We examine the impact of corporate board reforms on firm value in 41 countries. Using a difference-in-differences design, we find that board reforms increase firm value. Reforms involving board and ...audit committee independence, but not reforms involving separation of chairman and chief executive officer positions, drive the valuation increases. In addition, while comply-or-explain reforms result in a greater increase in firm value than rule-based reforms, the effects of reforms are similar across civil law and common law countries. Further investigation shows that the subsequent change in board independence plays an important role in explaining the effectiveness of the reforms.
This paper investigates the influence of corporate governance on financial firms' performance during the 2007–2008 financial crisis. Using a unique dataset of 296 financial firms from 30 countries ...that were at the center of the crisis, we find that firms with more independent boards and higher institutional ownership experienced worse stock returns during the crisis period. Further exploration suggests that this is because (1) firms with higher institutional ownership took more risk prior to the crisis, which resulted in larger shareholder losses during the crisis period, and (2) firms with more independent boards raised more equity capital during the crisis, which led to a wealth transfer from existing shareholders to debtholders. Overall, our findings add to the literature by examining the corporate governance determinants of financial firms' performance during the 2007–2008 crisis.
► Firms with higher institutional ownership performed worse during the crisis. ► Institutional ownership was associated with greater risk-taking before the crisis. ► Firms with more independent boards performed worse during the crisis. ► Board independence was associated with more equity raisings during the crisis. ► Equity capital raisings helped firms survive the crisis.
We test whether mandatory IFRS adoption affects firm-level "crash risk," defined as the frequency of extreme negative stock returns. We separately analyze nonfinancial firms and financial firms ...because IFRS is likely to affect their crash risk differently. We find that IFRS adoption decreases crash risk among nonfinancial firms, especially among firms in poor information environments and in countries where IFRS adoption results in larger and more credible changes to local GAAP. In contrast, IFRS adoption has no effect on crash risk for financial firms, on average, but decreases crash risk among firms less affected by IFRS's fair value provisions, and increases crash risk among banks in countries with weak banking regulations. Overall, our results are consistent with the increased transparency from IFRS adoption broadly reducing crash risk among nonfinancial firms, but more selectively among financial firms, and with financial regulations playing a complementary role in implementing IFRS among financial firms.
Proponents of IFRS argue that mandating a uniform set of accounting standards improves financial statement comparability that in turn attracts greater cross-border investment. We test this assertion ...by examining changes in foreign mutual fund investment in firms following mandatory IFRS adoption in the European Union in 2005. We measure improved comparability as a credible increase in uniformity, defined as a large increase in the number of industry peers using the same accounting standards in countries with credible implementation. Consistent with this assertion, we find that foreign mutual fund ownership increases when mandatory IFRS adoption leads to improved comparability.
► Foreign mutual fund ownership increases in the EU after mandatory adoption of IFRS. ► The increase in mutual fund ownership is larger when IFRS adoption improves comparability. ► Both implementation credibility and increased uniformity are important factors leading to improved comparability. ► The effects of improved comparability do not increase domestic mutual fund ownership. ► The effects of improved comparability on foreign fund ownership are primarily driven by foreign global funds, as opposed to foreign regional, country, and other funds.
Using a sample of German firms, we investigate the financial statement effects of adopting International Accounting Standards (IAS) during 1998 through 2002. We find that total assets and book value ...of equity, as well as variability of book value and income, are significantly higher under IAS than under German GAAP (HGB). In addition, book value and income are no more value relevant under IAS than under HGB, and HGB (IAS) income is highly persistent (transitory). Finally, we find weak evidence that IAS income exhibits greater conditional conservatism than HGB income. Our results are consistent with the fair-value (income smoothing) orientation of IAS (HGB). PUBLICATION ABSTRACT
Motivated by international business research on institutional arbitrage and headquarters–subsidiary relationships, we examine the effect of regulatory distance on multinational banks’ (MNBs) ...reporting transparency abroad. Using an international sample of foreign subsidiary banks in 46 host countries from 47 home countries, we find that bank transparency declines when the home countries have tighter activity restrictions than the host countries. We bolster the causal inference using difference-in-differences designs that take advantage of banking reforms and cross-border bank acquisitions. We also find that the result is more pronounced when parent banks have lower capital ratios or when host countries have weaker supervisory power, suggesting that parent banks use opaque reporting to conceal risk-taking abroad. Further analysis finds that less transparent subsidiaries are more likely to fail during financial crises. Overall, our findings suggest that regulatory distance creates negative externalities for bank transparency and stability abroad.
We test the assertion that a consequence of voluntarily adopting International Accounting Standards (IAS) is the enhanced ability to attract foreign capital. Using a unique database that reports ...firm-level holdings of over 25,000 mutual funds from around the world, our multivariate tests find that average foreign mutual fund ownership is significantly higher among IAS adopters. We also find that IAS adopters in poorer information environments and with lower visibility have higher levels of foreign investment, consistent with firms using IAS adoption to provide more information and/or information in a more familiar form to foreign investors. Taken together, our findings are consistent with voluntary LAS adoption reducing home bias among foreign investors and thereby improving capital allocation efficiency.
We examine how mandatory disclosure of corporate social responsibility (CSR) impacts firm performance and social externalities. Our analysis exploits China's 2008 mandate requiring firms to disclose ...CSR activities, using a difference-in-differences design. Although the mandate does not require firms to spend on CSR, we find that mandatory CSR reporting firms experience a decrease in profitability subsequent to the mandate. In addition, the cities most impacted by the disclosure mandate experience a decrease in their industrial wastewater and SO2 emission levels. These findings suggest that mandatory CSR disclosure alters firm behavior and generates positive externalities at the expense of shareholders.
We find that analysts are more likely to provide cash flow forecasts in countries with weak investor protection. This finding is consistent with our hypothesis that market participants demand (and ...analysts supply) cash flow information when weak investor protection results in earnings that are less likely to reflect underlying economic performance. Our results suggest that information intermediaries respond to market-based incentives to attenuate the adverse effects of country-level institutional factors on earnings' usefulness. These findings contribute to the literature by shedding light on the institutional determinants of analysts' research activities, and on the nature of the financial information they generate. PUBLICATION ABSTRACT
Motivated by the international business literature that examines the interactions between political forces and business environments, we investigate whether and how political connections affect ...managers’ voluntary disclosure choices. We show that compared to non-connected firms, connected firms issue fewer management earnings forecasts. In addition, relative to nonconnected firms, connected firms have a greater increase in the frequency of management forecasts subsequent to the elections that damage their political ties. Further analyses suggest that lack of capital market incentives, reduced litigation risk, and lower proprietary costs shape politically connected firms’ unique voluntary disclosure choices.
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