Bank Equity Investments: Reducing Agency Costs or Buying Undervalued Firms? The Information Effects

This paper analyses the relevance of two different reasons for banks to acquire firms' stock: the increase of agency costs in the lending relationship (the agency costs hypothesis), and participation in the expected profits of undervalued firms (the information asymmetry hypothesis). Results indicate not only that banks make equity investments for both reasons but also that the market exploits their lending decisions to learn which of the two motivations was in play. Bank equity investments concurrent with reductions in bank debt are consistent with the agency costs hypothesis, whereas bank equity investments concurrent with increases in bank debt are consistent with the information asymmetry hypothesis. Copyright Blackwell Publishers Ltd, 2006.

Corporate governance mechanisms and financial performance in China: panel data evidence on listed non financial companies

The objective of this paper is to provide empirical evidence on the influence of corporate governance characteristics and corporate ownership concentrations on the financial performance of Chinese companies. This is based on analysis of a panel data set covering the years 2001 to 2005. The characteristics considered are the ratios of independent directors and professional supervisors on the companies' two boards, and the level of concentration in and type of ownership of the companies. Our chosen performance metric is Tobin's Q. We find that ownership concentration in general is a significant factor in determining firm performance. The degree of board independence is significant, but it only appears to have a positive impact on performance in larger companies. The expertise of the supervisory board is not a significant determinant of corporate financial performance in China. Our findings support a continued focus on making improvements to the operation and effectiveness of China's institutions of corporate governance.Yuan George Shan and Ron P. McIve

Effect of board composition and ownership characteristics on fraud: evidence from Malaysian listed companies

Since the Asian financial crisis in 1997, there has been renewed interest in corporate governance policies and practices. This study focuses on corporate governance practices in Malaysia, where the increasing incidence of fraud suggests a lack of adequate corporate governance systems in Malaysian listed companies. Using an unbalanced data set comprising 200 companies representing a total of 579 firm-year observations, this study examines the effects of internal corporate governance mechanisms on the occurrence of fraud. Specifically, it looks at the effects of board characteristics, ownership structure and quality of audit on the occurrence of fraud in Malaysian listed companies from 2007 to 2009. The findings indicate that the number of board meetings was positively associated with the occurrence of fraud, but both state and foreign ownership revealed a negative correlation, whereas factors including the number of independent directors, board size, CEO duality and the quality of audit had no observable effects.Yuan George Shan, Chris Graves and Hussen Hassan Al