The Relationship between the Ownership Structure and the Role of the Board

This paper develops a theoretical model to better understand how the priorities of the board of directors are influenced by the ownership structure and how that affects firm performance. Most corporate governance research focuses on a universal link between corporate governance practices (e.g., board structure, shareholder activism) and performance outcomes, but neglects how the specific context of each company and diverse environments lead to variations in the effectiveness of different governance practices. This study suggests that the ownership structure has an important influence on the priorities set by the board, and that these priorities will determine the optimal composition of the board of directors. In contrast to a board prioritizing monitoring, where directors with financial experience and a duality are important, a board prioritizing the provision of resources could benefit from directors with different characteristics, the presence of the CEO on the board of directors and a larger board size. Understanding the influence of the board of directors on firm performance requires greater sensitivity to how corporate governance affects different aspects of effectiveness for different stakeholders and in different contexts. The insights on the interaction between the ownership structure and board composition can shed new light onto the contradictory empirical results of past research that has tried to link board composition or structure to firm performance directly. In an effort to increase the relevance of future research on boards and firm performance, we provide a framework on the interaction between ownership, corporate boards and firm performance. In light of scandals and perceived advantages in reforming governance systems, debates have emerged over the appropriateness of implementing corporate governance recommendations mainly based on an Anglo-Saxon context characterized by dispersed ownership where markets for corporate control, legal regulation, and contractual incentives are key governance mechanisms. This paper adds to the literature that argues in favor of the need to adapt corporate governance policies to the local contexts of firms.

A Configurational Approach to Comparative Corporate Governance

We seek to bring to the core of the study of comparative corporate governance analysis the idea that within countries and industries, there exist multiple configurations of firm level characteristics and governance practices leading to effective corporate governance. In particular, we propose that configurations composed of different bundles of corporate governance practices are a useful tool to examine corporate governance models across and within countries (as well as potentially to analyze over time changes). While comparative research, identifying stylized national models of corporate governance, has been fruitful to help us think about the key institutional and shareholder rights determining governance differences and similarities across countries, we believe that given the financialization of the corporate economy, current globalization trends of investment, and rapid information technology advances, it is important to shift our conceptualization of governance models beyond the dichotomous world of common-law/outsider/shareholder-oriented system vs. civil law/insider/stakeholder oriented system. Our claim is based on the empirical observation that there exists a wide range of firms that either (1) fall in the "wrong" corporate governance category; (2) are a hybrid of these two categories; or (3) should be placed into an entirely new category such as firms in emerging markets or state-owned firms. In addition, as Aguilera and Jackson (2003) argue, firms, regardless of their legal family constraints, their labor and product markets, and the development of the financial markets from which they can draw, have significant degrees of freedom to chose whether to implement different levels of a given corporate governance practice. That is, firms might chose to fully endorse a practice or simply seek to comply with the minimum requirements without truly internalizing the governance practice. An illustrative example of the different degrees of internalization of governance practices is the existing variation in firms' definition of director independence or disclosure of compensation systems. We first discuss the conceptual idea of configurations or bundles of corporate governance practices underscoring the concept of equifinal paths to given firm outcomes as well as the complementarity and substitution in governance practices. We then move to the practice level of analysis to show how three governance characteristics (legal systems, ownership and boards of directors) cannot be conceptualized independently, as each of them is contingent on the strength and prevalence of other governance practices. In the last section, we illustrate how different configurations are likely to playout across industries and countries, taking as the departing practice, corporate ownership.

Is managerial entrenchment always bad and corporate social responsibility always good? A cross‐national examination of their combined influence on shareholder value

Research summary: Building on the comparative capitalism's notion of institutional complementarities, we examine whether firms’ simultaneous adoption of managerial entrenchment provisions (MEPs) and corporate social responsibility (CSR) reinforces or undercuts one another in influencing firm financial performance. We propose that the financial impact of such configurations is contingent on the country's institutional setting. In Liberal Market Economies (LMEs), where firms face strong pressures to achieve short-term goals, the combination of MEPs and CSR creates shareholder value, particularly when firms engage in internally oriented CSR projects. Conversely, in Coordinated Market Economies (CMEs), where institutions already curb short-term demands, the combined adoption of MEPs and CSR initiatives destroys shareholder value, particularly when this CSR is external. Overall, our study enhances understanding of the institutional complementarity between corporate governance and CSR. Managerial summary: This study examines how two organizational practices, managerial entrenchment provisions (MEPs), and corporate social responsibility (CSR), combine between them to improve or reduce firms’ financial success. Our analysis demonstrates that institutional framework has a strong influence on their combined effect. When the institutional context supports solutions to coordination problems among economic agents through market-based arrangements, MEPs allow the implementation of strategies directed to promote long-term investments and relationships. In this case, MEPs when paired with CSR allow generating intangibles that contribute to create shareholder value. Contrarily, in frameworks with coordination mechanisms based on nonmarket arrangements, the joint adoption of MEPs and CSR destroys value by increasing the power of managers and blockholders to extract rents at the expense of firms’ minority shareholders

Earnings management and cultural values

Using theory and empirical data from social psychology to measure for cultural differences between countries, we study the effect of individualism as defined by Hofstede (1980) and egalitarianism as defined by Schwartz (1994, 1999, 2004) on earnings management. We find a significant influence of both cultural measures. In line with Licht et al. (2004), who argue that individualistic societies may be less susceptible to corruption, we find that countries scoring high on individualism tend to have lower levels of earnings management. In addition, we find that egalitarianism, defined as a society's cultural orientation with respect to intolerance for abuses of market and political power, is negatively related with earnings management. Our results are robust to different specifications and controls. The main message of this paper is that besides formal institutions, cultural differences are relevant to explain earnings management behaviour. We think that our work adds to the understanding of the importance of cultural values in managerial behaviour across countries contributing to the literature on earnings management and law and institutions

Essays on Ownership Structure, Corporate Governance and Corporate Finance

La mayoría de los estudios de gobierno corporativo se centran en empresas cotizadas en E.E.U.U o el Reino Unido donde existe una clara separación entre propiedad y control. Sin embargo, en Europa continental la estructura de propiedad de las empresas es muy diversa, pudiendo diferenciar desde empresas con una propiedad difusa y un gran número de accionistas relativamente pequeños hasta empresas concentradas con uno o más accionistas mayoritarios. El objetivo de esta tesis es investigar el efecto que ejerce la estructura de propiedad en la eficacia de otros mecanismos del gobierno corporativo y en el funcionamiento de la empresa. En el primer capítulo se desarrolla un modelo teórico para entender la influencia que la estructura de propiedad ejerce sobre las funciones del consejo de administración y sobre la eficacia del consejo. Una pregunta importante tratada en esta investigación es si todas las empresas, independientemente de su estructura de propiedad, se deben someter a las mismas recomendaciones de gobierno corporativo. La revisión de la investigación empírica sobre las características del consejo de administración demuestra que los resultados no son concluyentes. Una posible explicación a la gran variedad de resultados empíricos puede ser la omisión en al análisis del contexto externo e interno de las empresas (Filatotchev, 2008). Un resultado importante de nuestro estudio es que la estructura de propiedad afecta a la eficacia del consejo. Es decir, la eficacia de ciertas prácticas particulares ejercidas por el consejo y las ventajas comparativas que a nivel institucional derivan de ellas dependen de la manera en que estas se combinen en función de la estructura de propiedad de las empresas. El objetivo del segundo capítulo es profundizar en el entendimiento de cómo los mecanismos de gobierno corporativo dependen de la estructura de propiedad de las empresas. Sostenemos que la estructura de propiedad influencia el comportamiento del consejo de administración. Los resultados demuestran que la relación entre los honorarios de auditoría externa y la independencia del consejo dependen del grado de concentración de la propiedad. Para las empresas con propiedad dispersa, encontramos que los honorarios de auditoría se encuentran relacionados con la independencia del consejo y con la separación del presidente y máximo ejecutivo. Esto coincide con la literatura anterior que típicamente se centra en las compañías cotizadas en E.E.U.U. o el Reino Unido. En cambio, para las empresas con propiedad concentrada, la relación entre las características del consejo y la demanda para la auditoría externa es insignificante. El tercer capítulo investiga la relación entre la estructura de propiedad de las empresas y la valoración de sus acciones durante periodos de turbulencia. Los resultados demuestran la importancia que tiene (a) la concentración de la propiedad, (b) la presencia de múltiples accionistas significativos y (c) el tipo de accionista que controla, sobre la cotización de la acción en periodos de inestabilidad financiera. Además, los resultados para los mercados bajistas y alcistas difieren sustancialmente. Mientras que la concentración de la propiedad se valora positivamente durante períodos de perdidas, se valora negativamente en mercados alcistas. Los resultados sostienen la hipótesis de que los inversores confían en accionistas mayoritarios durante períodos de crisis para supervisar a la gerencia. Además, combinando los efectos que la concentración accionarial tienes sobre la cotización en los extremos alcistas y bajistas del mercado, nuestros resultados indican que la concentración de la propiedad fomenta una mayor estabilidad en la valoración de las empresas durante periodos de inestabilidad financiera.Recent corporate governance research suggests that a large proportion of public companies worldwide are characterized by controlling stockholders who are more often families, usually the founder(s) or their descendants. Thus far, most corporate governance research has focused on stylized US (and to a less extent UK) firms which separate ownership and control. The objective of this thesis is to further investigate the role of ownership structure on the effectiveness of other corporate governance mechanisms and the firm's performance. The objective of the first chapter is to understand how the role (control versus direction) of the board of directors is influenced by the ownership structure and a how a different role influences the board effectiveness. While shareholders in firms with dispersed ownership have a great need to use the board of directors to control the management, large controlling shareholders have both the incentive and the power to hold management accountable. The control role of the board is therefore considered to be less important in the presence of concentrated ownership (La Porta et al., 1998; Aguilera, 2005). An important result of this study is that board effectiveness does not result from a universal 'one best way', but suggests that particular practices will be effective only in certain combinations and furthermore may give different patterns of comparative institutional advantages given the contingencies of different environments. The objective of the second chapter is to offer greater insight into how corporate governance mechanisms are contingent on the ownership structure of the company. We empirically examine the relationship between board characteristics and the demand for external audit in firm with dispersed and concentrated ownership. The results show that the influence of board independence and single leadership on the external audit demand is contingent on the concentration of ownership. For firms with dispersed ownership, we find that both board independence and single leadership are significantly related to the total audit fees. This is in line with previous literature which typically considers large US or UK companies. In contrast, for firms with concentrated ownership, the relationship between board characteristics and the demand for external audit is insignificant. These results are consistent with the argument that the ownership structure has an important influence on the board behavior. The third chapter deals with the relationship between the ownership structure and stock price performance. Since ownership control can have both positive and negative properties, empirical evidence is of paramount importance. The results show the importance of ownership concentration, the presence of multiple blockholders and the type of controlling owner to explain stock market performance. In addition, the results for extreme down markets are fundamentally different from the up market results. While ownership concentration is valued positively during down market periods, it is valued negatively during up markets. Furthermore, the analysis shows that presence of multiple blockholders only influences the stock price during down market periods and firms controlled by a financial institution lose significantly less value during down markets and gain less easily value during extreme up markets. Furthermore, combining the findings from extreme up and down markets, there is an indication that ownership concentration is associated with more stable stock valuation during periods of market turmoil; especially firms controlled by a financial institution tend to lose less value during down markets and gain less value during up markets

Corporate governance and corporate social performance: The influence of ownership, boards and institutions

We analyze how ownership concentration and type, and board independence are related to corporate social performance (CSP). Drawing from agency and team production theories, we argue that the distribution of costs and benefits to shareholders and other stakeholders is crucial to understand what drives CSP. We analyze an international panel of listed firms and reveal that CSP is negatively related to ownership concentration, but positively to board independence. Furthermore, the ownership type and the business context matter. Ownership concentration is negatively related to CSP more strongly in shareholder-oriented societies. This negative relationship is weaker in egalitarian societies

Corporate governance and corporate social performance: The influence of ownership, boards and institutions

We analyze how ownership concentration and type, and board independence are related to corporate social performance (CSP). Drawing from agency and team production theories, we argue that the distribution of costs and benefits to shareholders and other stakeholders is crucial to understand what drives CSP. We analyze an international panel of listed firms and reveal that CSP is negatively related to ownership concentration, but positively to board independence. Furthermore, the ownership type and the business context matter. Ownership concentration is negatively related to CSP more strongly in shareholder-oriented societies. This negative relationship is weaker in egalitarian societies

Earnings management and cultural values

Using theory and empirical data from social psychology to measure for cultural differences between countries, we study the effect of individualism as defined by Hofstede (1980) and egalitarianism as defined by Schwartz (1994, 1999, 2004) on earnings management. We find a significant influence of both cultural measures. In line with Licht et al. (2004), who argue that individualistic societies may be less susceptible to corruption, we find that countries scoring high on individualism tend to have lower levels of earnings management. In addition, we find that egalitarianism, defined as a society's cultural orientation with respect to intolerance for abuses of market and political power, is negatively related with earnings management. Our results are robust to different specifications and controls. The main message of this paper is that besides formal institutions, cultural differences are relevant to explain earnings management behaviour. We think that our work adds to the understanding of the importance of cultural values in managerial behaviour across countries contributing to the literature on earnings management and law and institutions

Essays on ownership structure, corporate governance and corporate finance

Descripció del recurs: el 25/05/11La mayoría de los estudios de gobierno corporativo se centran en empresas cotizadas en E.E.U.U o el Reino Unido donde existe una clara separación entre propiedad y control. Sin embargo, en Europa continental la estructura de propiedad de las empresas es muy diversa, pudiendo diferenciar desde empresas con una propiedad difusa y un gran número de accionistas relativamente pequeños hasta empresas concentradas con uno o más accionistas mayoritarios. El objetivo de esta tesis es investigar el efecto que ejerce la estructura de propiedad en la eficacia de otros mecanismos del gobierno corporativo y en el funcionamiento de la empresa. En el primer capítulo se desarrolla un modelo teórico para entender la influencia que la estructura de propiedad ejerce sobre las funciones del consejo de administración y sobre la eficacia del consejo. Una pregunta importante tratada en esta investigación es si todas las empresas, independientemente de su estructura de propiedad, se deben someter a las mismas recomendaciones de gobierno corporativo. La revisión de la investigación empírica sobre las características del consejo de administración demuestra que los resultados no son concluyentes. Una posible explicación a la gran variedad de resultados empíricos puede ser la omisión en al análisis del contexto externo e interno de las empresas (Filatotchev, 2008). Un resultado importante de nuestro estudio es que la estructura de propiedad afecta a la eficacia del consejo. Es decir, la eficacia de ciertas prácticas particulares ejercidas por el consejo y las ventajas comparativas que a nivel institucional derivan de ellas dependen de la manera en que estas se combinen en función de la estructura de propiedad de las empresas. El objetivo del segundo capítulo es profundizar en el entendimiento de cómo los mecanismos de gobierno corporativo dependen de la estructura de propiedad de las empresas. Sostenemos que la estructura de propiedad influencia el comportamiento del consejo de administración. Los resultados demuestran que la relación entre los honorarios de auditoría externa y la independencia del consejo dependen del grado de concentración de la propiedad. Para las empresas con propiedad dispersa, encontramos que los honorarios de auditoría se encuentran relacionados con la independencia del consejo y con la separación del presidente y máximo ejecutivo. Esto coincide con la literatura anterior que típicamente se centra en las compañías cotizadas en E.E.U.U. o el Reino Unido. En cambio, para las empresas con propiedad concentrada, la relación entre las características del consejo y la demanda para la auditoría externa es insignificante. El tercer capítulo investiga la relación entre la estructura de propiedad de las empresas y la valoración de sus acciones durante periodos de turbulencia. Los resultados demuestran la importancia que tiene (a) la concentración de la propiedad, (b) la presencia de múltiples accionistas significativos y (c) el tipo de accionista que controla, sobre la cotización de la acción en periodos de inestabilidad financiera. Además, los resultados para los mercados bajistas y alcistas difieren sustancialmente. Mientras que la concentración de la propiedad se valora positivamente durante períodos de perdidas, se valora negativamente en mercados alcistas. Los resultados sostienen la hipótesis de que los inversores confían en accionistas mayoritarios durante períodos de crisis para supervisar a la gerencia. Además, combinando los efectos que la concentración accionarial tienes sobre la cotización en los extremos alcistas y bajistas del mercado, nuestros resultados indican que la concentración de la propiedad fomenta una mayor estabilidad en la valoración de las empresas durante periodos de inestabilidad financiera.Recent corporate governance research suggests that a large proportion of public companies worldwide are characterized by controlling stockholders who are more often families, usually the founder(s) or their descendants. Thus far, most corporate governance research has focused on stylized US (and to a less extent UK) firms which separate ownership and control. The objective of this thesis is to further investigate the role of ownership structure on the effectiveness of other corporate governance mechanisms and the firm's performance. The objective of the first chapter is to understand how the role (control versus direction) of the board of directors is influenced by the ownership structure and a how a different role influences the board effectiveness. While shareholders in firms with dispersed ownership have a great need to use the board of directors to control the management, large controlling shareholders have both the incentive and the power to hold management accountable. The control role of the board is therefore considered to be less important in the presence of concentrated ownership (La Porta et al., 1998; Aguilera, 2005). An important result of this study is that board effectiveness does not result from a universal 'one best way', but suggests that particular practices will be effective only in certain combinations and furthermore may give different patterns of comparative institutional advantages given the contingencies of different environments. The objective of the second chapter is to offer greater insight into how corporate governance mechanisms are contingent on the ownership structure of the company. We empirically examine the relationship between board characteristics and the demand for external audit in firm with dispersed and concentrated ownership. The results show that the influence of board independence and single leadership on the external audit demand is contingent on the concentration of ownership. For firms with dispersed ownership, we find that both board independence and single leadership are significantly related to the total audit fees. This is in line with previous literature which typically considers large US or UK companies. In contrast, for firms with concentrated ownership, the relationship between board characteristics and the demand for external audit is insignificant. These results are consistent with the argument that the ownership structure has an important influence on the board behavior. The third chapter deals with the relationship between the ownership structure and stock price performance. Since ownership control can have both positive and negative properties, empirical evidence is of paramount importance. The results show the importance of ownership concentration, the presence of multiple blockholders and the type of controlling owner to explain stock market performance. In addition, the results for extreme down markets are fundamentally different from the up market results. While ownership concentration is valued positively during down market periods, it is valued negatively during up markets. Furthermore, the analysis shows that presence of multiple blockholders only influences the stock price during down market periods and firms controlled by a financial institution lose significantly less value during down markets and gain less easily value during extreme up markets. Furthermore, combining the findings from extreme up and down markets, there is an indication that ownership concentration is associated with more stable stock valuation during periods of market turmoil; especially firms controlled by a financial institution tend to lose less value during down markets and gain less value during up markets

Corporate Social Responsibility and Cost of Financing \u2013 the Importance of the International Corporate Governance System

Research Question/Issue: Our study examines whether international corporate governance systems shape the relationship between a firm\u2019s engagement in Corporate Social Responsibility (CSR) and their cost of financing (both equity and debt). Research Findings/Insights: Using a large international sample, our findings reveal that while the link between CSR performance and the cost of equity is negative in a shareholder-oriented system, this relationship is positive in a stakeholder-oriented system. Furthermore, the link between CSR performance and the cost of debt is negative for firms that are close to default in both systems. Theoretical/Academic Implications: Our study highlights the importance of considering the shareholder/stakeholder-orientation at the country level to explain the link between CSR performance and the cost of financing. Our findings help to explain and place into context the previous mixed findings on the relationship between CSR and the cost of equity and debt and add to the debate about whether CSR is beneficial or detrimental to corporate governance. Practitioner/Policy Implications: The analysis of how the country corporate governance system influences the effect of CSR performance on the cost of financing allows for a deeper understanding of how investors respond to CSR initiatives worldwide and offers managers,directors and policy makers context-specific recommendations. Our analysis also highlights the limitations of transferring insights regarding CSR from one corporate governance system to another