Wendy Beekes

Corporate governance, accounting and finance: A review

We review accounting and finance research on corporate governance (CG). In the course of our review, we focus on a particularly vexing issue, namely endogeneity in the relationships between CG and other matters of concern to accounting and finance scholars, and suggest ways to deal with it. Given the advent of large commercial CG databases, we also stress the importance of how CG is measured and in particular, the construction of CG indices, which should be sensitive to local institutional arrangements, and the need to capture both internal and external aspects of governance. The ‘stickiness’ of CG characteristics provides an additional challenge to CG scholars. Better theory is required, for example, to explain whether various CG practices substitute for each other or are complements. While a multidisciplinary approach to developing better theory is never without its difficulties, it could enrich the current body of knowledge in CG. Despite the vastness of the existing CG literature, these issues do suggest a number of avenues for future research.

An Alternative Measure of Corporate Governance Using Discrete Principal Component Analysis

How is corporate governance to be measured? Much past research has focused on forming an index but this approach ignores the correlations between the variables forming the index and may also carry redundant variables. Principal Component Analysis (PCA) is a possible solution to these issues by distilling components from a Pearson correlation matrix. However, the estimated correlation matrix may be biased when discrete governance variables are involved. We use an alternative method known as discrete Principal Component Analysis which involves applying PCA to a modified correlation matrix which takes into account the underlying distribution of the governance variables. Using a sample of 760 firms in 2002, we find mixed support for prior research. Larger boards are found to negatively impact future ROA of firms whilst the proportion of old directors on the board has a negative relation with abnormal accruals and abnormal returns.

Corporate Governance, Companies’ Disclosure Practices and Market Transparency: A Cross Country Study

We examine the link between corporate governance, companies’ disclosure practices and their equity market transparency in a study of more than 5,000 listed companies in 23 countries covering the period 1 January 2003 to 31 December 2008. Our results confirm the belief that better-governed firms make more frequent disclosures to the market. We also find greater disclosure in common law relative to code law countries. However firms with better governance in both code and common law countries make more frequent disclosures. We measure market transparency by the timeliness of prices. In contrast to single country studies, results show, for the 23 countries collectively, better corporate governance is associated with less timely share prices. This would suggest that a firm substitutes better corporate governance for transparency. We are thus led to the conclusion that even if information is disclosed more frequently by better-governed firms, it does not necessarily follow that information is reflected in share prices on a timelier basis.

Earnings Management in Response to Regulatory Price Review. A Case Study of the Political Cost Hypothesis in the Water and Electricity Sectors in England and Wales

This paper examines the response of the water and electricity group companies to regulatory pressure and in particular, the first regulatory price review after privatisation. The sample period incorporates industry-specific regulatory price reviews in both the water and electricity sectors and provides an interesting case study to examine the political cost hypothesis. The results obtained in this study confirm that the regulatory process has an impact on the group companys financial reporting decisions: there is evidence of income-decreasing earnings management in the year of regulatory price review in both sectors. However there is little evidence to support the premise of income-decreasing earnings management in the electricity sector, following the regulators decision to re-open the distribution price review in 1995.

Financial Integration and the Transparency of Firms in Emerging Capital Markets

We examine the association between financial integration and capital market transparency of emerging-market firms. We use four intra-year price timeliness measures derived from the Beekes and Brown (2006, 2007) methods as indicators of the firm’s transparency. The sample comprises 57,465 firm-year observations on listed companies in 24 emerging economies over the period 1995-2010. As expected, we find that greater financial integration is associated with greater transparency, and that the effect is more pronounced when the news about the firm is bad. Using structural equation modelling (SEM), we find evidence of a mechanism through which financial integration enhances the information environment: improved corporate governance.