Does Board Independence Reduce the Cost of Debt?

Using the passage of the Sarbanes-Oxley Act and the associated change in listing standards as a natural experiment, we find that while board independence decreases the cost of debt when credit conditions are strong or leverage low, it increases the cost of debt when credit conditions are poor or leverage high. We also document that independent directors set corporate policies that increase firm risk. These results suggest that, acting in the interest of shareholders, independent directors are increasingly costly to bondholders with the intensification of the agency conflict between these two stakeholders

Director networks and informed traders

We provide evidence that sophisticated investors like short sellers, option traders, and financial institutions are more informed when trading stocks of companies with more connected board members. For firms with large director networks, the annualized return difference between the highest and lowest quintile of informed trading ranges from 4% to 7.2% compared to the same return difference in firms with less connected directors. Sophisticated investors better predict outcomes of upcoming earnings surprises and firm-specific news sentiment for companies with more connected directors. Changes in board connectedness are positively associated with changes in measures of adverse selection

The strategic role of reinsurance in the United Kingdom’s (UK) non-life insurance market

We demonstrate that by increasing the level of reinsurance, primary insurers increase their product-market share at the expense of rivals with lower reinsurance coverage in five main lines of insurance in the United Kingdom’s (UK) non-life insurance market. We use panel data drawn from statutory filings made by non-life insurers to the then UK regulator (FSA) over 1985 to 2010 period. We find that the influence of reinsurance and other financial variables on insurers’ growth in product-market share varies across lines of insurance business. Since reinsurance impacts on product-market outcomes in competitive non-life insurance industry, we conclude that reinsurance performs an important strategic function in insurance markets

The Cost of Multiple Large Shareholders

Previous research argues that large noncontrolling shareholders enhance firm value because they deter expropriation by the controlling shareholder. We propose that the conflicting incentives faced by large shareholders may induce a nonlinear relationship between the relative size of large shareholdings and firm value. Consistent with this prediction, we present evidence that there are costs to having a second (and third) largest shareholder, especially when the largest shareholdings are similar in size. Our results are robust to various relative size proxies, firm performance measures, model specifications, and potential endogeneity issues

Insider Trading and Financing Constraints

Insider trading may alleviate financing constraints by conveying value-relevant information to the market (the information effect) or may exacerbate financing constraints by impairing market liquidity and distorting insiders’ incentives to disclose value-relevant information (the confidence effect). We examine the significance of these two contrasting effects by investigating the link between insider trading and financing constraints as measured by the investment-cash flow sensitivity. We find that, overall insider trading exacerbates financing constraints; however the information effect dominates the confidence effect for insider purchases. Only trades by executive directors are significantly related to financing constraints

International Evidence on the Determinants of Organizational Ethical Vulnerability

© 2018 British Academy of Management This paper proposes a model to explain what makes organizations ethically vulnerable. Drawing upon legitimacy, institutional, agency and individual moral reasoning theories we consider three sets of explanatory factors and examine their association with organizational ethical vulnerability. The three sets comprise external institutional context, internal corporate governance mechanisms and organizational ethical infrastructure. We combine these three sets of factors and develop an analytical framework for classifying ethical issues and propose a new model of organizational ethical vulnerability. We test our model on a sample of 253 firms that were involved in ethical misconduct and compare them with a matched sample of the same number of firms from 28 different countries. The results suggest that weak regulatory environment and internal corporate governance, combined with profitability warnings or losses in the preceding year, increase organizational ethical vulnerability. We find counterintuitive evidence suggesting that firms’ involvement in bribery and corruption prevention training programmes is positively associated with the likelihood of ethical vulnerability. By synthesizing insights about individual and corporate behaviour from multiple theories, this study extends existing analytical literature on business ethics. Our findings have implications for firms’ external regulatory settings, corporate governance mechanisms and organizational ethical infrastructure

Firms cash management, adjustment cost and its impact on firms’ speed of adjustment-A cross country analysis

We investigate the firms’ specific attributes that determine the difference in speed of adjustment (SOA) towards the cash holdings target in the Scandinavian countries: Denmark, Norway and Sweden. We examine whether Scandinavian firms maintain an optimal level of cash holdings and determine if the active cash holdings management is associated with the firms’ higher SOA and lower adjustment costs. Our findings substantiate that a higher level of off-target cost induces professional managers to rebalance their cash level towards the optimal balance of cash holdings. Our results reveal that Scandinavian firms accelerate SOA towards cash targets primarily for the precautionary motive. Moreover, our results show that SOA is heterogeneous across Scandinavian firms based on adjustment cost and deviate cash holdings towards the target mainly with the support of internal financing. Furthermore, our empirical findings show that the SOA of Norwegian firms is significantly higher than the Danish and Swedish firms

Endogeneity: How Failure to Correct for it can Cause Wrong Inferences and Some Remedies

This is the peer reviewed version of the following article: ABDALLAH, W., GOERGEN, M. and O'SULLIVAN, N., 2015. Endogeneity - how failure to correct for it can cause wrong inferences and some remedies. British Journal of Management, 26(4), pp.791-804, which has been published in final form at http://dx.doi.org/10.1111/1467-8551.12113. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.Although researchers in business and management are becoming increasingly aware of the importance of endogeneity affecting regression analysis, they frequently do not have the right methodological toolkit to adjust for this issue. This paper discusses such a toolkit. There are also areas in business and management research which to date seem to be mostly oblivious about the endogeneity issue. This paper highlights such an area, which studies the question as to whether firms that are cross-listed on a foreign stock exchange are charged premium fees by their auditors. When the same methodology (pooled ordinary least squares) as in the existing literature is used, the existence of an audit fee premium for cross-listed firms seems to be confirmed. However, once methodologies are used which adjust for the various types of endogeneity (i.e. omitted variable bias, simultaneous and dynamic endogeneity) there is no longer support for the existence of such a generalised premium. Hence, this paper not only illustrates that failure to adjust for endogeneity has severe consequences such as drawing the wrong inferences, but it also reviews various ways to control for the different types of endogeneity

Executive Compensation, Corporate Governance and Corporate Performance: A Simultaneous Equation Approach

This paper investigates the association between executive compensation and performance. It uniquely utilises a comprehensive set of corporate governance mechanisms within a three-stage least squares (3SLS) simultaneous equation framework. Results based on estimating a conventional single equation model indicate that the executive pay and performance sensitivity is relatively weak, whereas those based on estimating a 3SLS model generally suggest improved executive pay and performance sensitivity. Our findings highlight the need for future research to control for possible simultaneous interdependencies when estimating the executive pay and performance link. The findings are generally robust across a raft of econometric models that control for different types of endogeneities, executive pay and performance proxies.<br/