Showing papers in "Journal of Management & Governance in 2010"

Female board appointments and firm valuation: short and long-term effects

Abstract: The presence of women on boards of directors has become a high profile issue in recent years. Several studies, based largely on data from countries with Anglo-Saxon corporate governance systems, have investigated the influence of female board appointments on firm performance. This study focuses on the impact of female directors in Spain, where debate about this topic has been intense for two reasons: the recommendation in 2006 by Spain’s Unified Good Governance Code of positive discrimination in favour of female board appointments and the passing in 2007 of a Gender Equality Act by the Spanish parliament. Our paper analyses the short and long term effect of the appointment of female directors prior to these events. We use an event study to analyze the short term stock market reaction to the appointment of female directors and a multiple regression approach, using the system GMM estimation procedure, to assess the long term influence on firm value of female boardroom appointments. We find that the stock market reacts positively in the short term to the announcement of female board appointments, suggesting that investors on average believe that female directors add value. This belief appears to be confirmed by our regression results which show that female board appointments are positively associated with firm value over a sustained period. These results suggest that the legislative changes in Spain make economic sense as well as advancing the cause of women in Spanish boardrooms.

The relation between board size and firm performance in firms with a history of poor operating performance

Abstract: Focusing on a sample of smaller firms with a history of poor operating performance, this paper posits that increases in board size will be associated with better share price performance. Notably, board sizes studied here are, on average, much smaller than those typically studied by prior research. Mostly consistent with predictions, board size is found to be positively correlated with firm value in between-firms tests, and changes in board size are found to be positively associated with annual stock returns. Last, event study results suggest that the market responds favorably to board size increases and unfavorably to large board size decreases. Together, these results identify a setting in which larger board sizes appear to be positively related to shareholder value.

Corporate governance, family ownership and performance

Abstract: Using a sample of 56 Italian IPOs issued between 1999 and 2005, several hypotheses are tested on the interplay between corporate governance, family ownership and performance. Specifically tested is which approach among all agency, stewardship, and contingency theory is most appropriate for Italian family firms. Findings suggest that board independence increases with family disinvestment at IPO, presence of venture capitalists, establishment of large and active boards, and existence of appointment and compensation committees. At the same time, results indicate that the presence of independent directors affects performance positively but with little statistical significance, while family involvement and the presence of execution committees negatively impact share performance.

Determinants and consequences of internal control in firms: a contingency theory based analysis

Abstract: In order to ensure the efficiency and effectiveness of activities, reliability of information and compliance with applicable laws, firms demand adequate internal control. However, several frameworks (COSO, CoCo etc.) assume that the need for internal control varies according to a firm’s characteristics. This concurs with contingency theory, which claims that each organization has to choose the most suitable control system by taking into account contingency characteristics. This study examines which contingency characteristics firms choose to adapt their internal control structure and whether it results in a more favorable assessment of the effectiveness of control by the management. While the components of internal control have been examined individually in the control literature, this paper attempts to shed light on internal control and place it in a broader context. The results, derived from a web-based survey of 741 Finnish firms, indicate that firms adapt their internal control structure to deal with environmental uncertainty and to achieve observed control effectiveness. Also the strategy has statistically significant effects on internal control structure.

Is philanthropy being used by corporate wrongdoers to buy good will

Abstract: While an increasing number of philosophers and community activists argue in favor of corporate philanthropy, the practice is not without its critics. A number of firms that have restated suspect earnings also appear on lists of top corporate givers or are ranked among most ethical firms, prompting the suspicion that companies are using philanthropy as a kind of moral window-dressing. This paper explores whether restating firms are (1) using philanthropy to divert public attention away from suspect financial results; or (2) making donations to buy good will or a better reputation after they have been required to restate suspect earnings. Our results paint a mixed picture of the morality of corporate philanthropy. Firms forced to restate suspect earnings do seem to be using philanthropy either to divert attention away from their lackluster earnings or to elicit good will from the large community after such restatements. However, the reverse is not true. Just because a firm is a top giver, it does not follow that it is more likely to be a restater of earnings. Nor did we find evidence that firms ranked as very ethical are more likely to be restaters than non-restaters. Firms engage in philanthropy for a variety of reasons. We should not uncritically praise them for their giving, but neither should we regard with a cynical eye all corporate reputations for goodness or all corporation donations.

What explains variation in voluntary disclosure? A study of the annual reports of corporations listed on the Stockholm Stock Exchange

Abstract: The demand for information and transparency from listed corporations has recently increased. In spite of an increased demand for mandatory disclosures from regulators, corporations choose to voluntarily disclose additional information in order to satisfy demands from the capital market. However, the extent and content of information in those voluntary disclosures vary across corporations. The aim of this study is to explain the variation in the content of information in voluntary disclosures by listed corporations. The analyses are based on data collected from 431 annual reports from corporations listed on the Stockholm Stock Exchange during the years 2002 and 2005. The findings support explanations from agency theory and positive accounting theory that size and the debt ratio are positively correlated with the content of information in voluntary disclosures. Corporations with a high share of management ownership disclosed less information than corporations with a low share of management ownership. The study also shows that variations in voluntary disclosures can be explained by factors derived from institutional theory and ‘international capital market pressures’. The results indicate that foreign ownership and international listing to some extent have a positive effect on the content of information in voluntary disclosures. Industry was another factor that had a significant influence on voluntary disclosures. One important finding is that regulation to some extent can stimulate voluntary disclosures; our results did not indicate an ‘unintended chilling effect’ due to too much regulation. In general, the corporations disclosed more voluntary information after the introduction of IFRS.

Board structures and the establishment of a risk management committee by Malaysian listed firms

Abstract: The purpose of this study is to examine the association between the establishment of a risk management committee and board structures of Malaysian listed firms. The study predicts that more independent, expert, and diligent boards are likely to establish a stand-alone risk management committee. It employs a cross-sectional analysis of 690 firms listed on the Bursa Malaysia for the financial year ending in 2003. Multiple regression analysis is used to estimate the relationships proposed in the hypotheses. The study finds a strong support for an association between the establishment of a risk management committee and strong board structures. Specifically, the result shows that firms with higher proportions of non-executive directors on boards and firms that separate the positions of chief executive officers and board chairs are likely to set up a stand-alone risk management committee. Firms with greater board expertise and board diligence are also likely to establish a risk management committee. These findings suggest that stronger boards demonstrate their commitment to and awareness of improved internal control environment. Finally, the study also documents a positive and significant association between firm size, complexity of a firm’s operations, and the use of Big Four audit firms with the establishment of a risk management committee.

A political economy of accounting standard setting

Abstract: In recent years accounting researchers have identified “political” lobbying as a problem for accounting standard setting. This paper presents a simple game-theoretic analysis of the political process to identify situations where companies have incentives to lobby the political principal instead of participating in the usual due process of accounting standard setting. Analysis of the model suggests that “political” lobbying is more likely to happen in the EU than in the US. Furthermore it is suggested that if the relevant standard setters wish to achieve harmonization of accounting standards between the EU and the US, European companies have more lobbying leverage than their American counterparts because there are more European veto players than American ones.

Country-specific institutional effects on ownership: concentration and performance of continental European firms

Abstract: This paper examines the effect of country-specific institutional constructs on the relationship between ownership concentration and performance for firms in the eight Continental European countries of Austria, Belgium, Germany, Spain, France, Italy, the Netherlands and Portugal. Using data from publicly-traded firms owned by other companies (i.e., blocks), measures of the quality of investor and creditor protection and the effectiveness of legal institutions are applied. Employing a hierarchical moderated multiple regression analysis, differential validity is established for the relationship between ownership concentration and performance as measured by return on shareholders’ funds. This differential effect comes from creditor protection regimes and is consistent with a relational corporate governance model based on debt finance and concentrated ownership.

Regulation by disclosure: the case of internal control

Abstract: In this paper we explore the use of disclosure as a regulatory tool, using as an illustration the current UK requirements regarding the disclosure of information about internal control. After discussing the broad concept of regulation by disclosure, we trace the evolution of concepts of internal control and its reporting, describing the background to the Turnbull guidance for directors on internal control reporting, the basis of current UK requirements. We then examine recent examples of internal control disclosures, identifying the range of ways in which they address the disclosure requirements and considering the possible impact of the disclosure requirements on corporate behaviour and on the audiences for disclosure. We conclude with some reflections on the disclosure life cycle. The paper contributes to the literature on disclosure by specifically considering the role of disclosure as a regulatory tool and by examining the nature of specific disclosures in an area of continuing interest, that of internal control.

Regulation, the public interest and the establishment of an accounting supervisory body

Abstract: The accounting/auditing profession in Ireland has maintained a form of self-regulation since the era of professional formation in the late-nineteenth century. In general, the view taken was that the public interest was best served by allowing the profession to monitor and regulate its own members. This reflected a general confidence in the workings of the market, with regulation being considered necessary only to address specific shortcomings. In recent years, a combination of factors ranging from corporate collapses in which the independence of the auditing profession was questioned, to a variety of political pressures arising from globalisation and the exigencies of international financial markets, have created an environment in which increased state involvement has been seen as critical to securing the public interest. In Ireland, these international developments conjoined with political and media disquiet at revelations regarding the conduct of prominent accountants and auditing firms to create an environment in which modifications to this regime could be considered. The result was a state initiative to introduce an independent authority, the Irish Auditing and Accounting Supervisory Authority, to regulate the profession. Using public interest theories as the dominant paradigm, this paper investigates this development.

Does accounting regulation enhance corporate governance? Evidence from the disclosure of share-based remuneration

Abstract: Accounting for stock options and share-based remuneration is a controversial issue. The purpose of this study is to explore the impact of the mandatory adoption of IFRS 2 on accounting for share-based remuneration by Italian listed companies. The requirements under this standard could have relevant implications for corporate governance as IFRS 2 is expected to reduce the information asymmetry that may exist between corporate insiders and outsiders regarding such remuneration. Empirical evidence confirms that overall disclosure in annual reports concerning the costs of remuneration plans has increased following the adoption of IFRS 2, although some cases of lack of disclosure have also been found. We find that this change in accounting regulation has contributed towards revealing the ‘true’ cost of share-based remuneration to minority shareholders and other investors, together with some evidence of creative accounting surrounding the substance over form principle.

The enduring presence of groups and public enterprises in the Italian economy

Abstract: What was the presence of the State-entrepreneur in the Italian economy in the 20th century? Which forms did it assume? What is the weight of the State-entrepreneur in Italy today? Trying to answer these questions, the author carries out an analysis through the historical method. His final thesis is that, notwithstanding the progressive pressures, which started in the 1990s, towards the privatization of national capitalism, the State-entrepreneur is still firmly present in the Italian economy, as if it had always to play a role in the country’s development. The results of the present investigation can turn out to be of interest both to scholars and to policy makers who are committed in the effective implementation of actions aiming at favouring, for the country’s welfare, a careful and balanced relationship between public and private powers.

Genesis of a research field: district, network, strategic network

Abstract: This article summarizes the changes since the beginning of the 1980s in the scholarly approach to organizational and economic research on Italian firms. Beginning with the study of industrial districts, which sparked a major reconsideration of the conventional wisdom, most scholars focused primarily on the significance of firm geographical proximity while marginalizing issues related to firm structure and strategy. Nevertheless, industrial district research eventually led to the question of firm networks, in particular how to manage relational capabilities and cooperation, both of which affect a firm’s competitive position. This new analytical framework no longer dependent on either the single firm or an industrial sector has opened up new research perspectives that promise rich insights into socio-economic studies.

The Impact of Institutional Changes on Corporate Governance Mechanisms in Transition Economies

Abstract: We examine how institutional changes affect corporate governance in transition economies. We develop a transition model that specifies three stages of the transition process including the early, intermediate, and late. We develop a framework for assessing the effectiveness of widely recognized corporate governance mechanisms (CGMs) in and across these stages. Our general proposition is that as transition economies move from early, to intermediate, to late stages, effective CGMs tend to be those that are based on state administrative control power, social networks and private orders, and market forces and formal institutions, respectively. Our study has contributions and implications regarding the transition economies and the impacts of institutions on corporate governance.

Governance and strategy within the financial system: tradition and innovation

Abstract: Italian banks have undergone an evolutionary process and development of corporate, retail and private banking within the Italian banking system as a response to market pressures exerted by business and private customers for a broadening and qualitative expansion of offerings and organization of available competencies. This not only refers to large enterprises, whose relations with the financial system are autonomous, on equal terms and for some time now have opened up internationally, but above all the large number of SMEs found in Italy’s economic system. Interpreting governance and strategy takes place in a broad perspective in which banks and the financial system have to deal with five significant factors today: regulations, customers, knowledge, capital and synergies. Interaction with these five factors is undoubtedly not only guided by a choice made by shareholders and managers but represents the set of decisions that mitigate ideological factors, choices concerning sustainability and social acceptance of these choices. This paper intends to explore this interaction, drawing on and utilizing the most significant studies in the Italian Banking & Finance sector, with a specific focus on relations between the financial system and businesses, that is to say, the corporate banking area.

Special issue on Governance and accounting regulation

Abstract: The accounting scandals that first erupted in 2001 caused a major upheaval. First, Enron’s collapse stunned the world. A shocking series of revelations of accounting irregularities by other major corporations in the USA followed, and this accounting ‘virus’ then metastasized into Europe (witness the Netherland’s Ahold and Italy’s Parmalat cases, for example) and then into Asia (Satyam). The gathering accounting storm of the early millennium pushed lawmakers into action, in the form of numerous regulatory reforms around the world, including the Sarbanes-Oxley Act. Weak corporate governance, lax regulation and gatekeepers that turned from the watchdogs they were supposed to be into lapdogs serving companies rather than their stakeholders were major culprits. As outrageous as these scandals were at the time, they pale in comparison with the financial horrors of today. The current global economic meltdown shines a harsh light on financial reporting systems that are opaque and on regulatory structures that are not up to the job, and which—along with reckless lending policies, cheap money greedily seeking high returns and impenetrable financial instruments—have caused untold suffering around the world. The regulatory impact of accounting standards occupies a prominent place among the causes of this financial unravelling. Consider for example the mark-to-market accounting rule and the chain of events it gave rise to. Indiscriminate application of the rule in the current, illiquid, almost nonexistent market has depressed equity

Regulatory intervention and the effect of changes in corporate governance on firm decisions and market reactions

Abstract: This paper investigates whether Italian companies that cross-list in the United States between 1993 and 2005 show (1) a change in their internal policies as anticipated by the bonding hypothesis, (2) an increase in market value, or (3) an increase in the access to capital funds. We use the unique environment created by the 1998 Draghi reform which significantly improved the protection of Italian listed companies’ minority shareholders and we further examine the impact of legislated changes in corporate governance in Italy on the decision of Italian companies to cross-list in the United States. Our results indicate that following the Draghi reform (1) firms that cross-list in the United States modify their dividend and cash policies as anticipated by the bonding hypothesis. Contrary to prior research, (2) we do not find evidence that cross-listing serves to enhance shareholder value or (3) is used as a vehicle to more easily access capital funds either before or after the domestic corporate governance is improved. The results of this study provide evidence that country level legislative innovations intended to enhance a weak corporate governance system can be a valid and effective substitute to the bonding mechanism by providing an alternative signal of a firm’s quality.

Trajectories of accounting and auditing development in EU enlargement: comparative analysis of ten new member states

Abstract: This paper presents comparative qualitative analysis of the development of accounting and auditing in the ten member states which joined the European Union in May 2004, eight with transition economies and two with established but emerging market economies. The post-communist eight shared many similarities at the outset of transition but subsequent economic and political experiences were strongly divergent. In contrast, Cyprus and Malta had established market economies (but at relatively lower levels of development than more established EU member states). Compared with the transition eight they also differed in having established accounting and auditing professions. The paper’s research questions and associated hypotheses address varying institutional characteristics and comparative inter-temporal institutional change among the ten member states. In testing these hypotheses we use qualitative analysis on descriptive data developed as part of the official EU evaluation of accession states’ suitability for membership. In adopting this research approach we are consistent with a range of studies of institutional change which have been undertaken in an EU context, largely in political theory and political economy. We find evidence that different trajectories of institutional development are observable in the ten new member states. This research thus documents a major exercise in pan-European regulatory change, adds to the record of the transition to market structures and institutions of eight transition economies, and assists understanding of accounting development in two emerging economies. Furthermore, it informs understanding of processes under way for other EU applicants and for new membership applications which may arise in future.