Min: Chinese State Controlling, Institutional Participation and Real Earnings Management

Abstract:

Early studies have showed that institutional investors help improve corporate governance by reducing the level of earnings management. Based on recent new measurement of earnings management, this article further studies whether institutional investors can help curb earnings management through real activities manipulation. The results show levels of real earnings management in Chinese state-owned companies are significantly higher than those in non-state-owned companies. Thus it indicates institutional investors have inhibitory effect on real earnings management, but their roles in state-owned companies have been restricted to a certain extent. The conclusions of this research have meaningful instruction to corporate  governance and reform of Chinese state-owned enterprises as well as reform of Chinese property rights system.

Available for download here.

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Han: Study on Correlation between CSR Performance and Financial Performance

Abstract:

With the development of economic globalization, corporate social responsibility (CSR) is getting more and more attention. However, there are still some differences on the relationship between CSR performance and corporate financial performance. To explore this problem, we construct the multiple regression model containing CSR indicators and financial performance indicators, and collect 120 categories of data from 60 sample companies in 2013, to carry out descriptive statistical analysis. The empirical results show that, CSR and financial performance are positively correlated.

Available for download here.

Allen, Qian, Shan & Zhu: Explaining the Disconnection between China’s Economic Growth and Stock Market Performance

Abstract:

The size of the Chinese stock market is the second largest in the world. The poor performance of this market over the period 2000-2013, relative to developed and large emerging markets as well as unlisted firms in China, has been striking. This is despite the fact that the Chinese economy, the largest in the world in PPP terms, has been the fastest growing economy globally for the past three decades. We examine reasons for the disconnection between economic growth and stock market performance. Problematic IPO and delisting processes exacerbate the adverse selection of firms into the market. With much higher levels of investment compared to listed firms from the US, Japan, India and Brazil, Chinese firms generate lower net cash flows, implying low investment efficiency. Lower cash flows are associated with more related-party transactions for Chinese firms, indicating deficiencies in corporate governance.

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Cox, Ferri, Honigsberg & Thomas: Are Companies Impermissibly Bundling Proposals for Shareholder Votes?

Abstract:

The integrity of shareholder voting is critical to the legitimacy of corporate law. To help protect investors’ rights, since 1992, SEC rules clearly prohibit corporate management from distorting shareholders’ choices by the artifice of joining in a single resolution multiple items. SEC rules require corporate management to make individual management proposals on “separate” items.

In this paper, we provide the first comprehensive evaluation of the SEC bundling rules. We begin with a careful dissection of the rules themselves as well as the courts’ interpretation of them. We provide an analysis of the contrasting, less vigorous, interpretation of the rule by the SEC itself. We find that while the courts have carefully developed several useful approaches to the rules scope and proper application, the SEC’s efforts have been in stark contrast with the rules’ mission. In fact, we find that the most recent SEC interpretive guidance has undercut the effectiveness of the existing rules and created unnecessary ambiguity about their proper application.

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Lupu: The Indirect Relation between Corporate Governance and Financial Stability

Abstract:

In the wake of last crises, there is an increased awareness regarding the role of a sound corporate governance framework for enhancing the financial stability. We believe, however, that the relationship between corporate governance and financial stability is an indirect one; companies are not obliged to pursue financial stability unless specific legislation or regulations require it. Interestingly, having such targets, large firms, especially those operating in the financial system, can lead to systemic risks, supporting financial contagion. Classical problems of corporate governance such as top management compensation, board composition, and independence of the director, agent theory or the correct valuation are problems envisaged to be analyzed when assessing how they affect financial stability.

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Lee: Hybrid Corporate Governance – The Case of Asia

ABSTRACT:

Asia’s economy has undergone a number of changes in corporate ownership and financial structure in the last several years. This paper addresses the evolving patterns of corporate governance among Asian countries since the crisis in 1997. Based on institutional theory, the discussion in this article is intended to illuminate in particular the notion of hybridization of institutional change in the form of corporate governance. The paper shows how Asian economies are reshaping their corporate governance features, leading to a diversity of corporate governance forms. Our empirical analysis suggest that the current Asian model can be described as being in a ‘hybrid model,’ with a mixture of new market-oriented elements and old practices of the Asian model.

 

Available for download here.

Çelik, Demirtaş & Isaksson: Corporate Bonds, Bondholders and Corporate Governance

ABSTRACT:

Worldwide, primary corporate bond markets have become an increasingly important source of financing for non-financial companies. This trend is coupled with a relative decrease in traditional bank lending to non-financial companies and low levels of bond interest rates. Just as shareholders, bondholders can play an important role in corporate governance. They can use both exit and voice. This report provides a comprehensive global overview of all corporate bond issues since 2000 and experiences of governance engagement by bondholders. The report builds on issue level data for more than 100,000 individual bond issues in 108 jurisdictions between 2000 and 2013. Data is provided with respect to the type of issues and numerous bond characteristics, such as country of origin, investment grade, maturity, covenants and conditions for redemption. The report also analyses trends in secondary bond markets, including market liquidity, the role of market makers and the relatively slow introduction of electronic trading systems. In order to analyse trends over time with respect to governance, we provide detailed time series data on the use and relative importance of 15 different categories of covenants. By constructing an overall “covenant protection index” we suggest that bond investors in their search for yield have overall traded governance rights for higher expected returns. This shift also seems to be associated with higher risk-taking. We also conclude that the degree of governance engagement primarily is linked to the business model of the bond investor. We end the report with a discussion about the scope for institutional changes that may build a larger community of truly informed and motivated bond investors.

 

Available for download here.

Pharoah & Walker: The Values of Corporate Giving

ABSTRACT:

People and governments are increasingly looking to the corporate sector to go well beyond the profits bottom line. Companies are expected to make both business and wider social impact, and, if they choose to get involved, can make a huge difference to local and global communities. Leading companies increasingly regard the dimensions of responsible business in a holistic and integrated way across their whole corporate value chain and external environment. In a speech to Business in the Community in February 2012, Prime Minister David Cameron claimed that ‘Business is the most powerful force for social progress the world has ever known’. In terms of means and power he is correct. Today some of the larger multinationals have a balance sheet larger than the economy of some countries. It has been claimed that 25 US ‘mega corporations’ have revenues which surpass the Gross Domestic Product of entire countries, not always small countries. (Trivett, 2011) However, there is also a growing school of thought which claims that the balance of power will increasingly be influenced by companies’ multiple stakeholders beyond the company boundaries, in individual consumers, communities and wider society. With growing global concern about the wealth gap and the challenges of the environment, we increasingly need to understand what motivates companies to engage in corporate community investment (CCI) or social responsibility, and develop responsible business, and what influences their involvement. Are they experienced as a net cost or benefit to the company? Are they driven by altruism or self-interest? Is there anything special about companies which get involved in them? Are there crucial success factors for prompting companies to give? Is our understanding of social responsibility changing, and are common values across businesses and communities an increasingly important influence? For the voluntary and community sector, key issues are how companies get information, how they identify their roles in investing in healthy voluntary organisations and communities and what are the key trends in corporate giving? This report aims to provide an up-to-date picture of corporate giving in the UK. It is in two parts. The first provides a brief overview of the main themes and findings of existing research on factors related to corporate giving and social and business responsibility, and explores the idea of value through some corporate examples. The second part provides an update of key statistics on company giving.

Kang: Optimized Theft – Why Some Controlling Shareholders “Generously” Expropriate from Minority Shareholders

ABSTRACT:

Although controlling shareholder agency problems have been well studied so far, many questions still remain unanswered.  In particular, an important puzzle in a bad-law jurisdiction is: why some controlling shareholders (“roving controllers”) loot the entire corporate assets at once, and why others (“stationary controllers”) siphon a part of corporate assets on a continuous basis.  To solve this conundrum, this Article provides analytical frameworks exploring the behaviors and motivations of controlling shareholders.  To begin with, I reinterpret Olson’s political theory of “banditry” in the context of corporate governance in developing countries.  Based on a new taxonomy of controlling shareholders (“roving controllers” and “stationary controllers”), I examine under what circumstances a controlling shareholder chooses to be roving or stationary, and why economically rational controlling shareholders with a long time horizon voluntarily abstain from looting minority shareholders.  In addition, agreeing with weaknesses of family corporations, I explain that controlling “family” shareholders tend to be more stationary, and thus improve the quality of corporate governance.  Moreover, I explain that a controlling shareholder’s non-pecuniary benefits (i.e., psychic value of corporate insiders when running business) can potentially lower the level of expropriation from public shareholders.

 

Available for download here.

Cheung, Rau, Stouraitis & Tan: When do controlling shareholders expropriate? Controlling shareholder performance and cash transfer tunneling from listed firms in China

ABSTRACT:

Studies on the expropriation of minority shareholders of publicly listed firms by their controlling shareholders focus on the publicly listed firm and treat the controlling shareholder as a black box, without providing any direct evidence of the incentives of controlling shareholders to expropriate at the micro level. We analyze pairs of Chinese publicly listed firms and their non-listed controlling shareholders or parents, and link the extent of expropriation of the publicly listed firm to the performance of its controlling shareholder. We document that publicly listed firms with underperforming controlling shareholders extend more intra-group loans to their parents. The market gives a lower valuation to the receivables generated by these loans, when the firm’s controlling shareholder is underperforming, suggesting a higher probability of default. More generally, we document a positive relationship between the market value of one additional dollar of cash on the listed firm’s balance sheet and the performance of its controlling shareholder. These findings help us understand the incentives of controlling shareholders, namely when and why the controlling shareholders expropriate, and establish the incentives of the controlling shareholder as a major determinant of the expropriation of listed firms in China.

Available for download here.