Dear colleagues,
In our fifth issue, we feature forthcoming articles, working papers, opinion pieces, reports, announcements and an engaging interview with Professor Joseph Fan! Starting with this issue, our newsletter will feature interviews with top corporate governance experts on the latest research on emerging markets. Thank you for your contributions.
Melsa Ararat, Network Coordinator
CG Insights
Dr. Joseph Fan is a finance professor and co-director of the Institute of Economics and Finance at The Chinese University of Hong Kong. He is one of Asia's most frequently cited financial economists and the author of numerous scholarly works on finance and corporate governance.
This is an abbreviated version, please read the full interview.
The most interesting piece on corporate governance I read recently was...
An article in the Economist magazine about in-fighting in the family that controls Macao’s gambling industry as the founder grows old and battles illness. The story highlights the fact that the family succession issue in Asia is extremely challenging and that it must be addressed. More...
Right now, I am working on...
A follow-up to my earlier research about what happens to family-owned companies in Asia following transition to the second generation. The earlier research revealed that in the five years after the company founder turns over the reins to the next generation, companies in the sample declined in value by an average of nearly 60 percent. 60 percent! The new research looks at each of the 250 companies in the sample in depth to understand what went wrong, and whether a shift to a better governance model could have mitigated the dissipation of value. More ...
I think the most relevant CG research topic for emerging markets now is...
Identifying corporate governance models that work in emerging markets. Simply importing international governance standards and forcing emerging market companies to adopt these standards will not be useful. The companies will remain opaque. We need to recognize the unique nature of these companies and their national and cultural contexts, and look at how to modify western governance models to fit them.
The latest development in the field of family business governance research is...
A shift toward quantitative methodologies.
Research on corporate governance in family businesses traditionally was a sort-of sub-science, where storytelling was the main method of analysis. Academics and researchers would use descriptive case studies to look at what went right and what went wrong. More recently, financial economists are teaming up with researchers to try to understand more about what’s going on in family-owned companies—and to find ways to measure this. More rigorous econometrics and larger sample sizes will enable more quantitative research—yield a deeper and more nuanced body of information. More...
Read the full interview
Publications and Working Papers
Do Controlling Shareholders’ Expropriation Incentives Imply a Link between Corporate Governance and Firm Value? Theory and Evidence
Kee-Hong Bae, Jae-Seung Baek, Jun-Koo Kang, and Wei-Lin Liu
In addition to solidifying the common expropriation hypothesis, the authors consider the overlooked explanations of how poor corporate governance decreases firm value. These ignored explanations are the information-based argument, sensitivity to systematic risk argument and the overreaction argument. Using the 1997 Asian financial crisis and the 2001 Argentine crisis, the authors show that the controlling shareholders' incentives to expropriate minority shareholders are indeed a key factor that links corporate governance and firm value during crisis periods.
Corporate Governance, Enforcement, and Firm Value: Evidence from India
Dhammika Dharmapala, Vikramaditya Khanna
Does corporate governance really affect firm value? Dharmapala and Khanna aim to answer this question in the light of India’s corporate governance reforms. Arguing that the reforms effectively created natural experiment settings, the authors use difference-in-difference approach and discontinuity analysis to show that the reforms had substantial positive effects on firm value. Across various specifications, the estimated effect is at least 6%. This effect is large and comparable in magnitude to the effects found in other studies of major corporate governance reforms, especially the ones in the emerging markets.
The Effect of Enforcement on Timely Loss Recognition: Evidence from Insider Trading Laws
Sudarshan Jayaraman
This paper deals with the effects of first-time enforcement of insider trading laws on timely loss recognition (TLR) in various countries, and it is essentially the first paper that extends the Khan and Watts (2009) measure of accounting conservatism to a cross-country setting. Effectiveness of law enforcement is a key determinant of reporting quality. Greater enforcement of insider trading laws increases the value of accounting information in contracts and imposes higher quality in reporting, which causes a significant increase in TLR. No such increase is detected in neighboring non-enforcing countries.
Factors Associated with the Internal Audit Function Having an Impact: Comparisons between Organizations in a Developed and an Emerging Economy
Audrey A. Gramling, Irem Nuhoglu, and David A. Wood
The literature recognizes that internal audit function (IAF) improves financial reporting and governance quality, and increases firm value. However, little is known about the factors associated with these three outcomes and how they differ in emerging markets in comparison to developed countries. Taking the U.S. and Turkey as representatives of these two groups, the authors find that factors positively associated with governance in the U.S are assurance activities, governance work, and competence. In Turkey the significant factors are governance work and competence. The authors raise a number of interesting questions. “For example, in the U.S, assurance activities are positively associated with financial reporting quality and governance quality, but negatively associated with adding value to the organization. What is then the importance of IAF-provided assurance activities? If audit committees perceive that assurance activities add value beyond financial reporting and governance, then audit committees can still include a non-trivial amount of assurance activities in the internal audit plan. Future research examining how the audit committee decides on the components of an audit plan could shed important insights into internal audit activities and the value that IAFs add to their organizations.”
China’s Financial System: Opportunities and Challenges
Franklin Allen, Jun “QJ” Qian, Chenying Zhang, and Mengxin Zhao
The authors provide a comprehensive review of China’s financial system, comparing the country’s financial history and current status to others’. They conclude that the banks, despite their progress in reducing the amount of non-performing loans, must increase their efficiency towards international standards. Moreover, China needs to further develop its stock market and other financial markets. The authors argue that the most successful part of the Chinese financial system is a non-standard sector that consists of alternative financing channels, governance mechanisms, and institutions. This non-standard sector relies on internal finance and alternative governance mechanisms, such as those based on trust, reputation and relationships. Interestingly, alternative institutions may indeed be superior to western-style legal institutions in supporting a fast growing economy like China. This non-standard sector should co-exist with banks and markets in the future in order to continue to support growth.
Opinions and Commentaries
Institutional Investors and Corporate Governance in Brazil
Alexandre Di Miceli da Silveira
This is a PowerPoint presentation that debates the role of institutional investors as relevant shareholders on corporate governance in Brazil. The data provides correlational evidence that the presence of some institutional investors such as largest pension funds and the (Brazilian Development Bank) BNDES as relevant shareholders are in fact associated with worst corporate governance practices, whereas the presence of independent mutual funds as relevant shareholders is associated with better overall governance practices.
An overview of Corporate Governance Reforms in India
Santosh Pande
Pande summarizes Indian corporate governance reforms since 1991 and provides recommendations to amend them. Indian corporate governance reforms are primarily based on the Anglo Saxon model of governance, but they do not provide an adequate solution to India’s corporate governance woes. Additionally, weak enforcement of CG regulations raises serious concerns on whether investors would be able to get timely dispensation of justice in case of corporate governance wrongdoings.
Corporate Governance in India’s Infrastructure Sector: Issues and Perspectives
Umakanth Varottil
Varottil examines the specific issues and concerns pertaining to corporate governance in the infrastructure sector of India. He identifies three key relationships. First, corporate governance framework defines the manner in which managers of infrastructure companies can be incentivized to demonstrate optimal performance so as to benefit shareholders and lenders. Second, the infrastructure sector in India is vulnerable to the ill-effects of related party transactions that put external or minority shareholders at a disadvantage compared to the insider shareholders or promoters. The imposition of checks and balances that monitor the impact of related party transactions to ensure fairness is required. Third, appropriate corporate governance mechanisms will minimize the adverse impact of infrastructure activity on stakeholders outside the industry, and also act as a driving force in the fight against corruption and in otherwise advancing public interest.
Corporate Social Responsibility in Developing Countries: the Case of Most Successful Companies in Romania and Ghana
J.K Obeng-Nyarko, Georgiana F. Grigore
This article examines how the most successful companies in Romania and Ghana carry out corporate social responsibility and the way CSR is communicated through the corporate websites and CSR/annual reports. The findings indicate that corporate social responsibility is still in the infant stage in Romania and in Ghana, and that approaches to CSR vary significantly among industries.
Surveys and Reports
The Synthesis Report of 3rd International Conference on Corporate Governance in Emerging Marketsis now complete. The conference took place in Seoul, Korea, in May 2011. The report summarizes the findings including how the institutions can affect firm valuation, influence the extent of corporate governance problems, and affect firm performance and financial structure. More information such as daily summaries and keynote speeches can also be found in this report.
Events and Calls for Papers
The submissions deadline for the ICFR - Financial Times Research Prize 2011is December 20, 2011. The title of this year’s prize is “What does good regulation look like?” Contributions should be up to a maximum of 3,000 words in length. The overall winner will be awarded US $7,500 with two runners up also receiving prizes of US $1,500.
Corporate Governance in CEE, Russia & Turkeywill be held on January 31, 2012 and February 1, 2012 at Warsaw Stock Exchange, Poland.
The Gamma Foundation will hold a workshop on the future of sustainable finance in Zurich, Switzerland, on February 1, 2012. See the call for proposals and the topics of interest.
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.
The Academy of Business in Society and INSEAD call for papers drawing on the proceedings of the 10th EABIS Annual Colloquium, ‘The Role of Business in Development’, held on October 26-28, 2011 in Fontainebleau. All submissions need to be sent in Word format to Joris Lenssen (joris.lenssen@eabis.org) by January 16, 2012.
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
Phone: +90-216-483-9626
E-mail: ihsancanayaz@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.