The influence of corporate governance on changes in risk following the global financial crisis: evidence from the Portuguese stock market

This paper examines the influence of corporate governance characteristics on changes in total, market and idiosyncratic risk in the Portuguese capital market following the collapse of Lehman Brothers. We aim to address corporate practices, while determining if corporate governance characteristics can help predict future variations of the risk associated with a certain security and, in this sense, if these characteristics may be used to help monitor or forecast risk of an existing portfolio of securities over time. We find positive and significant changes in total and idiosyncratic risk for non-financial firms listed on Euronext Lisbon, consistent with increases in investor uncertainty during the crisis period. Our results suggest that changes in risk measures over a shorter-term and a longer-term period vary with governance characteristics. The capital market rewarded companies with a greater proportion of non-executive directors and directors that exercise (on average) management roles in more companies or institutions. On the other hand, the capital market punished companies with a greater proportion of independent directors and greater ownership concentration.     

Impression management in corporate annual reports during the global financial crisis

This paper analyses impression management (IM) during the global financial crisis (GFC). It examines the differences in multiple textual characteristics and attributions between a highly positive performance period (2002–2007) and the GFC period (2008–2012), within the setting of Spain, where these two economic cycles were extreme. In contrast to previous research, companies' extreme poor performance in our sample is driven by an exogenous event. The findings do not show clear evidence of IM based on textual characteristics specifically linked to the GFC. Companies tried not to use overt IM and, to some extent, tried to clarify the impact of the crisis on performance. They were under great scrutiny and probably preferred to tell a more careful story. However, a general pattern of IM was still present during the GFC in the form of consistent positive attributions, favourable benchmarks and enhancement practices. In essence, the crisis did not fully stop IM practices, but rather influenced the way IM was produced. Overall, our results show that IM was lower during the GFC than in the case of poor performance in normal macroeconomic conditions found by previous literature. The results also show that the narratives of firms in the finance and real estate sectors were the most reactive to the GFC, probably linked to their key role in the crisis.     

Corporate governance and corporate social responsibility: lessons from the land of OZ

Australia corporate boards and senior management have been spirited from the Land of Milk and Honey (profit) to the Land of OZ. They are to embark on a journey, following the “yellow-brick road”, a proverbial path to a promised land of one’s hopes and dreams, in order to find brains, a heart and courage. The effect of new regulations introduced in Australia to curtail corporate misbehaviour is detailed by storytelling. The Wizard of OZ is the title of a story written by L. Frank Baum and published in 1899. In 1939, Metro Goldwyn Mayer Studios made a movie of the story. I have used The Wizard of Oz to argue that corporate boards and senior management need to make decisions using a balance of intellect (brains), emotionality (heart), and a sense of purpose (courage). The inspiration for using Baum’s story, as an analogy for the transformation needed in corporate boards and senior management, comes from Biberman and Whitty (Journal of Organisational Change Management 10(2):130–188, 1997). This research is based on interviews with Board members and non-executive directors from five companies listed in the Business Review Weekly (BRW) Top Twenty-five Companies in Australia (2007) and a range of secondary data sources. The financial and reputational success of the organisation and its members is out of balance with the human and social costs and benefits. Respondents confirmed that board members and senior management should willingly provide information about the corporation and its activities to its stakeholders, that information and data should be transparent, the true extent of director remuneration should be revealed and that financial reporting should be true and accurate. Board members and senior management can be assisted to operate in a way that observes socially responsible values and balances the obligation for profit maximisation with corporate social responsibilities (CSR). This study provides steps that organisations can take to achieve a balance of intellect, emotionality and sense of purpose and therefore realise their corporate social responsibility. The results of this empirical and secondary research suggest a method that may be used to make board members and senior managers more aware of their corporate social responsibilities and curtail corporate misbehaviour where the introduction of a range of new regulations has had little effect.     

Perspective on comparative corporate governance: understanding corporate governance patterns

 The purpose of this study was to examine the perspective of international comparative research on corporate governance. The problems of stock ownership and corporate control in large corporations are the basis of any discussion on corporate governance. In large corporations of major capitalist countries, the subject of corporate control is changing from a single individual or family to the system of impersonal possession, depending on various factors of stock ownership between corporations and the interlocking directorship. These are the common bases that started the corporate governance problem. After these aspects are recognized, it is important to identify the difference in patterns of corporate governance in each country. First, I clarify the common direction of the development of “stock ownership and corporate control” seen in large corporations of major capitalist countries. Second, I look at the Anglo-American, Japanese, and South Korea patterns, and consider the differences or the distinctiveness of the classification by country in a concrete system of stock ownership and corporate control.     

Corporate governance and social norms during financial crisis: evidence from France and Saudi Arabia

The resistance to financial crisis and compliance with social norms and effectiveness of corporate governance mechanisms is considered recently as a good matter of concern. Focusing on differences between French and Saudi firms, we examine the effect of (1) board of directors, (2) audit committee, (3) compliance with Corporate Social Responsibility activities, (4) compliance with Shariah principles on financial volatility during subprime crisis of 2007. We find that larger boards, larger audit committees, independent members on boards and audit committees are related negatively to financial volatility. The result supports corporate governance theory which suggests that corporate governance variables outlined provide effective of monitoring of the management thereby enhancing firm’s resistance to financial crisis. In addition, we find that compliance with CSR alone does not explain the financial volatility. Its concert with corporate governance variables is necessary. This result supports stakeholder theory which argues that companies compliant with CSR activities in their business strategy and have larger boards and audit committees, and independent directors on boards and audit committees resist more financial downturns and any economic shock. Furthermore, we find that compliance with Shariah norms plays a significant role in protecting shareholder interests, improving functioning of corporate governance mechanisms and affect positively the resistance of Saudi firms to financial crisis.     

The impact of the board of directors characteristics on corporate performance and risk-taking before and during the global financial crisis

Over recent years, the effectiveness of good corporate governance practices has received considerable attention by the financial literature. In the current global finance crisis, several practitioners, academic and regulators argue that mechanisms of corporate governance have not served their purpose to safeguard equitably the interest of stakeholders, increasing the corporate risk-taking without proper management. This research contributes to the empirical literature, analyzing the impact of board characteristics and the capital structure on corporate performance and corporate risk-taking, in two different economic contexts: in an economic growth and in an economic recession. The methodology implemented takes into account the bidirectional causality and addresses endogeneity problem using a simultaneous equations system with three-stage least squares estimation method. The results show that the effectiveness of the board is sensitive to the economic period and the capital structure leads to reduce the levels of corporate risk-taking during the crisis. This research suggests that good corporate governance mechanisms should mitigate excessive corporate risk-taking and protect the interest of stakeholders in both periods: before and during the global financial crisis.     

Auditor independence, corporate governance and aggressive financial reporting: an empirical analysis

This paper seeks to provide empirical evidence on the efficacy of three important governance mechanisms (auditors, directors, and institutional shareholders) in constraining aggressive financial reporting, proxied by abnormal accruals. It also examines the effects of the Sarbanes–Oxley Act (SOX) on their efficacy. Using a sample of US firms audited by the Big 5 (4) auditors between 2000 and 2004, we document a positive relation between abnormal accruals (our proxy for financial reporting aggressiveness) and auditors’ economic dependence on their clients. Furthermore, we find that this relation is driven by firms with weak non-auditor governance mechanisms before and after the enactment of SOX. The results suggest that aggressive financial reporting occurs only when multiple governance mechanisms ‘fail’. More specifically, such type of reporting requires that a highly dependent auditor operates in a ‘poor’ governance setting. Thus, the paper underscores the importance of strong governance in constraining aggressive financial reporting. Moreover, our results suggest that governance regulation (such as SOX) is not a substitute for strong governance mechanisms and thus caution against the over reliance on SOX-type legislation in other parts of the world.     

Bankers on boards as corporate governance mechanism: evidence from Poland

This paper examines whether a bank exercises a monitoring role when a banker is represented on a firm’s board. Bank monitoring reduces information asymmetries, and hence lessens firm’s financial constraints—phenomenon frequently measured by investment-cash flow sensitivity in the sample of all non-financial companies listed during 1999–2002 on the Polish stock exchange. I find that firms with a banker on the board rely more heavily on bank loans than on internal capital in their investment activities. In contrast, firms with no banker on the board finance to a larger extent their investment with internal capital than with credit. However, firms with the bank-lender representation on the board are almost as much financially constrained as firms without a bank-lender representative on the board. Hence, the presence of bankers on boards is not associated with bank monitoring. They rather promote their employer’s business. The findings show that investment of firms with a banker on the board is less sensitive to cash flow than investment of firms without bank representatives on the board. This result suggests that bankers on the board provide financial expertise that help those firm to reduce financial constraints.     

The financial crisis,investor activists and corporate strategy: will this mean shareholders in the boardroom?

The concept of stakeholder engagement is gaining increasing attention in the mainstream media and may feature as part of a corporation’s strategy for corporate social responsibility. Not only are boards considering how they might engage with key stakeholders, but stakeholders are also pursuing greater participation in the strategic decisions of companies in which they invest. While this is an emerging concept in companies governed by unitary boards, as in North America, the issue of stakeholder engagement in various forms is also entering debate in other countries around the world. In general, however, the idea of shareholder or stakeholder representation on the boards of most UK and Commonwealth companies is anathema. Forces now influencing the development of strategies for stakeholder engagement and the rise of active investors include changing corporate governance rules which give investors more power in the election of directors, the increasing role of pension plans and hedge fund investment groups which have produced investors who keep a close eye on company performance and value, and a sluggish or turbulent stock market as a result of the financial crisis initiated by the credit crunch in the sub-prime mortgage markets. In this paper the phenomenon of stakeholder representation is examined and results of a recent survey conducted among a large sample of New Zealand directors are presented. The findings suggest that these traditionally oriented boards are increasingly inwardly focused and are without an agenda for building and managing shareholder and stakeholder relations. Accordingly, such boards are unlikely to regard stakeholder engagement as a serious strategic issue and are thus also likely to miss significant opportunities in the changed business environment to benefit from stakeholder support.     

The governance of non-profit micro finance institutions: lessons from history

Microfinance is high on the public agenda, and better corporate governance has been identified as a key factor for enhancing the viability of the industry. However, recent literature on the subject struggles to identify the corporate governance mechanisms that influence the performance of the Micro Finance Institutions (MFIs). Guided by stakeholder and agency theories, this paper uses a historical parallel found in savings banks to present corporate governance lessons for MFIs, particularly non-profit MFIs, today. The findings indicate that monitoring by bank associations, depositors, donors, and local communities was important in securing the survival of savings banks. In addition, a willingness to expand their mission to serve wealthier customers alongside the poor helped the banks become financially viable. These findings could prompt a rethinking of microfinance governance, which stresses regulation, for-profit ownership, and traditional vertical board control. The paper argues that a broader and more stakeholder-based understanding of corporate governance is necessary. Moreover, the paper demonstrates that historical studies can provide governance lessons for today.     

The impact of corporate governance on auditor choice: evidence from Germany

Statutory audits are only beneficial if the appropriate audit quality is both provided and perceived by the users of audited financial statements. On the one hand, Big 4 audit firms are commonly viewed as producing high quality audits. On the other hand, regulators complain about the high market share of Big 4 audit firms. In this context, it is of interest to examine the drivers of a Big 4 audit firm selection. Despite extensive prior research, there is still a lack of findings form Continental European countries and on the impact of corporate governance on auditor choice. This paper on hand is intended to fill the related research gap. Thus, our study identifies variables that determine the auditor choice of large German listed companies. Based on a sample of 432 firm-year observations for the period 2010–2014, our logistic regression analysis suggests that the corporate governance structure influences auditor choice significantly. Notably, the annual meeting frequency of the audit committee and the size of the supervisory board are positively associated with the engagement of a Big 4 audit firm. However, the meeting frequency of the supervisory board and the compliance to the German corporate governance code are negatively related to the choice of a Big 4 auditor. Additionally, the proportion of female supervisory board members does not exert a significant impact. The results remain stable when the DAX30 observations, for which statutory audits are exclusively performed by Big 4 audit firms, are excluded. The main contribution of our paper is, that it sheds light on the impact of corporate governance variables not analyzed by prior research, like supervisory board characteristics, deviations from a corporate governance code, or the female quota, in a Continental European setting, and that it mainly indicates a complementary relationship. Despite the peculiarities of the German setting, the two-tier corporate governance system and the low level of investor protection, the findings of our study are not only relevant for Germany, since many other Continental European countries are characterized by a similar environment. The study’s findings are of particular interest for regulators when addressing audit market structure problems.     

Assessing corporate governance quality: substance over form

After the 2008 global financial crisis and corporate scandals, assessing and improving corporate governance quality (CGQ) is essential. This paper proposes a different approach to evaluate CGQ, to overcome the conceptual and methodological limits of the previous rating systems. It tries to go beyond the objectives of the existing models by suggesting an alternative operating model, (aligned with the new CG guidelines) that provides a concise index for monitoring and decision-making. Using a Fuzzy Expert System (FES), the authors propose a formalized model that: (1) represents all the factors (structural and behavioral) that affect the quality of corporate governance in terms of practical and objective decision-making procedure; (2) is a flexible and useful management tool for supporting the “Board review” and assessing the increase in CGQ associated with particular decisions; (3) supervisors can use to assess CG adequacy by replacing or integrating the experts’ opinions with interviews/questionnaires filled in by directors and managers or through direct observation, as recently suggested by EBA/ESMA. This paper highlights the importance of behavioral features and group dynamics in corporate governance and represents them in an integrated model together with other structural and organizational elements.     

Oil prices and the financial crisis

This paper aims to explain crude oil price volatility and its relationship respect to some macroeconomic and financial variables. Finding the main drivers of oil price dynamics is a crucial element for the definition of adequate monetary policies and risk management purposes. The role of macroeconomic and financial variables is analyzed in a Vector Error Correction Model framework, in order to test the existence of a long run equilibrium in the oil price dynamics. We use monthly data for crude oil prices, the Dollar/Euro exchange rate, the US interest rate, the crude oil Futures open interest, the US oil imports and the gold price over the period 1993–2009. One cointegrating relationship is found which allows to identify a long run equilibrium between the variables.