Sadok El Ghoul

Do Multiple Large Shareholders Play a Corporate Governance Role? Evidence from East Asia

Abstract We examine the governance role of multiple large shareholder structures (MLSS) to determine their valuation effects in a sample of 1,252 publicly traded firms from nine East Asian economies. We find that the presence, number, and size of multiple large shareholders are associated with a significant valuation premium. Our results also show that the identity of MLSS influences corporate value and that the valuation effects of MLSS are more pronounced in firms with greater agency costs. Our results imply that MLSS play a valuable monitoring role in curbing the diversion of corporate resources. Copyright (c) 2009 The Southern Finance Association and the Southwestern Finance Association.

Institutional Investment Horizon and Investment-Cash Flow Sensitivity

This paper examines the relevance of institutional investors’ investment horizon, as reflected in the response of firm investment to internal cash flows. We argue that institutional investors with longer investment horizons have greater incentives and efficiencies to engage in effective monitoring. This improved monitoring mitigates asymmetric information and agency problems, and in turn reduces the wedge between the costs of internal and external funds. As a result, the sensitivity of firms’ investment outlays to internal cash flows decreases in the presence of institutional investors with long-term investment horizons. Using a sample of 8402 US firms over the period 1981–2008, we provide empirical evidence consistent with these arguments.

Institutional Investment Horizons and the Cost of Equity Capital

We examine the influence of institutional investors’ investment horizons on a firm’s cost of equity. We argue that the cost of equity will decrease in the presence of institutional investors with longer-term investment horizons due to improved monitoring and information quality. Our empirical results demonstrate that the cost of equity declines in the presence of institutional investors with long-term investment horizons, all else remaining equal. Our results indicate also that the monitoring role of long-term institutional investors is more pronounced for firms with higher agency problems (poorly governed firms). Overall, our evidence suggests that when considering the influence of institutional investors, it is critical to account for institutional heterogeneity, which gives rise to new directions for future research.

Internationalization and Bank Risk

This paper investigates the effects of bank internationalization on risk taking. We find that internationalization increases bank risk taking: the Z-score of US banks that engage in foreign activities is lower than that of their purely domestic peers. The results are consistent with the empirical dominance of the market risk hypothesis, whereby internationalization increases banks’ risk due to market-specific factors (competition, culture, regulatory complexity, economic and political instability, etc.) over the diversification hypothesis, whereby internationalization allows banks to reduce risk through increased diversification of their operations. The results continue to hold after conducting a variety of robustness tests, including accounting for endogeneity and sample selection bias. We also find that the magnitude of this difference in risk taking is more pronounced during financial crises than normal times. Additional results suggest that capital market participants recognize the difference in risk taking between international banks and purely domestic banks. JEL Classification Codes: G21, G28, L25

The Global Financial Crisis, Family Control and Dividend Policy

Using newly collected data on the ultimate ownership structure of publicly traded firms in nine East Asian economies, we find that family control is negatively related to the dividend payout ratio. Family firms are less (more) likely to increase (omit) dividends than non-family firms. These negative associations between family firms and dividend policy are more pronounced during the recent global financial crisis, suggesting that controlling families have incentives to expropriate more firm resources during crises than in normal times.

National Culture and Profit Reinvestment: Evidence from Small and Medium-Sized Enterprises

We examine the role of national culture — an important informal institution — in the profit reinvestment decisions of small firms in emerging markets. Prior economic development literature focuses on formal institutions as determinants of growth. However, in emerging markets where formal institutions are less developed, informal institutions should have more of a direct versus indirect impact through formal institutions. We find that Schwartz’s cultural dimensions of Embeddedness and Hierarchy negatively affect profit reinvestment, and that access to external financing (strength of property rights) is more important for reinvestment decisions in countries with low (high) Embeddedness and Hierarchy.

Cross-Listing and Corporate Social Responsibility

This paper investigates the dynamics of cross-listing and corporate social responsibility (CSR). Using a sample of 10,815 firm-year observations from 54 countries over the period 2002–2011, we find that cross-listed firms have better CSR performance than non–cross-listed domestic firms. This result is robust to endogeneity and different types of cross-listing. We also find that CSR increases (decreases) significantly after cross-listing in (delisting from) U.S. markets. The positive impact of cross-listing on CSR performance is stronger for firms from countries with weaker institutions, lower country-level sustainability, and higher liability of foreignness, and for firms operating in industries with high litigation risk. Finally, we find that cross-listed firms with better CSR performance exhibit higher valuations.

New Evidence on the Role of the Media in Corporate Social Responsibility

Prior research suggests that the media plays an important information intermediary role in capital markets. We investigate the role of the media in influencing firms’ engagement in corporate social responsibility (CSR) activities. Using a large sample of 4396 unique firms from 42 countries over the period 2003–2012, we find strong evidence that firms engage in more CSR activities if located in countries where the media has more freedom. This relation is robust to using various proxies for media freedom, an alternative source of CSR data, and to applying the instrumental variables approach to address endogeneity. In additional analyses, we find that the positive relation between media freedom and CSR engagement is stronger for better governed firms and for larger firms. Since the media have the ability to impact reputational capital, we conclude that media freedom affects firms’ incentives to engage in costly CSR activities.

External versus Internal Monitoring: The Importance of Multiple Large Shareholders and Families to Auditor Choice in Western European Firms

The ownership structures of Western European firms engender agency conflicts between: (i) owners and managers (type I); and (ii) minority and controlling shareholders (type II). Prior research stresses that credible financial reporting ameliorates agency problems by identifying any diversion of corporate resources. We examine whether external monitoring by a high-quality auditor helps reduce the agency problems embedded in the ownership structures of Western European firms. In regressions that control for firm characteristics as well as country and industry fixed effects, we find that the demand for a Big Four auditor is insensitive to whether the largest shareholder’s control rights exceed her cash flow rights. Consequently, we fail to find any evidence that the agency conflict between minority and controlling shareholders affects the demand for external monitoring. In contrast, we find strong, robust evidence that firms with multiple large shareholders and family-dominated firms are associated with a lower demand for Big Four auditors. This suggests that committed internal monitoring by multiple large shareholders and families is valuable, which reduces the benefit of external monitoring by a Big Four auditor. Collectively, our research suggests that Western European firms rely more heavily on Big Four auditors when the type I agency problem stemming from the separation of ownership from management is worse. However, supplementary analysis reveals that East Asian firms that are known to suffer from poor corporate governance do not substitute between external monitoring by a high-quality auditor and internal monitoring by multiple large shareholders or families, which squares with prior research that the type II agency problem is more relevant in this region.

State Ownership and Corporate Cash Holdings

Using a unique sample of newly privatized firms from 59 countries, this article provides new evidence about the agency costs of state ownership and new insight into the corporate governance role of country-level institutions. Consistent with agency theory, we find strong and robust evidence that state ownership is positively related to corporate cash holdings. Moreover, we find that the strength of country-level institutions affects the relation between state ownership and the value of cash holdings. In particular, as state ownership increases, markets discount the value of cash holdings more in countries with weaker institutions.