Empirical

This study examines US firms' share repurchases during 1997–2006 to determine what factors are associated with firms that use share repurchases to manage earnings per share (EPS). Specifically, we analyze firm and governance characteristics associated with firms that engage in share repurchases that increase annual EPS by at least one cent in a given year and that had EPS less than or equal to annual EPS forecast prior to the share repurchase.

We find that growth firms are less likely to use share repurchases to increase EPS for earnings management purposes. We also provide evidence that firms with a more independent board, a separation of the roles of CEO and chairman of the board, or a low entrenchment index (E-Index) are less likely to engage in earnings management through share repurchases. Finally, we find evidence that high CEO share ownership restrains managers from using share repurchases as a mechanism to manage EPS.

Our empirical results support some of the best practices advocated by various shareholders groups regarding corporate governance. Also, strong shareholder rights can mitigate incentives to manage earnings, highlighting the importance of corporate governance mechanisms/provisions in ensuring the integrity of the financial reporting system.

This research is important to investors in the face of the growing popularity of share repurchases. In particular, our study suggests strong corporate governance, strong shareholder rights, and high percentage CEO stock ownership discourages repurchase-based earnings management.

Empirical

This study examines whether director independence, reputation, and financial expertise are related to management earnings forecast (MEF) activity. In particular, we examine whether such a relationship is moderated by firms’ growth options.

Using Australian archival data for 1,928 firm-years between 1999 and 2006, we find several board characteristics have a significant positive relationship with: (1) the likelihood of firms issuing MEFs; (2) their specificity; (3) their accuracy; and (4) a negative relationship with their bias. For (1), (2), and (3) we show that these relationships are accentuated for firms with high growth options.

While the theory of voluntary disclosure suggests firms will disclose information that is favorable to them or their managers, well-governed firms issue informative MEFs that potentially reduce information asymmetries in capital markets. We extend the prior literature by showing that such a relation is enhanced in the presence of information asymmetry and moral hazard associated with growth options.

Our results have strategic implications for nomination committees by showing that independent directors and those with strong reputations and financial expertise enhance the governance of high growth firms. We also inform the regulatory debate by showing that good corporate governance enhancing disclosure quality is context-specific – it is not a case of “one size fits all”.

Empirical

This paper investigates the relationship between corporate governance (CG) and corporate social responsibility (CSR) and, consequently, examines whether CG can positively moderate the association between corporate financial performance (CFP) and CSR.

Using a sample of large listed corporations from 2002 to 2009, we find that, on average, better-governed corporations tend to pursue a more socially responsible agenda through increased CSR practices. We also find that a combination of CSR and CG practices has a stronger positive effect on CFP than CSR alone, implying that CG positively influences the CFP-CSR relationship. Our results are robust to controlling for different types of endogeneities, as well as alternative CFP, CG and CSR proxies.

The paper generally contributes to the literature on CG, CSR, and CFP. Specifically, we make two main new contributions to the extant literature by drawing on new insights from an overarching neo-institutional framework. First, we show why and how better-governed corporations are more likely to pursue a more socially responsible agenda. Second, we provide evidence on why and how CG might strengthen the link between CFP and CSR.

Our findings have important implications for corporate regulators and policy-makers. Since our evidence suggests that better-governed corporations are more likely to be more socially responsible with a consequential positive effect on CFP, it provides corporate regulators, managers and policy-makers with a new impetus to develop a more explicit agenda of jointly pursuing CG and CSR reforms, instead of merely considering CSR as a peripheral component of CG or as an independent corporate activity.

Perspective

Relation-based governance has helped China to achieve rapid economic growth in its early stage; however, continuing to rely on it may hinder China's further development. The research question is: given China's cultural heritage and other institutional settings, will China be able to transition from relation-based to rule-based governance?

I discuss this question based on theoretical and empirical evidence and conclude that, first, from cost/benefit and social justice perspectives, China must complete the transition; second, cultural heritage is not the main obstacle to the transition, for the main obstacle is the powerful political forces that have been deeply entrenched in and benefited from the relation-based system.

I distinguish between the governance environment at the national level and the governance choice at the organizational and individual levels. The governance environment – the set of dominant political, economic, social, and cultural institutions – facilitates and constrains the choice of the mode of governance (e.g., rule-based versus relation-based).

Chinese government officials must realize the inevitability of the transition and the dire consequences of not completing it and take initiative to pursue the transition peacefully. For businesses, they must realize that the relation-based way may be in decline and must be prepared to embrace the rule-based way.

Empirical

We explore how the combinations of firm-level corporate governance (CG) practices embedded in different national governance systems lead to high firm performance.

Using fuzzy set/qualitative comparative analysis, we uncover a variety of findings. First, we show that within each of the stylized national CG models, there are multiple bundles of firm-level governance practices leading to high firm performance (i.e., equifinality). Second, we provide evidence of complementarity as well as functional equivalence between CG practices. Finally, we demonstrate that there can be heterogeneity (“differences in kind”) in firm governance practices within each stylized model of CG.

We build on the configurational and complementarity-based approaches to make the following theoretical claims. First, governance practices within firm bundles do not always relate to each other in a monotonic and cumulative fashion as this entails higher costs and possibly over-governance. Second, practices in bundles do not need to be aligned toward the insider or the outsider model (“similar in kind”). We argue that non-aligned practices can also be complementary, creating hybrid governance forms. Third, we predict functional equivalence across bundles of CG practices which grants firms agency on which of the practices to implement in order to achieve high performance.

We contribute to comparative CG research by demonstrating that there are multiple governance paths leading to high firm performance, and that these practices do not always belong to the same national governance tradition. Therefore, our findings alert of the perils of “one size fits all” governance solutions when designing and implementing CG policies.

Empirical

Does the ownership structure of a firm, specifically the aggregation of the different ownership types within each firm, relate with the composition of its board?

Using archival data from a sample comprising 1,487 U.S. firms, we find that the composition of the individual profiles of directors on corporate boards (i.e., independent, affiliated, or insider) match a firm's aggregated ownership configuration (institutional, corporate parent, family-entrepreneur control) even after parsing out the impact of CEO characteristics, firm size, and performance. Further analyses elaborate on the specific relationship between each director profile and ownership types present within the firm.

This study builds upon three conceptual perspectives: agency, resource dependency, and behavioral. We argue that each type of ownership has differing imperatives and may prefer different types of directors to fulfill their governance needs. The paper illustrates that the relationship between corporate governance, specifically board composition, and ownership is a comprehensive phenomenon that is best understood through multiple theoretical lenses.

This study shows that ownership and board composition are not substitutable governance mechanisms as commonly understood, but might be complementary mechanisms. A finding that governance mechanisms are complementary implies that regulatory or institutional pressures to modify board composition with the addition of directors with similar profiles may affect the governance in unforeseen ways.

Empirical

Social norm theory goes beyond economic efficiency arguments and provides a framework that allows for the subjective, judgmental, and socially interactive processes involved in the determination of CEO remuneration. Building on this theory, we argue that current CEO pay practices infringe a social norm. This norm states that a firm's wages ought to be fair. Thus, according to the social norm theory view, large inequalities between CEO pay and low-level incomes, as well as inequity concerns of CEO pay decoupled from performance, become a matter of public distress. If such publicly shared fairness norms become infringed, some amount of norm enforcement becomes likely, particularly when the punishment is of low cost. Norm enforcement also becomes likely if selective incentives and/or intrinsic norm enforcement are present to support punishing actions.

We test our model using a vignette-survey study and a representative sample of 800 Swiss citizens. We are able to show that individual differences – more precisely status attributes and moral development – drive perceptions of norm infringement. We demonstrate that the willingness to punish firms with norm-infringing CEO pay is high if low-cost punishment opportunities are provided, such as public votes on CEO pay regulation. In addition, the willingness to punish is also driven by feelings of deprivation which fuel intrinsic interest to punish norm infringers even at high individual costs.

We adapt and contextualize social norm theory for the CEO pay debate. A model that explains how individual differences drive norm infringement perceptions, and how these differences lead to behavioral punishment intentions, is developed and tested empirically.

The war for talent and the urge to offer incentives to CEOs impose costs on society, and firms are confronted with those costs. As a consequence, more and more people demand CEO pay regulation, which narrows firms' latitude. For firms, the evidence implies that they would be well advised to consider the climate of public opinion when determining executive pay. They may either reduce CEO pay or should communicate to the public why certain compensation designs may be favorable and in the interests of the enterprise and stakeholders. For politicians, the findings of our study show that there is a demand for CEO pay regulations and that this demand has to be acknowledged in some way in policy-making.

Empirical

We examine the effects of firm- and country-level “good” corporate governance prescriptions on firm performance before and during the recent financial crisis, using a large sample of 1,197 firms across 26 European countries.

We propose a contextualized agency perspective suggesting that firm- and country-level good governance prescriptions designed to assure managerial oversight may not hold in a financial crisis. This is because firms can benefit from broadening managerial discretion so as to facilitate the exercise of initiative and decisive leadership. Overall, our firm- and country-level findings support this argument. In a crisis, CEO duality is associated with better performance. We also find that the use of incentive compensation and the existence of a wedge between ownership and control rights negatively impacts on firm performance in a crisis. Hierarchical linear modeling shows that 25 percent of the heterogeneity in firm performance is among countries, indicating the importance of including country-level institutions in our analyses. In a crisis, we find that the general quality of the legal system and creditor rights protection are positively related to firm performance, but protection for equity investors is not.

The findings challenge the universality of good governance prescriptions and contribute to the growing body of work proposing that the efficacy of governance mechanisms may be contingent upon organizational and environmental circumstances.

The study offers insights relevant to policy and practitioner communities, showing that governance mechanisms operate differently in crisis and non-crisis periods. The tendency to respond to a crisis with more stringent rules may be counterproductive since such measures may compromise executives' ability to respond appropriately to systemic shocks. Practitioners are encouraged to optimize rather than maximize their governance choices.

Empirical

Direct transfer (Type I tunneling) means that the controlling shareholders transfer resources from the firm for their own benefit. This study aims to investigate the impact of internal and external governance mechanisms from the perspective of principal-principal (P-P) conflicts on Type I tunneling.

Using hand-collected data comprising 117 Chinese listed companies with 540 firm-year observations during 2001–2005, the results show that state ownership and the number of board of directors' meetings are positively correlated with Type I tunneling, whereas the number of independent directors reveals a negative association. Other internal governance mechanisms including foreign ownership, the size of the board of directors, supervisory board size, number of professional supervisors, and the number of supervisory board meetings were found to have no impact.

Several implications can be drawn. First, this study has modeled tunneling using a well-accepted theoretical perspective – agency theory of P-P conflicts. But the results show that agency theory does not appropriately explain tunneling behavior in China and so institutional theory is suggested as an alternative theoretical perspective for future research. Second, corporate governance reforms relating to supervisory boards have not been sufficient to ensure that they properly fulfill their role of oversight. Rather, such supervisory boards are perhaps playing more of a “rubber stamp” role.

This study recommends prescribing the legal responsibilities and obligations for two-tier boards in the Chinese context, allowing them to undertake their duties diligently.

Empirical

Family control in family firms can extend beyond the direct involvement of family members, but identifying these mechanisms is difficult in most markets. We utilize unique disclosures made by Taiwanese firms to examine the role played by family representatives in listed family firms. Family representatives are non-family members that represent the controlling family's indirect shareholdings in the firm. We examine whether family representatives are used in the same manner as family members and whether they provide net benefits or costs to shareholders.

In our sample of listed family firms, we find that omitting family representatives understates the influence of controlling families by 46 percent. We show that family representatives are associated with net costs to shareholders, but to a lesser extent than family members. We also find that controlling families use family members and family representatives differently. Family members are more involved in older family firms and in firms founded by the family. Family representatives are more involved in acquired and second generation family firms and in larger firms with more fixed assets.

We apply agency theory to the use of family representatives and show that family representatives are being used by controlling families to extend their influence within their firms, increasing agency costs to minority shareholders.

For policymakers, our analysis shows that disclosure of family member and representative relationships within firms is important and value-relevant to investors. Furthermore, our results suggest that firm performance could be improved by limiting the involvement of family members and family representatives in family firms.

Empirical

In this paper, we empirically investigate whether US listed commercial banks with effective corporate governance structures engage in higher levels of conservative financial accounting and reporting.

Using both market- and accrual-based measures of conservatism and both composite and disaggregated governance indices, we document convincing evidence that well-governed banks engage in significantly higher levels of conditional conservatism in their financial reporting practices. For example, we find that banks with effective governance structures, particularly those with effective board and audit governance structures, recognize loan loss provisions that are larger relative to changes in nonperforming loans compared to their counterparts with ineffective governance structures.

We contribute to the extant literature on the relationship between corporate governance and quality of accounting information by providing evidence that banks with effective governance structures practice higher levels of accounting conservatism.

The findings of this study would be useful to US bank regulators/supervisors in improving the existing regulatory framework by focusing on accounting conservatism as a complement to corporate governance in mitigating the opaqueness and intense information asymmetry that plague banks.

Empirical

This paper uses unique Danish data to examine whether non-executive directors draw on both direct and indirect ties in the network of interlocking directorates to impact auditor choice, and whether this impact has consequences for audit fees.

The paper finds clear evidence that non-executive directors draw on their networks to impact auditor choice, and evidence that clients pay an audit fee premium when non-executive directors are connected to audit firms outside the focal company. The relationship between non-executive directors and auditors is well established in Denmark and exhibits features that currently emerge in international debates and regulations. Therefore, the national context offers an interesting setting for empirical evidence of whether international aspirations are likely to be realized.

Audit-related corporate governance research has predominantly adopted the agency theory paradigm and has only drawn on alternative theoretical perspectives to a limited extent. We draw on the literature about board interlocks and social network theory in order to develop a study that aims to increase our understanding of the non-executive director–auditor relationship and the role that board networks have in governing auditor choice decisions. The study identifies interlocks as an infrastructure for differentiation in the audit market and determines that such differentiation is associated with an audit fee premium for audit firms. The findings indicate that personal experiences with auditors are shared among non-executive directors and that audit attributes other than low cost audit, auditor size, and industry specialism, are important in the audit market.

Our findings support continued efforts to strengthen the relationship between non-executive directors and auditors. Our findings also indicate that board interlocks may constitute a mechanism that mitigates the audit market failure that arises because of a lack of auditor differentiation.