The Role of Accounting Conservatism in a well-functioning Corporate Governance System

This paper analyses accounting related to corporate governance and is organized as follows. The first section deals with understanding the concept of accounting conservatism. In the second section we analyzed the Relevance of Accounting Conservatism in Corporate Governance to the modern corporate world. The third section includes a Case Study on Ericsson, a Swedish Telecommunications company and conservatism in strong governance firms versus weak governance firms. The fourth part is devoted to the conclusion of our research efforts. From this study, we conclude that there are several reasons to use accounting conservatism in corporate governance and that current empirical evidence indicates that conservatism has increased in the last decades. The value of β3 in Table 1 indicates that there is a positive significant level of conservatism in accounting practices followed by Ericsson. When the dependent variable is earnings (X), the asymmetric timeliness of earnings coefficient β3 in Table 2 provides an estimate of the level of conservatism. We observe that strong governance firms are more conservative than weak governance firms (0.13 versus 0.04).corporate governance; financial system; accounting conservatism

One Share - One Vote: The Theory

The impact of separating cash flow and votes depends on the ownership structure. In widely held firms, one share - one vote is in general not optimal. While it ensures an efficient outcome in bidding contests, dual-class shares mitigate the free-rider problem, thereby promoting takeovers. In the presence of a controlling shareholder, one share - one vote promotes value-increasing control transfers and deters value-decreasing control transfers more effectively than any other vote allocation. Moreover, leveraging the insider's voting power aggravates agency conflicts because it protects her from the takeover threat and provides less alignment with other shareholders. Even so, minority shareholder protection is not a compelling argument for regulatory intervention, as rational investors anticipate the insider's opportunism. Rather, the rationale for mandating one share – one vote must be to disempower controlling minority shareholders in order to promote value-increasing takeovers. As this policy tends to empower managers vis-a-vis shareholders, it is an open question whether it would improve the quality of corporate governance, notably in systems built around large active owners. The verdict in the case of depositary certificates, priority shares, voting and ownership ceilings is less I ambiguous, since they insulate managers from both takeovers and effective shareholder monitoring.Security-voting structure; market for corporate control; controlling minority shareholders

Club Enlargement: Early Versus Late Admittance

Within an incomplete contract framework, we analyze the enlargement strategy of a club facing applicants that differ in wealth and reform status. While an applicant benefits from entry, the club only gains if the entrant makes an adjustment investment. The club has a choice between early admittance, using its limited internal enforcement powers to ensure reform, and late admittance conditional on prior reform. Wealthy candidates enter early as the club can charge a higher entrance fee for undiscounted membership benefits. For poor applicants, the club applies a reversed admittance order: A less advanced applicant is admitted early to reform as member, while a more advanced enters late after it has reformed. Moreover, the admittance rents increase in the ratio of reform distance to wealth. The viability of the late admittance strategy depends on the club's commitment ability. If the club can credibly commit to a stage-financing schedule, it can induce applicants to reform without overfunding. In the repeated game, the threat of denying additional funding is not credible, and more overfunding is required for reform.

Security-voting structure and bidder screening

This paper analyzes how non-voting shares affect the takeover outcome in a single-bidder model with asymmetric information and private benefit extraction. In equilibrium, the target firm’s security-voting structure influences the bidder’s participation constraint and in response the shareholders’ conditional expectations about the post-takeover share value. Therefore, the structure can be chosen to discriminate among bidder types. Typically, the socially optimal structure deviates from one share - one vote to promote all and only value-increasing bids. As target shareholders ignore takeover costs, they prefer more takeovers and hence choose a smaller fraction of voting shares than is socially optimal. In either case, the optimal fraction of voting shares decreases with the quality of shareholder protection and increases with the incumbent manager’s ability. Finally, shareholder returns are higher when a given takeover probability is implemented by (more) non-voting shares rather than by (larger) private benefits

Family Firms

We present a model of succession in a firm controlled and managed by its founder. The founder decides between hiring a professional manager or leaving management to his heir, as well as on how much, if any, of the shares to float on the stock exchange. We assume that a professional is a better manager than the heir, and describe how the founder’s decision is shaped by the legal environment. Specifically, we show that, in legal regimes that successfully limit the expropriation of minority shareholders, the widely held professionally managed corporation emerges as the equilibrium outcome. In legal regimes with intermediate protection, management is delegated to a professional, but the family stays on as large shareholders to monitor the manager. In legal regimes with the weakest protection, the founder designates his heir to manage and ownership remains inside the family. This theory of separation of ownership from management includes the Anglo-Saxon and the Continental European patterns of corporate governance as special cases, and generates additional empirical predictions consistent with crosscountry evidence.

Family Firms

We present a model of succession in a firm controlled and managed by its founder. The founder decides between hiring a professional manager or leaving management to his heir, as well as on how much, if any, of the shares to float on the stock exchange. We assume that a professional is a better manager than the heir, and describe how the founder's decision is shaped by the legal environment. Specifically, we show that, in legal regimes that successfully limit the expropriation of minority shareholders, the widely held professionally managed corporation emerges as the equilibrium outcome. In legal regimes with intermediate protection, management is delegated to a professional, but the family stays on as large shareholders to monitor the manager. In legal regimes with the weakest protection, the founder designates his heir to manage and ownership remains inside the family. This theory of separation of ownership from management includes the Anglo-Saxon and the Continental European patterns of corporate governance as special cases, and generates additional empirical predictions consistent with cross-country evidence.

Signalling to dispersed shareholders and corporate control

This article analyses how outsiders, such as bidders or activist investors, overcome the lack of coordination and information among dispersed shareholders. We identify the two basic means to achieve this goal. First, the outsider must relinquish private benefits in a manner that is informative about security benefits. We show under which conditions this is feasible and which acquisition strategies used in practice meet these conditions. Second, the outsider can alternatively use derivatives to drive a wedge between her voting power and her economic interest in the firm. Such unbundling of ownership and control, while typically considered a source of corporate governance problems, is an efficient response to the frictions dispersed ownership causes for control contestability. We also show that unbundling comes with costs and benefits for the bidder's incentives to improve firm value

Agency conflicts, ownership concentration, and legal shareholder protection

This paper analyzes the interaction between legal shareholder protection, managerial incentives, monitoring, and ownership concentration. Legal protection affects the expropriation of shareholders and the blockholder's incentives to monitor. Because monitoring weakens managerial incentives, both effects jointly determine the relationship between legal protection and ownership concentration. When legal protection facilitates monitoring better laws strengthen the monitoring incentives, and ownership concentration and legal protection are inversely related. By contrast, when legal protection and monitoring are substitutes better laws weaken the monitoring incentives, and the relationship between legal protection and ownership concentration is non-monotone. This holds irrespective of whether or not the large shareholder can reap private benefits. Moreover, better legal protection may exacerbate rather than alleviate the conflict of interest between large and small shareholders

Takeovers

The development and integration of financial markets is at the forefront of academic and policy debates around the world. Nowhere is this more in evidence than in Europe where the integration of financial markets is a primary objective of the European Commission and fully supported by the European Central Bank. This book brings together leading economists from across the world to analyse the central issues in the development and integration of financial markets from a European perspective whilst highlighting their global relevance. The book is a timely contribution as it appears at a time when the effects of monetary unification on the one hand and the Financial Sector Action Plan on the other are beginning to shape a new pan European financial market

Performance pay, CEO dismissal, and the dual role of takeovers

We propose that an active takeover market provides incentives by offering acquisition opportunities to successful managers. This allows firms to reduce performance-based compensation and can rationalize loss-making acquisitions. When choosing its acquisition policy and the quality of its board, each firm ignores the adverse effect on other firms’ acquisition opportunities and takeover threat. As a result, the takeover market is not sufficiently liquid and too few takeovers occur. Furthermore, liquidity in the takeover and managerial labor markets are inversely related. When poaching managers becomes more profitable, firms invest more in board quality which in turn reduces the incidence of takeovers