Corporate Governance: Volume 9

Subject:

Table of contents

(16 chapters)

Contents

Pages V-VI
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List of Contributors

Pages VII-VIII
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Transactions between a firm and its own managers, directors, principal owners or affiliates are known as related party transactions. Such transactions, which are diverse and often complex, represent a corporate governance challenge. This paper initiates research in finance on related party transactions, which have implications for agency literature. We first explore two alternative perspectives of related party transactions: the view that such transactions are conflicts of interest which compromise management’s agency responsibility to shareholders as well as directors’ monitoring functions; and the view that such transactions are efficient transactions that fulfill rational economic demands of a firm such as the need for service providers with in-depth firm-specific knowledge. We describe related party transactions for a sample of 112 publicly-traded companies, including the types of transactions and parties involved. This paper provides a starting point in related party transactions research.

We examine three corporate governance characteristics of preferred stock issuers relative to non-issuers: managerial equity ownership, board size, and block shareholder ownership. We find that the preferred issuers have significantly lower managerial equity ownership than their controls. The finding is consistent with our expectation that the use of preferred stock and managerial equity ownership both serve to reduce agency costs and thus, preferred issuers tend to have little incentive to resort to higher managerial ownership to lessen agency costs. Significantly larger board size for preferred issuers is evident, but we find no difference in block shareholder ownership.

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Recent high profile U.S. corporate collapses have their counterparts in other international markets, such as Australia. The corporate governance failures that led to major corporate collapses in both countries are strikingly similar, despite differences in their respective corporate governance systems. In this paper, I present an examination of the corporate governance failures that led to the demise of three prominent Australian firms in 2001 and illustrate that the corporate governance failures are not limited to the existing corporate governance system in the United States. I will also outline the various corporate governance reforms that were established to restore investor confidence.

This study investigates whether block acquisitions lead to changes in board and CEO compensation characteristics and finds that block purchasers do not play a significant role in improving the firm’s governance practices. However, the majority of professional investors have sold their block within a year, suggesting that they do not own their stock long enough to alter governance policies nor to benefit from such changes. For the smaller number of firms where a new blockholder maintains their investment for more than a year, the use of equity based CEO compensation increases while the use of cash based compensation decreases.

German executives can make misleading statements regarding merger activities while U.S. executives must either state “no comment” or provide a truthful statement. Do these differences in corporate governance standards cause differences in the market response to merger announcements? A sample of German and U.S. firms that announced acquisition plans between 1995 and 1999 suggests that for smaller firms, merger news has no significant impact on cumulative abnormal returns for German firms but a significant positive impact for U.S. firms. Large German firms, however, have similar experiences to large U.S. firms, as do German firms listed on a U.S. stock exchange, which require greater disclosure requirements. Aside from the smaller-firm effect, the evidence is consistent with no price-relevant differences arising from the differences in corporate governance rules.

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This paper sets up a model of strategic sovereign default, in which crony capitalism provides policymakers with incentives to service the debt beyond what is socially optimal. It then considers reforms to deal with the supply side of clientelism: the private sector. This involves tackling agency problems between managers and corporate stakeholders, since a key element to constrain the ability of powerful economic interests to capture the state is good corporate governance. Economic hard times provide such an opportunity, as the implicit coalition between groups of cronies may break down. A model is built along those lines, which highlights international contagion of debt repudiation.

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This paper investigates the Saudi market and the ownership structures of listed firms within the Saudi context. This paper examines the historical phases of evolution of the Saudi market since the first flotation of a Saudi firm in 1935 to date. The data reveals high ownership by families and the government (30%) in the total companies listed. This paper also underscores the capacity of the Saudi market to develop into one of the leading stock exchange markets in the Middle East and East Asia. The discussion concludes that the Saudi market needs greater transparency, better legal frameworks, corporate governance codes, and more regulation, so as to realise its potential.

Using 3,994 observations of Chinese listed firms from 1995 to 2001, we find a significantly positive correlation between state ownership and cash dividend payment, and a significantly positive relation between private ownership and stock dividend payment. In particular, we find that the relation between dividend payment level and ownership structure is nonlinear. The higher the proportion of state ownership, the higher the cash dividend rate. The higher the proportion of private ownership, the higher the stock dividend rate. We conclude that the managers of Chinese listed companies are likely to cater for the preference of different shareholders.

This paper extends Demsetz and Lehn’s (1985) results and studies the determinants of corporate ownership concentration across countries in light of Qu’s (2004) model using a newly constructed dataset of 1,070 publicly traded stock companies from 45 countries. Estimation results show that ownership concentration varies systematically with respect to certain firm-specific economic variables and country characteristics in ways that are consistent with value maximization and predictions of agency theory. After controlling for firm-level determinants such as size, auditing practice, return rate, etc., ownership concentration is significantly lower in countries with more developed stock market and more effective investor protection.

Executive stock option grants are intended to remove corporate governance problems by aligning the managers’ interests with those of the outside shareholders. Conventional schemes leave several problems in place. Exotic option structures can resolve these. In this paper, such structures are proposed and tested on the Dow Jones constituents over a 10-year period. These alternative schemes increase the financial rewards to the better performing managers, at no extra cost to the company whilst offering a resolution or mitigation of the identified agency problems No one scheme dominates the others and a portfolio of option types is indicated.

The agency view of corporate governance requires effective monitoring to align the interests of the agent with those of the principal. This paper suggests that conventional proposals to reform corporate governance through legislation, codes of best practice, and the like, are necessary, but underestimate the pressures which reputational intermediaries face from inevitable conflicts of interest and bias. Various strands of the literature on corporate governance, cognitive research and behavioural economics are integrated to shed light on questions regarding the independence of boards of directors and external auditors.

I test empirically the hypothesis that the monitoring role of the board of directors depends on the severity of the agency problems and the amount of information needed to monitor. I show that in high growth firms, where the agency conflicts are low and managers are likely to reveal more information to get advice, boards are more independent but less likely to monitor, while in low growth firms, boards are less likely to be independent, but the relationship between firm value and board independence is strong. Overall, boards become more independent but monitor less as firms’ growth opportunities increase, suggesting that managers trade off the amount of information released to the board to get a better advice and to mitigate the monitoring role of the board.

The paper assembles data on over 1,000 manufacturing and services firms in India for the entire post-reform period from 1992 through 2002 to examine the association between corporate governance and monetary policy. The findings suggests that: (a) public firms are relatively more responsive to a monetary contraction vis-à-vis their private counterparts; and (b) quoted firms lower their long-term bank borrowings in favour of short-term borrowings, post monetary tightening, as compared with unquoted firms. A disaggregated analysis based on firm size and leverage above a certain threshold validates these findings. The study concludes by analyzing the broad policy implications of these findings.

This study outlines some major findings of the impact of ownership concentration on corporate performance, investment and financing decisions in the Malaysian corporate sector. Earlier studies on corporate governance linked very concentrated ownership structure to weak corporate governance, thus leading firms to make poor investment and financing decisions. However, a firm that strives towards maximising shareholder’s wealth would select its investment and financing strategy with care. Thus concentrated ownership has also been found to lead to better corporate performance, and that composition of ownership is an important element to spur better corporate performance.

DOI
10.1016/S1569-3732(2004)9
Publication date
Book series
Advances in Financial Economics
Editors
Series copyright holder
Emerald Publishing Limited
ISBN
978-0-76231-133-0
eISBN
978-1-84950-289-4
Book series ISSN
1569-3732