Do External Auditors Perform a Corporate Governance Role in Emerging Markets? Evidence from East Asia

In emerging markets, the concentration of corporate ownership has created agency conflicts between controlling owners and minority shareholders. Conventional corporate control mechanisms such as boards of directors and takeovers are typically weak in containing the agency problem. This study examines whether external independent auditors could be employed as monitors and as bonding mechanisms to alleviate the agency conflict. Using a broad sample of firms from eight East Asian economies, we document that firms are more likely to employ Big Five auditors when they are more subject to the agency problem imbedded in their ultimate ownership structure. One possible reason that this documented relation between auditor choice and the agency problem is more evident than the inconsistent results using U.S. and U.K. data is that alternative governance mechanisms are limited in East Asia. In addition, among East Asian auditees subject to the agency problem, Big Five auditors charge a higher fee and set a lower audit modification threshold while non-Big Five auditors do not. Taken together, the evidence suggests that Big Five auditors in emerging markets do have a corporate governance role.http://deepblue.lib.umich.edu/bitstream/2027.42/39784/3/wp400.pd

Do External Auditors Perform a Corporate Governance Role in Emerging Markets? Evidence from East Asia

In emerging markets, the concentration of corporate ownership has created agency conflicts between controlling owners and minority shareholders. Conventional corporate control mechanisms such as boards of directors and takeovers are typically weak in containing the agency problem. This study examines whether external independent auditors could be employed as monitors and as bonding mechanisms to alleviate the agency conflict. Using a broad sample of firms from eight East Asian economies, we document that firms are more likely to employ Big Five auditors when they are more subject to the agency problem imbedded in their ultimate ownership structure. One possible reason that this documented relation between auditor choice and the agency problem is more evident than the inconsistent results using U.S. and U.K. data is that alternative governance mechanisms are limited in East Asia. In addition, among East Asian auditees subject to the agency problem, Big Five auditors charge a higher fee and set a lower audit modification threshold while non-Big Five auditors do not. Taken together, the evidence suggests that Big Five auditors in emerging markets do have a corporate governance role.corporate governance, auditor, ownership concentration, East Asia

Expropriation of minority shareholders : evidence from East Asia

As many East Asian countries plunged into economic decline, the structure of concentrated ownership and associated corporate governance, along with weak corporate performance, have been blamed for the crisis. There is little empirical evidence, however, of the nature of ownership structures in East Asia and their relationship to corporate performance in the typical East Asian environment (where inefficient judicial systems, and weak property and shareholder rights are common). The authors examine evidence of the expropriation of minority shareholders for 2,658 corporations in nine East Asian countries in 1996. They distinguish control from cash-flow rights. They also distinguish between various types of ultimate owners, including family, state, widely held corporations, and widely held financial institutions. Higher cash-flow rights are associated with higher market values, consistent with Jensen and Meckling (1976). In contrast, deviations of control from cash-flow rights - through the use of dual-class shares, pyramiding, and cross-holdings - are associated with lower market values. This is especially true for corporations under family control and, in Japan, under the control of widely held financial institutions. They conclude that the risk of expropriation is the major principal-agent problem for large corporations, as suggested by La Porta and colleagues (1999). The degree to which certain ownership structures are associated with expropriation depends on country-specific circumstances. These may include the quality of banking systems, the legal and judicial protection of individual shareholders, and the degree of financial disclosures required.Small Scale Enterprise,Fiscal&Monetary Policy,Labor Policies,Economic Theory&Research,International Terrorism&Counterterrorism,Private Participation in Infrastructure,Microfinance,Economic Theory&Research,Fiscal&Monetary Policy,Small Scale Enterprise

Diversification and efficiency of investment by East Asian corporations

The East Asian financial crisis has been attributed in part to the corporate diversification associated with the misallocation of capital investment toward less profitable and more risky business segments. Much anecdotal evidence to support this view has surfaced since the crisis but there was little discussion of it before the crisis. Quite the contrary: The rapid expansion of East Asian firms by entering new business segments was viewed as contributing to the East Asian miracle. The authors examine the efficiency of investment by diversified corporations in nine East Asian countries, using unique panel data from more than 10,000 corporations for the pre-crisis period, 1991-96. They: 1) Document the degree of diversification in the corporate sector in Hong Kong, Indonesia, Japan, the Republic of Korea, Malaysia, the Philippines, Singapore, Taiwan (China), and Thailand, countries that have achieved enviable rates of economic growth over the past three decades. 2) Distinguished between vertical and complementary diversification and study the differences across nine countries. 3) Investigate whether diversification in East Asian has hurt economic efficiency. Their study tests the learning-by-doing and misallocation-of-capital hypotheses related to the types and degrees of diversification in East Asian countries. Firms in Indonesia, Korea, Taiwan, and Thailand appear to have suffered significant negative effects of vertical integration on short-term performance; the same countries gained significant short-term benefits from complementary expansion. The results suggests that the misallocation-of-capital hypothesis is appropriate for Korea and Malaysia; the learning-by-doing hypothesis for Indonesia, Taiwan, and Thailand. Firms in more developed countries succeed in vertically integrating and improve both short-term profitability and market valuation. Firms in more developed countries are ultimately more likely to benefit from such diversification (learn faster, to improve theirperformance). And diversification by firms in less developed countries is subject to more misallocation of capital.Microfinance,Fiscal&Monetary Policy,Economic Theory&Research,Small and Medium Size Enterprises,Small Scale Enterprise,Economic Theory&Research,Microfinance,Private Participation in Infrastructure,Small Scale Enterprise,Achieving Shared Growth

Does"good government"draw foreign capital ? Explaining China's exceptional foreign direct investment inflow

China is now the world's largest destination of foreign direct investment (FDI), despite assessments highlighting its institutional deficiencies. But this FDI inflow corresponds closely to predicted FDI flows into China from a model that predicts FDI inflow based on government quality indicators and controls and is estimated across a sample of other weak-institution countries. The only real discrepancy is that, if government quality is measured by constraints on executive power, China receives somewhat more FDI than the model predicts. This might reflect an underestimation of the strength of these constraints in China, a unique institutional setting for FDI operations, FDI based on expected future institutional improvements, or a unique Chinese model of development. The authors conclude that Ockham's razor disfavors the last. They also note that FDI may be elevated because Chinese institutions protect foreign firms better than domestic ones.Foreign Direct Investment,Economic Theory&Research,Legal Products,Investment and Investment Climate,Parliamentary Government

The clustering of intermediate redshift quasars as measured by the Baryon Oscillation Spectroscopic Survey

We measure the quasar two-point correlation function over the redshift range 2.2<z<2.8 using data from the Baryon Oscillation Spectroscopic Survey. We use a homogeneous subset of the data consisting of 27,129 quasars with spectroscopic redshifts---by far the largest such sample used for clustering measurements at these redshifts to date. The sample covers 3,600 square degrees, corresponding to a comoving volume of 9.7(Gpc/h)^3 assuming a fiducial LambdaCDM cosmology, and it has a median absolute i-band magnitude of -26, k-corrected to z=2. After accounting for redshift errors we find that the redshift space correlation function is fit well by a power-law of slope -2 and amplitude s_0=(9.7\pm 0.5)Mpc/h over the range 3<s<25Mpc/h. The projected correlation function, which integrates out the effects of peculiar velocities and redshift errors, is fit well by a power-law of slope -1 and r_0=(8.4\pm 0.6)Mpc/h over the range 4<R<16Mpc/h. There is no evidence for strong luminosity or redshift dependence to the clustering amplitude, in part because of the limited dynamic range in our sample. Our results are consistent with, but more precise than, previous measurements at similar redshifts. Our measurement of the quasar clustering amplitude implies a bias factor of b~3.5 for our quasar sample. We compare the data to models to constrain the manner in which quasars occupy dark matter halos at z~2.4 and infer that such quasars inhabit halos with a characteristic mass of ~10^{12}Msun/h with a duty cycle for the quasar activity of 1 per cent.Comment: 20 pages, 18 figures. Minor modifications to match version accepted by journa

Binary Quasars at High Redshift. II. Sub-Mpc Clustering at z ~ 3-4

We present measurements of the small-scale (0.1 ≲ r ≲ 1 h^(-1) Mpc) quasar two-point correlation function at z>2.9, for a flux-limited (i < 21) sample of 15 binary quasars compiled by Hennawi et al. The amplitude of the small-scale clustering increases from z ~ 3 to z ~ 4. The small-scale clustering amplitude is comparable to or lower than power-law extrapolations (assuming a fixed slope γ = 2) from the large-scale correlation function of the i < 20.2 quasar sample from the Sloan Digital Sky Survey. Using simple prescriptions relating quasars to dark matter halos, we model the observed small-scale clustering with halo occupation models. We found that the level of small-scale clustering favors an active fraction of black holes in (M ≳ 10^(13) h^(–1) M_☉) satellite halos f_s ≳ 0.1 at z ≳ 3