance, structures, culture, and behavior: A view from the inside

Abstract: Manuscript Type Empirical Research Questions/Issues Risk governance (emphasizing internal structures and risk culture) is a relatively new approach to the governance of financial institutions that is being widely adopted in the industry. Due to obvious assessment challenges, to date no evidence exists regarding the effectiveness of risk structures nor the status of risk culture in financial institutions. We therefore investigate the extent to which bank employees view risk structures as effective and risk culture as favorable. We also investigate how risk structures and risk culture together influence risk behavior. Research Findings/Insights Risk structures were typically rated as effective with the exception of remuneration. Risk culture varied at the business unit level as well as by firm and country. Senior leaders tended to have a rosier perception of risk culture than staff generally. Favorable risk culture together with effective risk structures was associated with high levels of desirable and low levels of undesirable risk behavior. Theoretical/Academic Implications The study provides a window into internal bank governance using a novel survey methodology. Many governance papers rely exclusively on external measures of governance; these do not guarantee effective internal risk governance. Practitioner/Policy Implications Further managerial and supervisory attention should be paid to ensure that culture and remuneration structures support risk management in financial institutions. As risk culture varies at the local level, it should be measured and managed at the local level. Senior leaders cannot rely on their own perceptions but should rely instead on independent assessments of risk culture.

Politicians in the boardroom: Is it a convenient burden?

Abstract: We analyze whether the activity of former politicians as corporate directors is different than the activity of the rest of directors. We study whether former politicians have a different probability of holding relevant positions in the full board of directors and in the delegated committees. Our results provide weak evidence of a higher activity by politicians, and strong evidence against a lower activity. Firms decide the positions held by each of their directors. Therefore, our results suggest that firms estimate the quality of former politicians as corporate directors in terms of monitoring and advising, to be like quality of the rest of corporate directors. This quality is also corroborated by studying whether their presence affects the performance of the board of directors in terms of CEO turnover events, and in terms of executive directors’ compensation. Therefore, firms on average do not bear a high opportunity cost, regarding directors’ quality, when hire former politicians to obtain political connections. Our analysis is implemented in Spain, representative of the continental European countries, characterized with high ownership concentration.

Founder‐CEOs and Corporate Turnaround among Declining Firms

Abstract: Manuscript Type. Empirical. Research Question/Issue. Despite the growing interest in leaders' role in the turnaround process, there is a paucity of research on founder‐CEOs' role in achieving successful turnaround among declining firms. In this study, using insights from the organizational identification literature, we argue that founder‐CEOs play an important role in turnaround attempts due to their strong organizational commitment and psychological attachment to the declining firm as well as the relative absence of agency problem issues common among their non‐founder counterparts. Research Findings/Insights. Using data from a matched pair sample of 142 US firms that experienced performance decline, we found that founder‐CEO leadership significantly increases in declining firms. We also found that, among turnaround firms, those led by founder‐CEOs tend to put more emphasis on market‐based turnaround strategies, such as new product introductions, and less emphasis on retrenchment actions, such as divestments. Theoretical/Academic Implications. Our findings contribute to corporate turnaround research by providing a more nuanced view of leaders' role in the turnaround process by specifically exploring the effect of founder CEO leadership. Furthermore, this study contributes to the turnaround literature by highlighting the strategic choices of founder‐CEO‐led firms and how these choices influence successful turnaround. Finally, by introducing organizational identification perspective, this study provides additional theoretical explanation of leadership antecedents of successful turnarounds. Practitioner/Policy Implications. The findings of this study suggest that boards of directors, shareholders, and consultants who often participate in turnaround management should carefully consider retaining founder‐CEOs and endorsing their leadership during the turnaround process. Further, the findings provide turnaround specialists and other stakeholders with further understanding of not only the importance of product market strategies in the turnaround process but also founder‐CEOs' role in fostering such strategies.

Industrial Foundations as Long‐term Owners

Abstract: Short-termism has become a serious concern for businesses and policy makers and this has inspired a search for governance arrangement to promote long term decision making. In this paper we study a particularly long-term ownership structure, which is fairly common in Northern Europe, particularly in Denmark. Industrial foundations are independent legal entities without owners or members typically with the dual objective of preserving the company and using excess profits for charity. We use a unique Danish data set to examine the governance of foundation-owned companies. We show that they are long-term in several respects. Foundations hold on to their shares for longer. Foundation-owned companies replace managers less frequently. They have more conservative capital structures with less leverage. Their companies survive longer. Their business decisions appear to be more long term. This paper supports the hypothesis that time horizons are influenced by ownership structures and particularly that industrial foundations promote longtermism. Policymakers which are interested in promoting longtermism should allow and perhaps even encourage the creation of industrial foundations. More generally they should consider the impact of ownership structure on longtermism.

A configurational analysis of board involvement in intergovernmental organizations

Abstract: Manuscript Type. Empirical. Research Issue. Research on board involvement has evolved and shifted towards seeking the appropriate role these boards should play in the strategy process. Current theoretical debates and inconclusive empirical findings in the literature point to an unresolved issue regarding the level of board involvement that is conducive to effective strategy formulation. This study aims to identify the levels of board involvement that are associated with highly effective and less effective strategy formulation. Research Findings. We examine the boards of 16 intergovernmental organizations by conducting an inductive fuzzy‐set qualitative comparative analysis to identify different levels of board involvement that are associated with highly effective and less effective strategy formulation. Our results illustrate that both active and less active board involvement are associated with highly effective strategy formulation, while an intermediate level of board involvement is associated with less effective strategy formulation. Theoretical Implications. This study contributes to the literature seeking to understand board involvement in the strategy process. We build a multi‐dimensional board involvement framework consisting of board dynamics, the use of director resources, and context. We use the information‐processing perspective to elucidate the relationship between different levels of board involvement and effective strategy formulation. Practitioner Implications. Our findings suggest that the optimal level of board involvement in strategy formulation depends on an organization's complexity, a factor which determines its information‐processing needs.

Founding family and auditor choice: Evidence from Taiwan

Abstract: Manuscript Type: Empirical Research Question/Issue: From an agency perspective, we investigate whether family ownership and control configurations are systematically associated with a firm's choice of auditor. Our analysis focuses on three different characteristics of family ownership and control: family ownership (cash flow rights), disparity between cash flow and voting rights held by family owners (cash–vote divergence), and the family identities of CEOs. Research Findings/Insights: Our findings suggest that different family ownership and control configurations lead to different agency effects. The alignment effect prevails in family firms with greater family ownership, founder CEOs, and professional CEOs, whereas the entrenchment effect prevails when there is greater cash–vote divergence. Despite the presence of two distinct types of agency effects, regardless of differences in family ownership and control configurations, none of these firms is inclined to appoint higher-quality auditors. Theoretical/Academic Implications: This study advances our understanding of the varied agency effects arising from family ownership, cash–vote divergence, and the family identities of CEOs, as well as the impact of family ownership and control features on auditor choice. Our empirical evidence provides a unique insight, showing that higher-quality auditors do not tend to be appointed in firms where family alignment with outside investors is relatively strong, as this lowers demand for such auditors. In addition, although family entrenchment may create greater outside investor demand for higher-quality auditors, such demand is difficult to realize. Practitioner/Policy Implications: Auditors are an important external governance mechanism. This study offers insights for policymakers, family owners, auditors, and other capital market participants, with regard to the varied effects of different family ownership and control features on auditor choice.

Politically induced board turnover, ownership arrangements, and performance of SOEs

Abstract: Manuscript Type. Empirical. Research Question/Issue. This study investigates the impact of elections on board member changes and its relationship with profit‐oriented performance of state‐owned enterprises (SOEs), thus providing new insights on political tie heterogeneity. Research Findings/Insights. Using a unique hand‐collected dataset of 200 SOEs in six countries of the former Socialist Federal Republic of Yugoslavia (SFRY) from 2010 till 2014, we find that board member changes within SOEs, unlike for private enterprises, are politically motivated rather than performance induced. We reveal that SOEs with higher levels of board member changes encounter lower productivity and profitability levels. These findings suggest that political interference via board member changes causes organizational inefficiencies and poor SOE performance. Moreover, the results show that board member changes are insignificant for the performance of large SOEs and SOEs governed by independent government body. Theoretical/Academic Implications. This study reveals an indirect channel for political interference, thus contributing to a better understanding of political tie heterogeneity. Moreover, our study is the first to link political interference and performance of SOEs through introduction of election cycles into the board member changes–performance relationship. Practitioner/Policy Implications. The results of this study provide insights for policymakers who are interested in enhancement of SOEs' performance. They suggest ways in which board appointment procedures should be altered as to be insulated from political interference. In addition, they show boards how they can lower the negative consequences of frequent board member changes.

The promise of reward crowdfunding

Abstract: Research Question/Issue. We study reward crowdfunding (RC), the most innovative segment of the crowdfunding market, where, instead of a debt or equity contract, fund providers are promised some good or service in the future in exchange for their contribution to the funding of the investment project under a contract that does not penalize the creator's failure to deliver. The existing economic and legal literature is puzzled by the platform's use of this seemingly inefficient contract where a standard pre‐sale contract would appear to work better. Research Findings/Insights. Counterintuitively, we prove that the no‐penalty contract is the optimal contract between creators of unknown talent and early adopters of their products when creators can benefit from being discovered as talented and from the goodwill generated by delivering on their promise to early adopters. Theoretical/Academic Implications. Our analysis contributes to understanding RC by showing that the no‐penalty RC contract, far from being an inefficiency, is a contractual innovation specifically designed for talent discovery. We also contribute to the literature on relationship contracts, showing that even in a one‐shot game, it is possible to sustain a contract in the desire to build a reputation that will be useful in a future contract with a third party. Practitioner/Policy Implications. Our analysis has important policy implications on how backers should be protected. Standard measures of consumer or investor protection may be counterproductive.

Institutional environment and bank loans: Evidence from 25 developing countries

Abstract: Research Question/Issue This study tries to verify the impact of institutional environment, namely legal protection, law enforcement, trust and religion, on bank loans in the context of developing countries. Moreover, we investigate the interactive effect of formal and informal institution. Research Findings/Insights Using survey data on enterprises from twenty-five developing countries, we find that institutional environment can significantly affect bank loans in developing countries. Compared with formal institutions, informal ones are relatively efficient at alleviating enterprises’ financial constraints, while law enforcement is more important than legal protection within the set of formal institutions. The split-sample tests indicate that informal and formal institutions have substitutive effects on firms’ loan financing. Theoretical/Academic Implications This study provides evidence of the impact of institutions on loan contracts in developing countries and sheds light on the importance of law enforcement and informal institutions. It suggests new avenues of research on the loan contract from a neo-institutional perspective. Practitioner/Policy Implications This study offers inspiration to the government of developing countries interested in promoting the development of enterprises. In addition, it provides efficient methods that entrepreneurs can use to reduce enterprises’ financing constraints in the context of lower legal protection.

When do firms benefit from affiliated outside directors? Evidence from Korea

Abstract: Manuscript Type Empirical Research Question/Issue Directors can serve different roles: advisors, liaisons, or monitors. Affiliated outside directors have social or business/financial ties to firm executives, are often more trusted than others by the latter, have more knowledge of the firm, give better advice, or liaise more effectively with other organizations. However, they monitor less effectively than other outside directors do. This study theoretically predicts and empirically examines whether affiliated outside directors' contributions to firm value are moderated by corporate conditions: external control threats, uncertainty, government regulation, or information asymmetry. Research Findings/Insights Panel data analysis shows that among firms that are standalone, have M&A threats, suffer financial distress, face financial uncertainty, or are subject to stricter government regulations, those with more affiliated outside directors—especially those with social ties—have greater firm value. In low information asymmetry environments, firms with more affiliated outside directors have lower firm value. In high information asymmetry environments, however, firms with more independent outside directors have lower firm value. These results remain robust after controlling for endogeneity issues of board composition, outside directors' human capital, social capital, CEO attributes, firm attributes, and industry attributes. Theoretical/Academic Implications This study extends and links resource dependence theory and agency theory by showing how outside directors with social ties and those with business ties are related to firm value. Furthermore, the value of affiliated outside directors' resources and liaisons differ across corporate conditions, which extends resource dependence theory. Also, effective monitoring by unaffiliated outside directors requires sufficient access to firm information, which extends agency theory. Practitioner/Policy Implications The relations of different outside directors to firm value across corporate conditions suggest that firms can benefit from considering their corporate conditions when designing the composition of their board of directors.

Entrepreneurial Finance Meets Government Investment at Initial Public Offering: The Role of Minority State Ownership

Abstract: Research Question/Issue Prior studies on the role of state investment tend to focus on either majority state ownership or aggregating majority and minority state ownership. Drawing upon signaling theory, we theorize that the negative intent signaled by minority state ownership reduces initial public offering (IPO) market performance. In addition, we hypothesize that founders as chief executive officers and outside directors not from state-owned enterprises, representing the positive signal of intent, can attenuate the negative effect of minority state ownership. Research Findings/Insights The empirical results based on 274 small and private firms in China's newly launched stock market provide support for the hypotheses based on price premium, first-day turnover rate, first-day price increase, underpricing, and Tobin's Q. Theoretical/Academic Implications To our knowledge, it is the first study that examines how minority state ownership affects small and private firm IPO performance. It suggests new avenues of research on ownership structure and principal-principal problem in corporate governance of emerging economies. This study reveals the distinctive nature and effect between controlling state ownership and minority state ownership. The current research also opens new avenues of research on applying signaling theory, signal of intent in particular, in an IPO study. Practitioner/Policy Implications This study reveals the negative intent signaled by minority state ownership in privately controlled firms at IPO due to the weak monitoring capacity, limited resource provision, and enhanced political interdependency between private controllers and minority state owners. As minority state ownership becomes a more salient phenomenon in emerging markets, it guides policy makers in governance choices for government-funded firms.

The market for independent directors

Abstract: Manuscript Type Empirical Research Question/Issue Research Findings/Insights Using the US setting from 1996 to 2006, we examine how the market for independent directors responds to increasingly stringent scrutiny. Despite the unambiguous increase in the demand for independent directors (with financial expertise) since 2000, independent directors (with financial expertise) have not expanded their board seats but reduced them. Incumbents are more likely to depart from firms that are costly to advise and monitor, but only post-2000. Meanwhile, we document an influx of new directors to the labor market. These new directors are more likely to be hired by firms that are costly to advise and monitor post-2000 and are more likely to be financial experts so that the increased demand can be satisfied. Theoretical/Academic Implications Practitioner/Policy Implications Hypothesis We provide evidence that the demand-supply framework adequately captures the market for independent directors. In particular, rather than the demand effect simply dominating the supply effect for a particular group of directors, the demand is fulfilled by opposing supply effects of different types of directors, specifically incumbents versus new entrants. Policy makers should not underestimate the (dis)incentives that directors have to provide services to the market when initiating future governance reforms (e.g. writing the limit on the number of directorships held by directors into best practice/law). Firms, especially ones that are costly for directors to advise and monitor, are encouraged to explore effective ways to retain valuable directors and prepare thorough succession plans whenever the supply of directors is expected to shrink.

Can Benford's Law explain CEO pay?

Abstract: Manuscript Type: Empirical Research Issue: This study applies the statistical properties of Benford’s Law to CEO pay. Benford’s ‘Law’ states that in an unbiased dataset, the first digit values are usually unequally allocated when considering the logical expectations of equal distribution. In this study we question whether the striking empirical properties of Benford’s Law could be used to analyse the negotiation power and preferences of CEOs. We argue that performance-based or market-determined compensations should follow Benford’s Law, demonstrating no direct negotiation by the CEOs. Conversely, deviation from Benford’s Law could reveal CEO negotiating power or even preference. Research Findings: Our analysis shows that market-determined ‘Option Fair Value’ (the dollar value of stock options when exercised) conforms closely to Benford’s Law, as opposed to ‘Salary’, which is fully negotiated. ‘Bonus’, ‘Option Award’ and ‘Total Compensation’ are generally also largely consistent with Benford’s Law, but with some exceptions. We interpret these exceptions as negotiation by the CEOs. Surprisingly, we found that CEOs prefer to be paid in round figure values, especially ‘5’. We use Benford’s Law to study the negotiating powers of CEOs vs. that of Other Executives. Finally, we compare the negotiating tactics of CEOs before and after SOX and analyse the impact of firm size on their compensations. Academic Implications: This study introduces Benford’s Law and its applications within the corporate governance literature. Practitioner Implications: This method could be used by academics, industry and regulators to uncover compensation patterns within large business departments or/and organisations or even entire industry segments.

Do OECD-type governance principles have economic value for Vietnamese firms at IPO?

Abstract: Manuscript Type Empirical Research Question Using agency and resource dependency insights this paper examines first which type of firm-level antecedents trigger the adoption of OECD-type governance principles by Vietnamese listed firms at IPO. Subsequently this paper investigates whether the adoption of these governance principles leads to higher firm values at IPO and whether stricter governance is related to transparency after IPO. Research Findings With respect to the antecedents of OECD-type governance in Vietnam this study finds that firms with foreign shareholders and younger firms adopt these governance principles. The adoption of stricter governance principles, especially in terms of strict supervisory board independence, as well as the appointment of directors with multiple director seats are beneficial for firm value at IPO. Governance transparency after IPO is unrelated to a firm's governance characteristics but positively associated with increasing firm size. Theoretical/Academic Implications The results show that agency insights are applicable in a context of concentrated ownership, low investor protection and weak enforcement, since stricter board independence leads to higher firm value. In addition resource dependence theory explains the choice of directors and provides evidence that boards with better network potential lead to higher firm value in this relationship-based emerging market. Practitioner/Policy Implications Vietnamese firms benefit from higher value at IPO when they adopt stricter internal governance mechanisms and appoint directors holding multiple board seats. However, to ensure compliance with governance and transparency principles, formal institutional changes related to stricter enforcement of the regulation are of utmost importance.

Are optimal contracting and managerial power competing or complementary views? Evidence from the compensation of statutory auditors in Italy

Abstract: Manuscript Type. Empirical. Research Question/Issue. This study examines whether and to what extent the compensation of independent monitors at the board level is the outcome of an optimal contract between independent parties or the result of involvement with corporate insiders. Research Findings/Insights. By using a hierarchical linear regression model with a sample of 559 statutory auditors, whose main task is to monitor the acts and the decision‐making process of the board of directors, this study provides evidence that statutory auditors' compensation is mainly based upon the effort and responsibilities that are observable by shareholders. However, our findings highlight that the additional, poorly disclosed, compensation that a statutory auditor may receive, unrelated to his/her role, is associated with his/her involvement with corporate insiders. Theoretical/Academic Implications. By analyzing a three‐tier hierarchical agency model, this study gives insights into how and to what extent the optimal contracting and managerial power perspectives provide complementary, rather than competing, explanations to the basis and design of compensation at the board level. Not only do these perspectives of agency theory co‐exist at an aggregate level, but also seem to be complementary at both the firm level and individual level. Practitioner/Policy Implications. This study offers insights to policymakers by questioning the current regulation that allows threats to the independence of a formally independent corporate governance mechanism. We recommend further disclosure about the criteria and the rationales of the additional compensation received by statutory auditors. In addition, we suggest investors and other stakeholders, who may rely on the work of the board of statutory auditors as independent monitor, to be careful about the way statutory auditors are paid.

CEO compensation and mortgage origination in the banking industry

Abstract: Manuscript Type. Empirical. Research Question/Issue. This study examines the relationship between bank CEO compensation and mortgage origination practices before the 2008 financial crisis. It extends the discussion about the degree of responsibility of executive compensation for the crisis, by testing whether bank CEO equity incentives contributed to the growth in high‐risk mortgages before the collapse of the mortgage market. Research Findings/Insights. Using a unique dataset of comprehensive loan origination records and CEO compensation in an inclusive sample of publicly traded U.S. banks, this study finds strong evidence that CEO compensation vega is positively associated with the riskiness of mortgages before the collapse of the mortgage market and some evidence that compensation delta is negatively associated with the riskiness of mortgages. Theoretical/Academic Implications. This study contributes to the understanding of the role of executive compensation in the 2008 financial crisis. Consistent with prior research, it provides further empirical support that compensation vega induces risk‐taking. Moreover, in the context of the financial industry, the findings illustrate the potential adverse effect of high‐vega compensation of bank CEOs, as such compensation may have contributed to the build‐up of high‐risk mortgages prior to the crisis. Practitioner/Policy Implications. Following the financial crisis, a series of policy changes towards regulating and reforming executive compensation in financial firms has been implemented. This study offers important insights for the reform and design of executive compensation in the financial sector. In particular, practitioners and policymakers should examine the incentive structures of bank executives (such as compensation delta and vega) in order to appropriately influence risk‐taking.

Executive migration: How information cues from departing firms and the labor market affect shareholder value

Abstract: Research Question/Issue: This study examines the extent to which newly-hired migrating executives affect shareholder reaction at their arriving firms. We draw upon the information economics and upper echelons literatures to explain how (1) deviant behavior and ability information cues from an executive’s “departing” firm contribute to shareholder value at the “arriving” firm and how (2) labor market information cues moderate these relationships. Research Findings/Insights: We use event study methodology to determine investors’ reactions to the hiring announcements. We test our framework with a sample of 268 chief financial officers who migrated between 2002 and 2014. Controlling for sample selection and endogeneity, we find that a financial restatement at the migrating executive’s departing firm adversely affects shareholder reaction at the arriving firm. However, financial restatements at the departing firm adversely affect shareholder reaction at the arriving firm, especially when the migration is recent (i.e., within one-year). An extended analysis reveals an interaction between departing firm financial restatement and departing firm financial performance. Theoretical/Academic Implications: Our study contributes to the literature by theorizing and showing that investors screen by using information cues from migrating executives’ departing firms when signals are not salient in order to determine their contributions to shareholder reaction at arriving firms. Investors react negatively to deviant behavior information cues from the departing firms of newly hired executives. Also, the framework explains the moderating effect of labor market information cues -- investors react unfavorably to deviant behavior information cues when they involve same-year executive migrations. Practitioner/Policy Implications: Our study suggests that investors and hiring firms have divergent views on the value added of deviant behavior, yet convergent views on the value added from executive abilities.