Corporate governance and expected stock returns: evidence from Germany

Recent empirical work shows that a better legal environment leads to lower expected rates of return in an international cross-section of countries. This paper investigates whether differences in firm-specific corporate governance also help to explain expected returns in a cross-section of firms within a single jurisdiction. Constructing a corporate governance rating (CGR) for German firms, we document a positive relationship between the CGR and firm value. In addition, there is strong evidence that expected returns are negatively correlated with the CGR, if dividend yields and price-earnings ratios are used as proxies for the cost of capital. Most results are robust for endogeneity, with causation running from corporate governance practices to firm fundamentals. Finally, an investment strategy that bought high-CGR firms and shorted low-CGR firms would have earned abnormal returns of around 12 percent on an annual basis during the sample period. We rationalize the empirical evidence with lower agency costs and/or the removal of certain governance malfunctions for the high-CGR firms

The role of accounting in the German financial system

This chapter analyzes the role of financial accounting in the German financial system. It starts from the common perception that German accounting is rather "uninformative". This characterization is appropriate from the perspective of an arm´s length or outside investor and when confined to the financial statements per se. But it is no longer accurate when a broader perspective is adopted. The German accounting system exhibits several arrangements that privately communicate information to insiders, notably the supervisory board. Due to these features, the key financing and contracting parties seem reasonably well informed. The same cannot be said about outside investors relying primarily on public disclosure. A descriptive analysis of the main elements of the Germany system and a survey of extant empirical accounting research generally support these arguments

An Empirical Analysis on Board Monitoring Role and Loan Portfolio Quality Measurement in Banks

This paper aims to analyze the effectiveness of the board monitoring role on specific loan portfolio quality measures in banks (default rate, recovery rate and provisioning rate). We use a sample comprises a totality of Italian-based banks, listed at Borsa Italiana SpA in 2006-2008 and a number of accounting proxies to express the loan portfolio quality of a bank. The results of the analysis show an overall weakness of the board role (expressed by Independents and Audit Committee on board) in monitoring loan portfolio quality of the bank, with the subsequent damage of the interests of stakeholders. A positive contribution of board monitoring, even if partial, is highlighted in two cases: Independents seems improve recovery rate, while the Audit committee enhances provisioning rate in banks. With reference to default rate, a total negative effect of board monitoring is reported. On the base of these results, some managerial implications are proposed.Banks, Corporate governance, Board of directors, Loan Portfolio Quality

Corporate governance, Islamic governance and earnings management in Oman: A new empirical insights from a behavioural theoretical framework

Purpose: This paper examines the impact of corporate (CG) and Islamic (IG) governance mechanisms on corporate earnings management (EM) behaviour in Oman. Design/Methodology/Approach: We employ one of the largest and extensive datasets to-date on CG, IG and EM in any developing country, consisting of a sample of 116 unique Omani listed corporations from 2001 to 2011 (i.e.,1,152 firm-year observations) and a broad CG index containing 72 CG provisions. We also employ a number of robust econometric models that sufficiently account for alternative CG/EM proxies and potential endogeneities. Findings: First, we find that, on average, better-governed corporations tend to engage significantly less in EM than their poorly-governed counterparts. Second, our evidence suggests that corporations that depict greater commitment towards incorporating Islamic religious beliefs and values into their operations through the establishment of an IG committee tend to engage significantly less in EM than their counterparts without such a committee. Finally and by contrast, we do not find any evidence that board size, audit firm size, the presence of a CG committee and board gender diversity have any significant relationship with the extent of EM. Originality: To the best of our knowledge, this is a first empirical attempt at examining the extent to which CG and IG structures may drive EM practices that explicitly seeks to draw new insights from a behavioural theoretical framework (i.e., behavioural theory of corporate boards and governance). Keywords: Corporate governance, Islamic governance, earnings management, behavioural theory, endogeneity, Oman. Paper type: Research pape

Kajian terhadap minat kerjaya di kalangan pelajar di Sekolah Menengah Teknik Pengkalan Chepa

Kajian ini dijalankan untuk melihat minat kerjaya di kalangan pe!ajar. Seramai 95 orang pelajar telah dipilih secara rawak mudah dan sebuah Sekolah Menengah Teknik Pengkalan Chepa di daerah Kota Bharu. Mereka terdiri daripada pelajar-pelajar tingkatan empat yang terdiri dari pelbagai jantina, bangsa, persekitaran tempat tinggai dan latar beiakang ibu bapa. Instrumen kajian yang digunakan iaiah Career TH/'ere-sV 7/?ven/orp (CII) dan &yD;rec^eJ&arc/! (SDS) yang telah diterjemahkan ke daiam Bahasa Melayu. Data-data yang diperoiehi diproses secara statistik deskriptif dan inferensi yang bertujuan untuk mengukur dan menguji hipotesis-hipotesis yang dibina dengan menggunakan min, anahsis varian sehata (ANOVA) pada aras signifikan 0.05 dan anahsis korelasi Pearson pada aras signifikan 0.01. Hasil kajian menunjukkan pelajar-pelajar cenderung daiam orientasi Intelek dan Daya Usaha. Keputusan kajian menunjukkan peiajar-peiajarmeminati bidangjurutera, ah!i perniagaan, melanjutkan pelajaran dan kesenian. Hasil kajian juga menunjukkan tidak ada perbezaan yang signifikan minat kerjaya pelajar-pelajar daiam bidang-bidang CII dan SDS dari segi jantina, bangsa dan persekitaran tempat tinggai. Dari segi hubungan, hasil kajian menunjukkan wujud hubungan yang signifikan daiam pemilihan kerjaya dengan tahap pendidikan ibu bapa

Can Auditors Be Independent? - Experimental Evidence

The Sarbanes-Oxley Act of 2002 has transformed the institutional environment in the US by making the audit committee responsible for the appointment, compensation and oversight of the auditor. We examine whether this institutional change successfully resolves the alleged problem of an unconscious favoring of the management (Bazerman et al. 1997, 2002, 2006) by changing the effects of auditors’ economic incentives and psychological pressure. In our experimental design, we make use of the particular features of the German institutional setting as it enables us to manipulate the client of the auditor in a realistic and clear-cut way. 72 German auditors with at least two years of job experience participated in our experiment. Following Turner (2001), we distinguish in our analyses between belief tasks (e.g. evidence evaluation) and action tasks (e.g. audit opinion). Our findings imply that certain institutional features seem to be helpful in ensuring auditor independence. First, we find that auditors demonstrate professional scepticism in belief tasks. This seems to counteract any potentially negative effect of the acceptability heuristic in actions tasks. Second, experience helped auditors in coping with psychological pressure. Third, making the auditor accountable to a supervisory board was helpful in reducing the risk that financial considerations would impair auditor independence.

Firm performance and managerial turnover: the case of Ukraine

The paper studies whether and how CEO turnover in Ukrainian firms is related to their performance. Based on a novel dataset covering Ukrainian joint stock companies in 2002-2006, the paper finds statistically significant negative association between the past performance of firms measured by return on sales and return on assets, and the likelihood of managerial turnover. While the strength of the turnover-performance relationship does not seem to depend on factors such as managerial ownership and supervisory board size, we do find significant entrenchments effects associated with ownership by managers. Overall, our analysis suggests that corporate governance in Ukraine operates with a certain degree of efficiency, despite the well-known lacunas in the country’s institutional environment

Corporate governance, conservatism and firm performance: Evidence from China

This thesis examines the effect of the board of directors and supervisory board on conservatism and firm performance, respectively, and the benefits of conservatism on performance. In addition, this thesis investigates whether the effectiveness of firms’ governance on conservatism and firm performance is influenced by ownership concentration and state ownership. The extant literature has shown that conservatism reduced agency conflict and was beneficial for corporate governance in developed countries; however, little evidence has been provided for emerging countries such as China. Sample companies are selected from the Shanghai and Shenzhen stock exchanges for the period from 2007 to 2010. Archival data from companies’ annual reports are used and the information relating to conservatism is collected from Datastream. Panel data methodology is employed to test the developed hypotheses developed. Two popular methods are used to measure conservatism: asymmetric timeliness developed by Basu (1997) and accrual-based method produced by Givoly and Hayn (2000). Two accounting-based performance measures (return on equity and net profit margin), and a market-based indicator (market to book ratio) are used in this study to measure firm performance. For corporate governance variables, five characteristics of the board of directors and four characteristics of the supervisory board are examined. They are board independence, board size, board meetings, CEO duality, top management turnover, supervisory board independence, supervisory board size, supervisory board meetings and supervisory board qualification. Ownership structure is identified by ownership concentration and state ownership. Ownership concentration is measured by the largest shareholdings and state ownership is measured as the number of shares controlled by the state divided by the total number of shares. In terms of the effect of corporate governance on conservatism, the initial results show that as predicted, higher proportion of independent directors, top management turnover, smaller supervisory boards and more supervisors with professional knowledge or work experience lead to more conservatism. Except for supervisory board independence and supervisory board meetings, the predicted effects of the other characteristics of the board of directors and supervisory board on firm performance are supported. In addition, firms that employ more conservatism are shown to have better firm performance. The results on the moderating effect indicate that state ownership does influence the effectiveness of corporate governance on conservatism and firm performance. In addition to the linear relationship between corporate governance, conservatism and firm performance, this thesis finds that some corporate governance mechanisms have a nonlinear U-shaped effect on conservatism or firm performance. Board size is found to have a Ushaped effect on conservatism and supervisory board independence is shown to have a Ushaped effect on firm performance. The frequency of supervisory board meetings has a Ushaped effect on firm performance measured by profit margin while it has an inverted Ushaped effect when market to book ratio is used to measure performance. For the moderating effect of ownership structure, this thesis finds that ownership concentration has an inverted U-shaped moderating effect on the effectiveness of firms’ governance on firm performance. State ownership has an inverted U-shaped influence on the relationship between firms’ governance and conservatism while it has a U-shaped influence on the effectiveness of firms’ governance on firm performance. The findings of this thesis contribute to the corporate governance and conservatism literature in the context of emerging economies. This study also provides some meaningful implications for policy makers, accounting practice, researchers and users of financial statements in China

Controlling shareholders and payout policy: do founding families have a special 'taste for dividends'?

Around the world (with the U.S. and U.K. as exceptions) concentrated ownership structures and controlling shareholders are predominant even among listed firms. We provide novel empirical evidence how such controlling shareholders, in particular founding families, affect payout policy decisions. Thereby, we use a unique panel dataset of 660 listed firms in the 1995 to 2006 period from Germany, an economy that is traditionally characterized by concentrated ownership structures and strong family capitalism. We find that family firms exhibit a higher propensity and level for both dividend payments and total payouts. This result is driven by family ownership rather than family management. Conflicts between the founding family and non-family controlling shareholders and tensions within the founding family are important determinants of payout policy. While family blockholder increase the propensity for a payout to shareholders, outside blockholder have an opposing effect. Finally, we find that common action problems and conflicts among a multitude of family members and/or generations in 'real family firms' lead to a higher 'taste for dividend payments' if compared to firms dominated by the founder ('founder-controlled firms'). Our results prove to be stable against a battery of robustness tests including a matching estimator technique to demonstrate causal effects. Overall, our paper contributes to two strands of literature: the emerging literature on family firms and the more mature literature on corporate payout policy. --family firms,founding family,family ownership,family management,controlling shareholders,agency costs,payout policy,dividends,share repurchases,corporate governance

Ownership structure, board characteristics, and tax aggressiveness

Tax aggressiveness, as commonly proxied by the effective tax rate (ETR), measures a firm’s effort spent on minimizing its tax payments. It is suggested that more tax aggressive firms have greater incentives to allocate resources to minimize taxes and thus have lower ETRs. Corporate governance has been continuously receiving attention in literature across different fields and can affect a firm’s tax strategy through its control mechanism. This thesis investigates how corporate governance influences a firm’s tax aggressiveness. The main hypothesis of this thesis is whether firms with good corporate governance will have less incentives and opportunities to manage tax aggressively. Specifically, I take advantages of the distinct institutional settings in China to study whether the Chinese firm’s tax aggressiveness is affected by ownership structure and the characteristics of board of directors. Using all non-financial listed companies in the Chinese A-share market during 2003 and 2009 period, I find that firms with state-controlled nature and lower proportion of controlling shares pursue less aggressive tax strategies and maintain higher ETRs. In addition, my finding is consistent with prior literature that a higher percentage of the boards’ shareholdings and dual service duties performed by the board chairman result in lower ETRs. However, I do not find a significant relationship between the percentage of independent directors and tax aggressiveness which may suggest the ineffective role of independent directors in China