International Journal of Corporate Governance (11 papers in press)
REVIEWING AND REVISITING THE USE OF CORPORATE GOVERNANCE INDICES
by Shinu Vig, Manipadma Datta
Abstract: The recent developments in the regulatory framework on corporate governance worldwide have drawn the attention of academic world on corporate governance issues, and especially on the measurement of the quality of corporate governance. Corporate governance is a complex mechanism with multiple attributes. A comprehensive corporate governance index is thus needed to concentrate all of the governance mechanisms into a single integrated, yet informative score which can reflect upon the overall quality of a firms corporate governance. Several methods of measurement of quality of corporate governance have been employed by the academic researchers and the commercial service-providers to measure the same underlying phenomenon, i.e. the quality of corporate governance. Thus paper examines, through extensive review of the extant literature, the use, problems and prospects of CG indices as a correct and dependable measure of quality of corporate governance and analyses the challenges in the construction and interpretation of corporate governance indices.
Keywords: corporate governance; index; rating; measures of quality; firm performance; indices; good governance.
The Impact of Ownership Structure on Dividend Policy and Cash Holdings for Chinese Privatized Firms
by Ohaness Paskelian, Stephen Bell, Julia Creek
Abstract: This paper examines the impact of ownership structure on dividend policies and cash holdings of privatized Chinese firms. In particular, we examine investor valuation of dividends and cash holdings between firms where the Chinese government holds majority ownership versus firms where private and foreign stockholders possess substantial ownership. We also examine measures designed to reflect agency problems in privatized Chinese firms to determine if dividend and cash holding policies can alleviate these agency problems. We find that government ownership has negative impact on firm value in China. In addition, we find that in firms where the government ownership is substantial, holding large reserves of cash does not impact on the firms future profitability. In contrast, we find that firms with low government ownership concentration have better use for cash thus relatively lower dividend payments constitutes positive signal about the firms future prospects. Finally, we find foreign ownership has positive impact on firm value and contributes to mitigation of agency problems in Chinese firms.
Keywords: Cash Holdings; Ownership Structure; Corporate Governance; Chinese Firms; Dividend Policy; Government Ownership.
Corporate Governance in Lebanese Banks: Focus on Board of Directors
by Walid El Gammal, ABDUL-NASSER El-Kassar, Bilal Kchouri, Samir Trabelsi
Abstract: This study investigates the Corporate Governance mechanisms (CG) applied in the Lebanese banks with a focus on the Board of Directors (BOD). We collected board data for 67 banks between 2013 and 2015. The results document a lack of consistency in the disclosure of BOD practices where half of the banks do not abide by international standards with disclosed information being minimal. Moreover, banks applying the ISS standards at the BOD level, did not prove any better financial performance. These findings are explained by the fact that Lebanese banks have the right to lend the central bank while foreign banks do not, thus giving the local banks higher chances for profitable and less risky investments. The central bank also provides continuous support to the Lebanese banks through monetary facilities in order to stimulate the economy in Lebanon.
Keywords: Corporate Governance; Board of Directors; Banks; Lebanon.
Governance Mechanisms and Earnings Management Practices: Evidence from Egypt
by Ahmed Abousamak, Tamer Shahwan
Abstract: This study develops an aggregate corporate governance index (ACGINX) composed of four individual corporate governance (CG) indices Disclosure & Transparency Index, Board of Directors Index (BoDINX), Shareholders Rights & Investor Relations Index and Ownership & Control Structure Index to investigate the assumed effect of each sub-index and the ACGINX on mitigating the practices of earnings management in the Egyptian Context during 20082016. In addition to the effect of board size, institutional ownership, and ownership concentration, the current study executes panel data analysis to regress the practices of earnings management measured by working capital accruals, the F-score, the modified Jones criteria, and Pustylniks combined algorithm score on the abovementioned CG mechanisms. It does so after controlling for seven variables that may affect this relationship; i.e., firm size, leverage, state ownership, losses, bookmarket ratio, type of audit report, and year effect.
The results are inconclusive, showing traded-off significant relationships among control variables and earnings management practices assessed via different earnings management measures. The results should be interpreted in terms of the need to improve the familiarity of the Egyptian market with CG mechanisms and to use other measures of CG mechanisms and earnings management. In addition, this study contributes to the existing literature by investigating and operationalizing the independent and joint effects of four CG mechanisms on earnings management practices in the emerging-market context of Egypt.
Keywords: corporate governance; earnings management; Egypt; emerging market; panel data analysis.
INFLUENCE OF BOARD CHARACTERISTICS ON CSR: A STUDY OF INDIAN FIRMS
by Neeti Khetarpal Sanan
Abstract: This study examined the relationship between corporate social responsibility (CSR) and board characteristics among large Indian firms. The examined board characteristics included the proportion of independent directors and female directors on the board. The final study sample included 171firms that operate across multiple representative industries, and period of the study was from 2014 to 2016. Panel data analysis used the proportion of independent directors and female directors on the board as independent variables and CSR spending as the dependent variable. Board size, firm age, firm size, industry type, and profitability were the control factors. Available empirical evidence using the ordinary least squares and random effects estimation models showed that while female directors influenced a firms CSR, independent directors did not have an impact. The results remained robust using alternate measures of a firms CSR and different estimation methods.
Keywords: Corporate Social Responsibility; Indian Firms; Female Directors; Independent Directors.
Do Female Directors Create Value for the Shareholders? Case study of New Zealand publicly listed companies
by Nirosha Hewa-Wellalage
Abstract: The potential contribution from moving toward an even gender balance for those bodies charged with corporate governance, especially boards of directors, is discussed in this paper. Prior empirical research, reported in the literature, provides conflicting results. The likelihood of these opposite findings resulting from endogeneity suggests a dynamic GMM model as a preferable tool for analysing gender balance on Boards. Agency theory is core for finance modelling of governance and increasing from the low level of female director proportion on boards reduces agency costs in the publicly listed companies in New Zealand. The positive effects diminish as the proportion of female directors reach higher levels. Is it the gender balance or competency set of the board contributing the gains? Our interpretation is that gender diversity quotas for women need to focus on acquiring relevant skills and qualifications required in boardrooms and gradually increasing participation goals is likely to be most efficacious through signalling the core competency base for improved performance.
Keywords: Women; financial performance; principal- agent agency costs; principal- principal agency costs; New Zealand.
Does Corporate Governance Influence the Working Capital Management of firms: Evidence from India
by Punam Prasad, Narayanasamy Sivasankaran, Palanisamy Saravanan, Manoharan Kannadhasan
Abstract: The study explores the impact of corporate governance on the working capital management of the Indian firms. The research question was investigated using panel data procedures for a sample of 126 Indian firms listed in the Bombay Stock Exchange for the period 2007-2014. A composite corporate governance score was developed and regressed with the proxies for working capital management. We have used ordinary least square (OLS), random effects and fixed effects panel model. Findings of our study indicate that corporate governance plays a definite role in improving the working capital management. The results indicate that the board efficiency indicators have an effect on the working capital management of the Indian firms. The composite corporate governance score results show that it plays a significant and positive role on working capital liquidity decisions. The results of the study will help the practitioners, investors, and analysts to better understand the relation between effective corporate governance practices and working capital management that enables them to make better and informed decisions. Our findings have implications for board efficiency in the quest for improving working capital management of firms. The study limits the generalization of the findings since the data is pooled across all industries.
Keywords: Corporate Governance; Working Capital Management; Bombay Stock exchanges; Liquidity; Indian firms.
Public pension funds as shareholders and firm performance
by Naufal Alimov
Abstract: Public pension funds are important shareholders around the world. How these funds manage their holdings is of a considerable interest. Are public pension funds likely to vote with their feet, or do they instead try to have an impact when they become dissatisfied with the performance of companies in their portfolios? This study thus tests two competing hypotheses on data from the Swedish pension system restructured at the turn of the millennium: exit, that is, sell underperforming company shares, or direct impact, that is, contribute actively to securing the resignation of underperforming CEOs and Boards of Directors.
The findings indicate that public pension funds tend to sell their shares in underperforming companies, instead of seeking to influence them through corporate governance mechanisms that would increase the likelihood that underperforming CEOs or the Boards of Directors be replaced.
Keywords: Institutional investors; public pension funds; shareholders; firm performance; corporate governance; investment decisions.
Audit Committee Director-Auditor Interlocking, Audit Pricing and Industry Specialization
by Xiaolu Xu
Abstract: This study examines the relation between audit committee director-auditor interlocking and audit fees, as well as the effect of auditor industry specialization on this relation. Using a sample of S&P1500 firms in the United States during the years 2004-2014, we find a positive relation between audit committee director-auditor interlocking and audit fees only for firms that select industry specialist auditors. Firms that select non-industry specialist auditors pay lower audit fees compared to the control firms which do not have either interlocked audit committees or interlocked audit committees through director-auditor links. The findings are robust after controlling for sample selection bias and unobserved omitted variables and using alternative measures of audit committee director-auditor interlocking. Additional analyses show that firms with audit committee director-auditor interlocking are more likely to select industry specialist auditors. These results indicate that audit committees with director-auditor interlocking demand high quality audits and extensive audit coverage due to reputation effects only when the selected auditors have higher reputational cost and more bargaining power.
Keywords: audit committee director-auditor interlocking; audit fees; auditor industry specialization; United States.
Towards A More Accurate Audit Assessment: Can Corporate Social Performance Provide Clues?
by Angie Zaher, Dina Abdelzaher
Abstract: Regulators have been particularly concerned with the increased frequency of auditors deficiencies related to material misstatement as reported in the 2017 (Public Company Accounting Oversight Board) PCAOB Inspection brief. This research examines the relationship between auditors risk of failing to capture material misstatement and the clients social responsibility concerns. The findings indicate that clients with social performance concerns (human rights, environment, and governance) were associated with higher auditors risk assessment, as indicated by higher audit fees. The results are consistent after controlling for various auditor and client variables. Implications of this study support the importance of incorporating social performance of clients in the auditors evaluation since it can provide key insights into the clients underlying risk of future litigations which can arise due to socially irresponsive behaviors. In doing so, we seek to come closer to an accurate client assessment as well as respond to the call of PCAOB for minimizing the deficiencies of the auditing process particular in the area of material misstatement.
Keywords: Audit Quality; Audit Fees; Corporate social performance; client risk; audit effort; Audit risk; material misstatement.
Does Good Governance Lead to Better Financial Performance?
by Pitabas Mohanty, Supriti Mishra
Abstract: Relationship between corporate governance and financial performance of firms has been a hotly debated topic. More particularly, the direction of the relationship, whether better corporate governance leads to better financial performance or the vice versa has been often debated. More often, firms decide whether to have better governance standards within the company and this self-selection gives biased OLS regression results. In this paper, using data for Indian companies, we adjust for this endogeneity and find that corporate governance is related to financial performance. Using the two-stage regression suggested by Heckman (1979), we also find that it is corporate governance that leads to better financial performance and not the other way round. We finally find that the average ROA of poorly-governed firms increases by almost 70% if they become well-governed.
Keywords: Corporate governance; endogeneity; Indian business groups; switching regression.