Emerging Markets Corporate Governance Research Network (EMCGN) Newsletter, June 2011

May 31, 2011

The 3rd International Conference on Corporate Governance in Emerging Markets was held on May 28-29, 2011 at Korea University Business School in Seoul. The conference was a great success. Papers were presented on the following topics: Agency Problem and Managerial Incentive, Capital Markets and Corporate Governance, CEO and the Board of Directors, Corporate Governance Mechanisms and Corporate Decision, Family Controlled Firms, Green Financing and Corporate Social Responsibility, Governance of Business Groups, Institutions and Corporate Governance Market for Control, Shareholder Rights and Corporate Control. Topics suggested for further research include: ownership structures and their relationships with performance; internal corporate governance mechanisms and stakeholders' roles; enforcement, both private and public; corporate social responsibility; corporate governance of financial institutions; and regulatory corporate governance. Planning is underway for the 4th conference where some of these topics will be further analyzed.

Stijn Claessens, International Monetary Fund and University of Amsterdam

All the papers presented can be downloaded here. Below we present a sample of the papers discussed: 

Is Cross-Listing a Commitment Mechanism? Evidence from Cross-Listings around the World
Jaiho Chung, Hyejin Cho, Woojin Kim

Is a stronger corporate governance system a pulling or pushing factor in determining the choice of firm's cross-listing decision? One stream of research argues that firms may cross-list to reduce information asymmetry and agency problems. Those firms would choose destinations with more stringent disclosure standards and better investor protection. A contrasting stream argues that cost-avoiding firms may seek to cross-list where disclosure and governance standards are lower. Chung, Cho and Kim contribute to this debate by showing that firms are more likely to choose cross-listing destinations that are less strict on regulating self-dealing or exhibit higher block premiums. They also show that this tendency is more evident after Sarbanes-Oxley in 2002. Their findings are contradictory to the ‘bonding’ hypothesis, which argues that firms choose to cross-list to voluntarily commit themselves to higher disclosure standards.

How Does Product Market Competition Interact with Internal Corporate Governance?: Evidence from the Korean Economy 
Hee Sub Byun, Ji Hye Lee, Kyung Suh Park

Byun, Lee and Park seek to find whether firms that belong to a business group behave differently from stand-alone firms in their decisions regarding internal corporate governance, given product market competition. The authors conclude that the member firms of business groups maintain better internal corporate governance in a non-competitive environment, whereas stand-alone firms do so in a competitive environment. Additionally, internal corporate governance has a positive effect on firm value regardless of product market competition for the firms that belong to a business group, whereas the positive effects of internal corporate governance on firm value are stronger in a non-competitive environment for stand-alone firms.

Effects of Independent and Friendly Outside Directors
Sung Wook Joh, Jin-Young Jung

Joh and Jung investigate the effects of friendly and independent outside directors. They find that the independent outsiders increase firm value on average, whereas the friendly outsiders decrease it. However, these results change when the firms face financial volatility and mergers and acquisitions (M&A) threats. Friendly boards increase firm value more than independent boards in case of financial volatility and M&A threats. Furthermore, friendly outsiders, who are also politically connected, have more positive impacts on firm value in domestic markets. In a nutshell, the effectiveness of boards' multiple roles as monitor, advisor, and facilitator depends on their independence and corporate environments.

Family Involvement and Family Firm Performance
En-Te Chen, Stephen Gray, John Nowland

This paper brings together finance and management literature to examine all aspects of family involvement in firms. It actually is the first to examine all of the family involvement mechanisms (ownership, board of director representation, family CEOs and family managers) in the same setting. The authors find that the form of family involvement is related to both firm characteristics and other family involvement measures. Family representatives are more likely to be used in acquired and second-generation family firms. Family directors and family CEOs are complements, while family directors and family managers are substitutes. Additionally, there are significant negative relationships between family directors, family managers and firm performance. As a policy recommendation, the authors suggest that "firm performance could be improved by limiting family involvement. In particular, restricting the proportion of board seats the family can hold to their ownership position."

Anti-Takeover Charter Amendments and Managerial Entrenchment: Evidence from Korea
Sunwoo Hwang, Woochan Kim

The removal of statute-based anti-takeover provisions during the aftermath of Asian crisis caused many Korean firms to introduce charter-based measures. In this paper, Hwang and Kim make use of this fact as they investigate the links between ATP and firm performance. The authors find that firms with charter-based anti-takeover provisions are smaller in size, they have lower inside and foreign ownerships, and upon adoption, they experience lower share prices, the extent of which drops with inside ownership. Their results are consistent with the overinvestment hypothesis in Jensen (1986), as they also find that these firms increase capital expenditure. Lastly, ATP adoptions are followed by lower profitability and lower dividend payouts and firms with ATPs also experience greater delisting during the global financial crisis.

Enforceability and the Effectiveness of Laws and Regulations
Ke Li, Lei Lu, Jun Qian

How do regulators tackle different types of tunneling activities in China? The Chinese government introduced two new rules for tackling problems of this sort. The first rule prohibits asset diversion from listed firms for ‘non-operational’ purposes by large shareholders, and the second rule standardizes the practice of listed firms providing loan guarantees. Li, Lun, and Qian show that firms complying with the first rule experience a reduction in the ownership stakes of controlling shareholders, an increase in investment, and significantly better performance, whereas the second rule has no impact on firms. They conclude by saying that the laws and regulations that can be enforced at lower costs are much more likely to succeed, especially in countries with weak institutions.

The Impact of the Split-share Structure Reform on Compensation Incentive Based on Firm Performance in China
Burcin Yurtoglu, YANG Qing

Yurtoglu and Qing take the split-share structure reform of China in 2005 as an exogenous policy variable in order to analyze the relationship between executive compensation and corporate performance from 2001 to 2007. The authors show that the non-tradable reform has a significant impact on the improvement of executive compensation incentive. "The signaling effect of the reform had a bigger influence than its actual practice, with the state bureau owned, central state-owned and collective-owned listed companies most significantly affected and private-owned ones the least." They also state that the compensation raise was mainly from the growth of corporate assets rather than the relevance between executive compensation and corporate performance. In conclusion, the corporate performance had limited contribution to the compensation incentive.

Does One Size Fit All in Corporate Governance? Evidence from Brazil (and other BRIK Countries)
Bernard S. Black, Antonio Gledson de Carvalho, Érica Gorga

This paper is harmonious with a paper by the same authors that we covered in our May 2011 Newsletter. In this paper Black, Carvalho, and Gorga find evidence on "good" corporate finance practices being country and firm dependent. In contrast to other studies, their results show a negative relationship between board independence and Tobin’s q. "Firm characteristics also matter: governance predicts market value for nonmanufacturing (but not manufacturing) firms, small (but not large) firms, and high-growth (but not low-growth) firms." When they extend their study to multinational case, they find that country characteristics importantly influence which aspects of governance predict firm market value, and at which firms that association is found. In conclusion, their paper supports a flexible approach to governance, with ample room for firm choice, rather than a top-down regulatory approach.

Shareholder Rights and Tunneling: Evidence from a Quasi-Natural Experiment
Jun Qian, Shan Zhao

Qian and Zhao identify a non-uniform governance mandate on cumulative voting as a plausibly exogenous shock to listed firms. They use this to examine the effects of strengthening shareholder rights on tunneling. Using a difference-in-differences method, they show that firms adopting cumulative voting experience a significant decrease in tunneling activities by controlling shareholders relative to firms that do not follow this voting mechanism. "However, this result goes away when we introduce an instrument variable that is free from any manipulations to the difference-in-differences estimations. Therefore, our results imply that a 'self selection' by firms committed to improve governance, rather than the governance mandate, can explain the drop in tunneling activities in estimations without the instrument variable." They conclude by suggesting that in emerging markets, laws and regulations aimed at improving a specific aspect of governance are not likely to be effective.

See the complete list of papers presented. 

Upcoming Events

Conference on Board Diversity and Economic Performance will be held September 29-30, 2011 at Copenhagen Business School.

6th Annual USC Corporate Governance Summit will meet at University of Southern California on October 27-28, 2011.

Executive Program Corporate Governance: Effectiveness and Accountability in the Boardroom will be held at Kellogg School of Management on December 4-11, 2011.


Call For Papers - Corporate Governance in Emerging Markets. The International Centre for Financial Regulation (ICFR) will hold a conference "The Business Case for Strengthening Corporate Governance in Emerging Markets – Impact on Firm Performance and Economic Development," both in London and Hong Kong in December 2011. Deadline for Submissions is October 3, 2011.
The Emerging Markets Corporate Governance Research Network is supported by the Global Corporate Governance Forum, the leading knowledge and capacity building platform dedicated to corporate governance reform in emerging markets and developing countries. The Forum is a multi-donor trust fund facility located within IFC, co-founded in 1999 by the World Bank and the Organisation for Economic Co-operation and Development (OECD). Learn more about the EMCGN's activities or contact its coordinator Melsa Ararat at

© June 2011 IFC |