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1 – 10 of 22Santanu Mitra, Mahmud Hossain and Barry R. Marks
The purpose of the paper is to examine the association between the corporate ownership characteristics and the timely remediation of internal control weaknesses over financial…
Abstract
Purpose
The purpose of the paper is to examine the association between the corporate ownership characteristics and the timely remediation of internal control weaknesses over financial reporting under Section 404 of the Sarbanes‐Oxley Act (SOX) of 2002.
Design/methodology/approach
The paper employs both ordered and binary logistic regression models for a sample of 695 US firms who reported internal control weaknesses for the first time, pursuant to SOX Section 404, and evaluates the impact of the stock ownership characteristics on the timeliness in remediation of their control weaknesses.
Findings
The test results show that the corporate ownership characteristics, as a part of governance mechanism, play an incrementally critical role to influence firms' decisions to promptly remediate their internal control problems and improve the reliability of financial information. In addition, it was also found that a corporate board independent of its CEO is effective in monitoring timely remediation of control problems. Sub‐sample analyses for the company‐level and account‐specific internal control weaknesses produce similar results in support of the effect of corporate stock ownership characteristics on the timely remediation of internal control weaknesses.
Originality/value
First, the paper adds to the literature by demonstrating the incremental effect of the stock ownership characteristics on a firm's timeliness in remediation of control weaknesses, even after controlling the effect of audit committee and board characteristics in the analysis. Second, the paper shows that even in the post‐SOX years with enhanced regulatory oversight in corporate affairs, the effect of corporate ownership attributes as a part of governance is incrementally observable in a situation that calls for prompt managerial action to ensure the reliability of financial information. Third, for the first time, the study makes a separate detailed analysis on the association between the stock ownership attributes and the remediation of company‐level and account‐specific control weaknesses. The results provide valuable insights into the ownership governance effect on the remediation of the two types of control weaknesses that have different rigor, auditability (more or less auditable), and effects (pervasive or non‐pervasive) on financial reporting quality. Fourth, the study further enhances one's understanding of several important governance factors that help achieve a sound financial reporting system and restore investors' confidence in the system.
Details
Keywords
- United States of America
- Financial reporting
- Shareholders
- Corporate governance
- Sarbanes‐Oxley
- Stock ownership characteristics
- Remediation of internal control weaknesses
- Systematic and non‐systematic internal control weaknesses
- Managerial stock ownership
- Diffused and concentrated institutional ownership
- Non‐institutional blockholder ownership
- Board and audit committee characteristics
Manel Hessayri and Malek Saihi
The purpose of this paper is to examine whether International Financial Reporting Standards (IFRS) adoption complements corporate governance factors (e.g. ownership structure) in…
Abstract
Purpose
The purpose of this paper is to examine whether International Financial Reporting Standards (IFRS) adoption complements corporate governance factors (e.g. ownership structure) in monitoring managers’ discretional behavior in an emerging market context.
Design/methodology/approach
The paper relies on a sample of listed companies in the United Arab Emirates, Morocco, South Africa and the Philippines during an eight-year period on average (four years of pre-adoption period and four years of post-adoption period).
Findings
The authors find no evidence of lower earnings management after the switch to IFRS reporting, suggesting that managerial discretional behavior is insensitive to a firm’s IFRS adoption. However, the authors document effective monitoring role of a firm’s ownership structure on earnings management. More interestingly, institutional investors are effective in constraining earnings management when holding a high level of ownership. Moreover, the effect of blockholders and institutional blockholders varies as their ownership rises following a non-linear pattern.
Research limitations/implications
First, the assumption that discretionary accruals are adequate measure of earnings management may be criticized in different ways. Second, the findings, performed on listed companies in the United Arab Emirates, Morocco, South Africa and the Philippines, should be interpreted with caution and cannot be generalized to all emerging market countries.
Practical implications
Standards setters and market authorities should be aware of earnings management determinants to set adequate and fitting accounting standards limiting opportunistic behavior of managers and mainly to set up training programs to accounting professionals improving the IFRS implementation. Moreover, considering specific features of firms in emerging market countries related to ownership structure, international investors may rely on such criteria to evaluate firms. Finally, auditors should be aware of different incentives for earnings management in order to be able to detect eventual manipulation of accounting earnings.
Originality/value
This paper provides a timely contribution to the continuous debate of the effect of IFRS adoption on earnings management in a poorly exploited setting, emerging market context. When investigating, additionally, the eventual non-linear effect of institutional ownership, block ownership, institutional block ownership and non-institutional block ownership on earnings management, a major contribution is that it brings to light the finding of a differential influence of ownership levels on earnings management.
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Marc Steffen Rapp and Oliver Trinchera
In this paper, we explore an extensive panel data set covering more than 4,000 listed firms in 16 European countries to study the effects of shareholder protection on ownership…
Abstract
In this paper, we explore an extensive panel data set covering more than 4,000 listed firms in 16 European countries to study the effects of shareholder protection on ownership structure and firm performance. We document a negative firm-level correlation between shareholder protection and ownership concentration. Differentiating between shareholder types, we find that this pattern is mainly driven by strategic investors. In contrast, we find a positive correlation between shareholder protection and block ownership of institutional investors, in particular when we restrict the analysis to independent institutional investors. Finally, we find that independent institutional investors are positively associated with firm valuation as measured by Tobin’s Q. The opposite applies for strategic investors. Overall, our results are consistent with the view that (i) high shareholder protection and (ii) limited ownership by strategic investors make small investors and investors interested in security returns more confident in their investments.
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Adel AlQadasi and Shamharir Abidin
This study is motivated by the competing views on whether internal governance mechanisms complement or substitute for external auditing, and how this association is affected by…
Abstract
Purpose
This study is motivated by the competing views on whether internal governance mechanisms complement or substitute for external auditing, and how this association is affected by ownership concentration. The complementary view predicts that good internal governance mechanisms are related to high-quality audit. On the other hand, corporate governance mechanisms may be substituted for each other, so more investment in governance mechanisms leads to less investment in external auditing. Therefore, this study aims to examine the association between internal governance mechanisms and the demand for audit quality.
Design/methodology/approach
Data from Malaysian listed companies during the period 2009 to 2012 are used. Ordinary least square (OLS) regression is applied to analyse the data.
Findings
Companies with a higher concentration of ownership are less likely to demand extensive auditing. In addition, the study provides supporting evidence for the complementary association between a company’s governance and audit fees. However, the ownership concentration plays a minor role in the positive association between internal corporate governance and audit quality. Further tests are conducted and support the main findings.
Practical implications
Significant implications are provided for the audit profession in emerging economies, where concentrated ownership is common, to help policymakers and regulators in determining the power of controlling shareholders on audit quality and firm’s governance. The study’s findings open up avenues for further research.
Originality/value
This is the first work to address the role of ownership concentration in the association between corporate governance and audit quality; it suggests that the ownership structure must be considered in examining the effectiveness of corporate governance. The study also provides a comprehensive combination of internal governance mechanisms.
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Keywords
Proper empirical tests of the effect of blockholders’ monitoring incentives on corporate governance are scant in the literature because the relationship between ownership…
Abstract
Purpose
Proper empirical tests of the effect of blockholders’ monitoring incentives on corporate governance are scant in the literature because the relationship between ownership structure and enforcement of corporate governance mechanisms is bidirectional. This study aims to address the endogeneity issue by examining the effect of blockholding on executive turnover–performance sensitivity, using the split-share-structure (SSS) reform in China as an exogenous shock to blockholders’ monitoring incentives.
Design/methodology/approach
This study uses a logit model for estimating the change in executive turnover–performance sensitivity around the SSS reform. Sub-sample analysis is conducted to examine whether the impact of SSS reform on the turnover-performance sensitivity is stronger for firms with more contestable blockholders who might consider stock liquidity, risk sharing and diversification in their monitoring/trading decisions.
Findings
Top executive turnover, defined as CEO or board chair turnover, becomes less sensitive to firm operating performance after the reform, mainly for firms with contestable blockholders prior to the reform. Stock liquidity and blockholders’ demand for diversification can explain the impact of contestable blockholding. Moreover, blockholding is sensitive to firm operating performance after the reform but not before it.
Originality/value
With few exceptions, most studies in the blockholding literature focus on the effect of blockholder monitoring on firm value. Examining an exogenous shock to blockholding, this paper provides a set of new evidence for the impact of blockholding on executive turnover–performance sensitivity. The results call for more evidence of the impact of blockholding on executive turnover from other markets.
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Initial public offerings (IPOs) underpricing is a world-wide phenomenon in the stock market. It is generally explained with asymmetric information and risk. The purpose of this…
Abstract
Purpose
Initial public offerings (IPOs) underpricing is a world-wide phenomenon in the stock market. It is generally explained with asymmetric information and risk. The purpose of this paper is to complement these traditional explanations with a theory where investors also worry about the after-market illiquidity that may result from asymmetric information after the IPO.
Design/methodology/approach
The model blends such liquidity concerns with adverse selection and risk as motives for underpricing and liquidity. The model's predictions are supported by evidence for 798 French IPOs realized between 1995 and 2008. Using various measures of liquidity, the author finds that expected after-market liquidity and liquidity risk are important determinants of IPO underpricing.
Findings
The author finds evidence that less liquid the aftermarket is expected to be, and the less predictable its liquidity, the larger will be the IPO underpricing.
Practical implications
The study provides empirical evidence that shares outstanding and author IPO characteristics play a vital role on post-IPO liquidity. According to the results obtained, three IPO characteristics, that is, relative size, blockholder and underpricing of offering have an explanatory for the liquidity and trading activity of the shares outstanding. It should be noted that this explanatory power is much greater before isolating the market effect. Nevertheless, given the evidence to show that these operations are executed during upmarket periods when trading volume is high, the non-exclusion of the market effect may attribute these variables with more explanatory power than they actually possess. Be that as it may, even after eliminating the market effect, their explanatory capacity is still considerable.
Originality/value
The author has found that underpricing is negatively related to the breadth of shareholders but positively related to institutional shareholders after the IPO. When a company is underpriced, it is likely, on average, to have a higher breadth of shareholder base and lower concentration of large outside investors.
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Qaiser Rafique Yasser, Abdullah Al Mamun and Margurite Hook
This paper aims to focus mainly on the relationship between ownership structure and earnings management of a developed and two developing economies, and is distinct from prior…
Abstract
Purpose
This paper aims to focus mainly on the relationship between ownership structure and earnings management of a developed and two developing economies, and is distinct from prior research.
Design/methodology/approach
Using a sample of firms from three countries (Australia, Malaysia and Pakistan), the detailed ownership evolutions for the period 2011-2013 were observed.
Findings
Overall, the authors find that in the East, ownership concentration is negatively associated with financial reporting quality. Individual ownership and group ownership were negatively associated with earnings management in Pakistan, however, not in Malaysia where the same were positively associated. Further, the result of this study indicated that state ownership is negatively associated with firm performance. Among the control variables, it was found that larger firms were negatively correlated with financial reporting, while firms with a larger board size and mature in the maneuver were coupled positively with earnings management.
Originality/value
The results highlight the highly individualized effects of blockholders and the need for research to further understand the mechanisms through which shareholders impact financial reporting quality.
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Keywords
Qaiser Rafique Yasser, Abdullah Al Mamun and Irfan Ahmed
The main purpose of this paper is to examine the causes and interrelations between ownership composition and financial reporting quality of firms in the Asia-Pacific region.
Abstract
Purpose
The main purpose of this paper is to examine the causes and interrelations between ownership composition and financial reporting quality of firms in the Asia-Pacific region.
Design/methodology/approach
The study uses panel data for 420 firms for the period 2011-2013 (three years) from Australia, Singapore, Malaysia, the Philippines and Pakistan.
Findings
Overall, the authors find that ownership concentration is positively associated with the financial reporting quality. However, institutional ownership and foreign ownership are positively associated with financial disclosure in developing countries. Further, the result indicates that institutional and public ownership is positively associated with financial reporting in developed countries. Among the control variables, the authors find that larger firms are negatively correlated with financial reporting quality in Asia-Pacific.
Originality/value
These results highlight the highly individualized effects of blockholders and the need for research to further understand the mechanisms through which shareholders impact financial reporting quality.
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Keywords
SHANTARAM P. HEGDE and SANJAY B. VARSHNEY
We argue that uninformed subscribers to an initial public offering (IPO) of common stocks are exposed to greater ex ante risk of trading against informed traders in the secondary…
Abstract
We argue that uninformed subscribers to an initial public offering (IPO) of common stocks are exposed to greater ex ante risk of trading against informed traders in the secondary market because the advent of public trading conveys hitherto private information and thereby mitigates adverse selection. The going‐public firm underprices the new issue to compensate uninformed subscribers for this added secondary market adverse selection risk. We test this market liquidity‐based explanation by investigating the ex‐post consequences of ownership structure choice on the initial pricing and the secondary market liquidity of a sample of initial public offerings on the New York Stock Exchange (NYSE). Consistent with our argument, we find that initial underpricing varies directly with the ex post trading costs in the secondary market. Further, initial underpricing is related positively to the concentration of institutional shareholdings and negatively to the proportional equity ownership retained by the founding shareholders. Finally, the secondary market illiquidity of new issues is positively related to institutional ownership concentration and negatively to ownership retention and underwriter reputation. Thus, the evidence based on our NYSE sample supports the view that the entrepreneurs' choice of ownership structure affects both the initial pricing and the subsequent market liquidity of new issues.