Dear Colleagues,
To open this issue, Kee-Hong Bae from York University discusses whether or not opening financial markets to foreign institutional investments leads to improved governance. Further in Publications, Choi et al. (2012) considers the links between institutional/foreign ownership and technological innovation, and Watson et al. (2012) examines the benefits of foreign ownership and control structures in New Zealand. Furthermore, we feature a methodological governance article from the perspective of management science, and an empirical article on independent directors from the perspective of legal studies. Lastly, as always, you can find several reports, news and events.
Melsa Ararat, Network Coordinator
Do Foreign Investors Improve Corporate Governance in Emerging Markets?
Interview with Kee-Hong Bae, a professor of finance at the York University, Canada. This is an abbreviated version, read the full interview here.
The most interesting piece on corporate governance I read recently was…
A book called Saving Capitalism from the Capitalists by Raghuram G. Rajan and Luigi Zingales. The authors argue that in developing countries, those who would benefit most from the financial markets don’t have access to them, because a small group of the elite who are in power limit this access to protect their own entrenched interests. Rajan and Zingales posit a solution. They propose an “interest group” theory of financial development. This theory predicts that this group’s opposition to financial market development will be weaker when an economy allows both cross-border trade and capital flows, because it will be in their interests to do so. If this is true, one way to solve governance problems in emerging markets is to promote globalization, easing the flow of cross-border trade and capital.
Right now, I am working on…
A paper to be published in the Journal of Financial Economics called "Do Controlling Shareholders' Expropriation Incentives Imply a Link between Corporate Governance and Firm Value? Theory and Evidence,” co-authored by Jaeseung Baek, Jun-Koo Kang, and Wei-Lin Liu. The paper shows that the main channel through which governance affects firm value is the ability of controlling families to expropriate outsiders’ investments in the company. More ...
I think the most relevant CG research topic for emerging markets now is…
Whether or not opening financial markets to foreign institutional investments does, in fact, lead to improved governance and better functioning markets. There is not a lot of empirical evidence to support either view, so we need more research...
The latest development in the field of research on how foreign capital flows relate to the corporate governance environment in emerging markets is…
The empirical evidence so far indicates that better-governed firms tend to attract more foreign capital. So, the implication for emerging market companies is that if you want to attract foreign capital, you need to improve your governance.
Research
Does ownership Structure Matter for Firm Technological Innovation Performance? The Case of Korean Firms
Suk Bong Choi, Byung Il Park, and Paul Hong
Choi, Park and Hong find that institutional and foreign ownership does have a positive effect on technological innovation performance. Successful technological catch-up and innovation in the emerging markets not only require policies for upgrading technology capabilities, but also a suitable ownership structure that favors innovation.
Corporate Governance and Stock Returns in Asia
Roy Kouwenberg, Roelof Salomons, and Pipat Thontirawong
The authors explore whether governance-based trading strategies produced abnormal returns in China, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Thailand and Taiwan between 2001 and 2010. They find that a poor governance portfolio had a higher market beta, higher expected return, and higher realized return compared to a good governance portfolio over the last decade. Nevertheless, the authors also find no abnormal returns to governance after adjusting for risk and country effects.
Are Firm-and Country-Specific Governance Substitutes? Evidence from Financial Contracts in Emerging Markets
Bill Francis, Iftekhar Hasan, and Liang Song
The authors explore the association between corporate governance and bank loan contracting terms in emerging markets, and investigate how this relationship changes across countries. The authors find that borrowers with stronger corporate governance obtain favorable contracting terms with respect to loan amount, maturity, collateral requirements, spread, and firm-level and country-level corporate governance are substitutes in writing and enforcing financial contracts. From a policymaker’s perspective, it is almost impossible to reform the legal system in short horizon. Alternatively, firms can improve their own corporate governance, and therefore quickly improve their financing environment. “Thus, it is very important to know the role of the borrower’s corporate governance on the bank loan contracting process and how this relation is moderated by the existing legal environment. This will help policy-makers to take measures to facilitate the financing markets.”
Challenges in the Measuring of Comparative Corporate Governance: A Review of the Main Indices
Ruth V. Aguilera, Kurt A. Desender
Aguilera and Desender find three methodological issues in measurement and analysis of corporate governance. First, governance might have only an indirect affect on firm performance. Second, the literature shouldn’t rule out the possibility that the causality might be in the opposite direction. Namely, firm performance may actually cause the adoption of certain governance practices. Third, there are important issues in measuring firms’ financial performance. Accounting performance measures are noisy and market-based measures may generate endogeneity issues. For future research, the authors urge scholars to analyze governance practices involving potential conflicts of interest between shareholders and management, and the effects of such conflicts on firms’ strategic decisions. They also advise academics to use Fuzzy Set/Qualitative Comparative Analysis (Fs/QCA) over traditional regression analysis.
Evidence of Ownership and Control in the Top Fifty NZX Non-Financial Listed Corporations
Carolina Giles, Susan Watson
Giles and Watson examine the ownership and control structures of the top New Zealand Exchange companies, and show how decisive foreign control and interlocking directorships have been on the growth of the Exchange. Briefly, the ownership of equity by overseas institutions has increased significantly over the last decades due to economic deregulations in NZX policies and changes in the NZ Securities Commission standards. Keeping capital flight issues apart, this increase has significantly benefited the NZX companies.
The Effect of Nonaudit Fees and Family Owned Businesses on Earnings Management in the Indian Industry
Renu Desai , Vikram Desai ,Vishal Munsif, Meghna Singhvi
Following the Sarbanes-Oxley Act, the Securities and Exchange Board of India (SEBI) amended Indian Companies Act by restricting the audit firms from accepting certain non-attest services that may compromise the auditor’s independence. In light of these amendments the authors investigate the relationship between auditor fees for non-audit services and earnings management, and the relationship between ownership structure and earnings management. They find a positive relationship between non-audit fees and the magnitude of absolute discretionary accruals, and a positive association between family owned firms and the magnitude of discretionary accruals.
A Social Disclosure Index for Assessing Social Programs in Brazilian Listed Firms
Rodrigo de S. Goncalves, Otavio R. de Medeiros, Elionor F. J. Weffort, and Jorge K. Niyama
The authors develop a social disclosure index that aims to measure the level of social disclosure of external social programs implemented between 2005 and 2009 by the firms listed in Brazilian Stock Exchange. They explain that factors such as size, industry sector, internationalization, auditing and listing on social responsible investment funds primarily affect the level of social disclosure. The social disclosure index can benefit analysts and investors who evaluate Brazilian firms, and it can also be used by the financial market regulators.
Opinion and Commentary
Deconstructing Independent Directors
María Gutiérrez, Maribel Sáez
The authors argue that board independence in companies with concentrated ownership structures may lead to several problems that have been overlooked by legislators and most of the academic literature. They propose two types of reform. First, the function of the independent directors must be redefined. Independents should prevent minority expropriation at the hands of the block-holders. Second, the presence of independents on the board should be considered as “a complement of a strong enough regulation and enforcement of disputes between controlling and minority shareholders”. In short, independents should act as gatekeepers for the regulator and as surrogates of the minority.
Implementing IFRS and Corporate Governance in Greece: The case of Proton Bank
Themistokles Lazarides
Since the introduction of corporate governance in 2002 and International Financial Reporting Standards (IFRS) in 2003, the business environment in Greece has changed dramatically. Nonetheless, Lazarides argues that these Anglo-Saxon initiatives were not functional, because they weren’t appropriate for the social, political, legal and economic business environment of Greece. Using the Proton bank scandal, which cost the Greek taxpayers 1 Billion Euros, Lazarides explains the governance inefficiencies in Greece, and highlights the fallacies of the policy makers.
Reports
This is a Synthesis Report of March 2012 ICFR Conference on Corporate Governance in Emerging Markets.
In summary, global governance themes are essential but specific processes and practices should be tailored to each region/jurisdiction, and they should evolve in line with the business environments. “Does good governance lead to better performance and enhanced value for a corporation? The answer is a definite ‘maybe’. The by-products of good governance will lead to a corporation raising the quality of management, improving decision making and gaining a competitive edge. In essence good governance leads to good business.” A list of conference papers and presentations can be found online here.
Sustainability Matters: Why and How Corporate Boards Should Become Involved
Matteo Tonello
This is a comprehensive research report by the Conference Board on designing, endorsing, and overseeing the implementation of corporate sustainability programs. It provides boards of directors a clear guidance on how to approach the task of overseeing a sustainability strategy. Briefly, it explains why business leaders need to fully understand the concept of sustainability, how the case for the competitive advantage of having a sustainability strategy can be made, and how sustainability strategy can generate value for firms.
Value Creation & Corporate Governance in Emerging Markets Private Equity
Privcap, Ernst & Young
This is a Privcap Briefing that summarizes the views on the association between value creation and governance. “Private equity, with its long-term investment horizons, embrace of risk and volatility, and focus on adding value, is especially well suited for growing businesses in the emerging markets, where value creation requires not only capital, but expertise and time.” Governance is the key value driver for emerging markets private equity. Questions such as: “Who is on the board?”, “How often does it meet?”, “Who controls the bank accounts?”, and “How is money distributed?” are critical. Indeed, control of cash is the very first issue that private equity sponsors must address with their new partners.
Events and Calls for Papers
Third International Conference on Corporate Governance in Emerging Markets
We have received strong hosting proposals from every region of the world, and it was a very difficult choice to make. In the end we felt that the joint proposal by the the Indian School of Business and the Indira Gandhi Institute of Development Research offered the strongest combination of excellent facilities, financial and organizational commitment, reputation for academic excellence, and accessibility for the network members. The conference will take place at Indian School of Business at Hyderabad. Tentative dates are August 22-25, 2013. The call for papers will be published on GCGF Website and will be disseminated to the the Network by e-mail.
Call for papers: Graduate Student Conference: Institutional Investor and Corporate Governance for Sustainability will be held on May 18, 2012 at the School of Geography and the Environment, University of Oxford.
Key Corporate Governance Issues in Emerging Markets - Theory and Practical Execution. June 11-12, 2012, Leipzig, Germany. The conference will bring together senior representatives from academia, developing institutions, companies and investors to provide a future-oriented assessment of the governance situations in three important regions of the world - Africa, Asia and Southern Europe.
ICGN’s Annual Conference will be held on June 25-27, 2012 in Rio de Jeneiro. It is hosted by the Brazilian Institute of Corporate Governance.
Airlangga Accounting International Conference (AAIC) will be held in Bali International Convention Center (BICC), Nusa Dua, Indonesia on June 27-29, 2012. The main theme of the conference is “Governance, Competitive Advantages, and Accounting Issues in Emerging Countries.”
Comparing Regulatory Reforms and Market Practices will be held in Tokyo on July 6th, 2012.
Call For Papers: European Accounting Review (EAR) Special Section - The Influence of Political Forces on Financial Reporting and Capital Market Activity. The deadline for submission is October 31, 2012.
Fourth Joint BIS/ECB/World Bank Public Investors Conference will take place at the World Bank, Washington DC, on December 3-4, 2012. Papers should be submitted (extended abstracts will also be considered) in electronic format by August 31, 2012. Final versions of the selected papers are due by end-September, 2012. Submissions can be made to Tamara Tabatadze by email: ttabatadze@worldbank.org
Harvard Business School, in collaboration with the Journal of Accounting & Economics, is organizing Conference on Research in Corporate Accountability Reporting on January 18, 2013.
From Our Coordinator
We encourage all of our members to notify us regarding their ongoing research or the events or conferences they want to share with the Network. We also welcome other relevant information and your feedback.
Please contact: Mehmet Ihsan Canayaz at ihsancanayaz@sabanciuniv.edu or Yasemin Şeyda Erol at yaseminerol@sabanciuniv.edu
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Emerging Markets Corporate Governance Research Network is supported by the Global Corporate Governance Forum, the leading knowledge and capacity building platform dedicated to corporate governance reform in emerging markets and developing countries. The Forum is a multi-donor trust fund facility located within the IFC, co-founded in 1999 by the World Bank and the Organisation for Economic Cooperation and Development (OECD). For more information about the EMCGN's activities, contact melsaararat@sabanciuniv.edu.