Newsletter

Emerging Markets Corporate Governance Research Network (EMCGN) Newsletter, June 2012

July 11, 2012

In our 8th issue, you will find the latest research papers, opinions pieces, news and upcoming events. Interview with Yishay Yafeh focuses on the impact and influence of family-owned business groups. We feature Jayati and Subrata Sarka’s new book on current state of corporate governance in India. We spotlight articles on ownership in Latin American firms, CEO compensation in China, and earnings management across emerging markets. Prof. Joseph Fan comments in South China Morning Post on the succession plans announced recently by Li Ka-shing. And, as always, we present stimulating reports, news and events. 

CG Insights: When and How to Control the Influence of Family-Owned Business Groups?

Yishay Yafeh is an associate professor at  Hebrew University’s School of Business Administration.

The most interesting piece on corporate governance I read recently was….

A paper by Karl Lins, Paolo Volpin and Hans Wagner on how families and other groups that hold large blocks of company stock respond in times of financial crisis. This study of companies in 35 countries with large family-held blocks suggests that some blockholders and some firms with concentrated ownership actually fare rather well in crisis, comparatively speaking. This has some intriguing corporate governance implications, and worth a deeper look. More…

Right now, I am working on…

A study of American business groups during the Great Depression in the 1930s. We know they existed back then in a pyramid-type form somewhat similar to business groups prevalent in emerging markets today.  But during the 1930s and 1940s they all disappeared or evolved into other forms.  There is very little research that tracks the reasons for this. More…

I think the most relevant CG research topic for emerging markets now is…

How to regulate large, strong family-owned business groups. The existing literature suggests that these family-owned groups can contribute significantly to economic growth in countries that have low levels of economic development. (…) Yet, once the country has moved beyond the early development stage, there must be more mechanisms in place to limit their influence.  More…

One way to restrict the conflict between controlling and minority shareholders is to….  

Assign a corporate governance role to institutional investors.  In my opinion, the only way to empower institutional investors and help them play a role in corporate governance when ownership is dominated by a large block is by making sure they are truly unbiased. More…

Research Papers

Accrual-Based and Real Earnings Management: An International Comparison for Investor Protection
Masahiro Enomoto, Fumihiko Kimura, and Tomoyasu Yamaguchi
The paper examines the differences between accrual-based and real earnings management across 38 countries between 1991 and 2010. The authors show that strong investor protection decreases accrual-based earnings management but increases real earnings management. These results are robust to audit quality. Real earnings management is seen as a “departure from normal operational practices” in the literature, and efforts to meet or beat analyst forecasts by using real earnings management can have a negative effect on a firm’s future ROA and stock price. In light of these earlier findings, the authors argue that strong investor protection may increase the risk of firm value reduction through real earnings management.

Corporate Ownership in Latin American Firms: A Comparative Analysis of Dual-Class Shares
Luiz Ricardo Kabbach de Castro, Rafel Crespí-Cladera, and Ruth V. Aguilera
The authors investigate the relationship between largest shareholder characteristics and voting rights in Latin American firms. They ask two crucial questions: 1- Who are the major owners of voting rights in Latin America? 2- Do these large owners use the dual-class mechanism to enhance their voting power on firms? They find that the type and origin of the largest shareholder, and firm-level and country-level characteristics are key determinants to explain the decision to separate voting from cash-flow rights.

CEO Compensation and Corporate Governance in China
Martin J. Conyon and Lerong He
Using data on publicly traded firms between 2000 and 2010, the authors show that Chinese CEO compensation is positively related to both stock market and accounting performance. CEO pay is made up mainly of salaries and bonuses, and it is higher in firms with more growth opportunities, compensation committees, and combined CEO and chair. The authors also document the substantial changes in Chinese corporate governance over the past decade. “The Chinese State is less likely to be the ultimate owner of public firms. Ownership concentration has declined, and internal firm governance has improved significantly as evidenced by a greater fraction of outsiders on the board and the adoption of compensation committees.”

Does the Relationship between the Controlling Shareholder and Other Large Shareholders Affect the Firm Value?
Minying Cheng, Bingxuan Lin, and Minghai Wei
The authors find that firm value in Chinese firms decreases when non-controlling large shareholders have prior relationships with controlling shareholders. Ownership stakes and board representation by relational non-controlling large shareholders also decrease firm value. Future studies should consider the identities of non-controlling shareholders while investigating the effects of multiple large shareholders on corporate governance or firm value.

Executive Compensation, Earnings Management and Over Investment in Malaysia
Chu Ei Yet and Song Saw Imm
Using a dataset of 196 Malaysian public listed firms, the authors investigate the inter-relationship between executive compensation, earnings management and over investment. They find a positive relationship between executive compensation and over-investment. For each percent of over investment, one percent increase in share prices increases 23 percent of executive directors’ equity value. There is also evidence of positive relationship between earnings management and overinvestment as one percent increase in over investment explains 12 percent of earnings management.

State Control, Access to Capital, and Firm Performance
Oliver Zhen Li, Xijia Su, and Zhifeng Yang
Li, Su and Yang investigate the effects of state control on capital allocation and investment in China. They find that state firms are more likely to obtain government approval to conduct seasoned equity offerings than non-state firms. Non-state firms are more sensitive to subsequent investment and stock performance to regulatory decisions on stock issuances than state firms. Their results suggest that state control of capital access distorts resource allocation and impedes the growth of non-state firms.

The Effects of Outside Board on Firm Value in the Emerging Market from the Perspective of Information Transaction Costs
Sung Wook Joh and Jin-Young Jung
Using data on publicly listed Korean firms between 1999 and 2006, Joh and Jung investigate whether the problem of high information asymmetry hampers the positive impacts of board independence on firm value. The authors find that independent directors cause higher corporate value when the firm has lower information transaction costs. The monitoring role of independent directors is limited when transferring firm-specific information is costly. As a policy implication, the authors suggest that regulatory frameworks should avoid imposing one-size-fits-all requirements on board structure and policy makers and researchers should pay special attention to the effect of mandated reforms on small, poorly governed firms with high information transaction costs.

Opinion Pieces

An Australian Perspective on a Global Phenomenon: Initiatives to Place Women on Corporate Boards of Directors
Douglas M. Branson
In light of the rising number of female board members, particularly in Australia, this article reviews the recent developments in female representation on corporate boards of directors across many counties. The author touches upon recent developments such as the “comply or explain” diversity disclosure requirement by Australian Stock Exchange and the mentoring/sponsorship program designed to obtain more board seats for women by Australian Institute of Company Directors.

Corporate Governance in India
Jayati Sarkar and Subrata Sarkar
The authors discuss the effectiveness and applicability of corporate governance mechanisms in the context of the institutional structure within which Indian companies operate. It provides a comprehensive coverage of the governance mechanisms of Indian corporations stressing the latest international research done in the area.

The Business of Succession
Joseph Fan
Prof. Joseph Fan comments on the succession plans announced recently by Li Ka-shing, Asia’s richest man and the chairman of Cheung Kong Holding. Fan argues that Li’s announcement is the first time that a Hong Kong tycoon has publicly announced a clear succession and wealth- splitting plan. In his earlier research Fan found that a generational change in ownership and control causes around 60% market-adjusted decrease in companies’ share prices during the five- year “change” period.

Reports

Development and Regulation of Institutional Investors in Emerging Markets
IOSCO
Emerging Markets Committee of International Organization of Securities Commission states that policy makers in the emerging markets should give more priority to developing a stronger institutional investor base for deepening the capital markets and increasing demand for professional asset management services. Policy makers should construct a multi-pillar pension system, create strong market surveillance infrastructure, ensure more legal protection of ownership rights, and promote proper governance standards.

Exchanges Listing Over 4,600 Companies Commit to Promoting Sustainability
Sustainable Stock Exchanges Initiative
Istanbul, Sao Paulo, Johannesburg, Cairo and Nasdaq announce a commitment to promote long-term, sustainable investment in their markets on the eve of the United Nations Conference on Sustainable Development (Rio+20).

Events and Calls for Papers

Financial Regulation in Asia conference will be held in London on September 19, 2012. It is organized by Asia House, and it will explore the range of capital controls instituted in Asian economies.

To commemorate the 20th anniversary of Corporate Governance: An International Review (CGIR), Cambridge Judge Business School will be co-hosting Conference on National Governance Bundles. The conference will be held in Judge Business School on September 28-29, 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 submissions is October 31, 2012.

International Conference on Corporate Governance and Business Management will be held in Paris on November 28-29, 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. The conference will be held at Harvard Business School on January 18, 2013. Hermes Fund Managers have also provided a prize fund for the best papers presented.

The Corporate Governance: An International Review is seeking paper submissions for a special issue conference on the “Global Perspectives on Entrepreneurship: Public and Corporate Governance.”  The conference will be held on April 25-26, 2013 at the Schulich School of Business, York University, Canada.

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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The 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. For more information about the EMCGN's activities, go to http://www.gcgf.org/research  or contact melsaararat@sabanciuniv.edu.