Advances in Financial Economics: Volume 8

An inverse relation between performance and managerial turnover at Japanese firms suggests that bank monitoring substitutes for other governance mechanisms (Kaplan, 1994; Kang & Shivdasani, 1995). Morck and Nakamura (1999), however, report that Japanese banks protect their self-interests as creditors rather than the interests of shareholders when appointing corporate directors. We re-examine data on top management changes at Japanese firms and find results consistent with this latter notion. Specifically, management turnover is conditionally related to a firm’s ability to meet its short-term obligations rather than profitability or stock returns. Bank monitoring is therefore not a substitute for mechanisms that directly serve shareholders’ interests.

We examine whether the curvilinear relationship between directors’ equity ownership and firm performance exists in a non-Western economy such as Singapore. We find that it does, although the inflection points are much higher than that generally cited for U.S. firms. We then compare this relationship across two kinds of firms that are not common to the U.S. marketplace. We observe for founder-controlled firms that the impact of director ownership is insignificant. We also examine government-linked corporations and in spite of the presence of a government blockholder, find that the pattern of alignment, entrenchment and then alignment remains operative.

Though cross-border acquisitions have grown dramatically in value and frequency in the last ten years, little is known about returns to acquirers or their method-of-payment choice. This paper studies returns to U.S. bidders and their method-of-payment choice for acquisitions of foreign targets. Results indicate that bidder returns are higher for cash offers, for offers to private and subsidiary targets, if there is high insider ownership, and if there is high exchange rate variation. The method-of-payment choice for these bidders is linked to the target country’s legal regime and accounting standards, insider ownership, target type, and value uncertainty.

During recent years, financial economists have made a significant contribution to the rapid development of a vibrant and growing literature on organization structure and corporate governance. In reviewing the development of this literature, it becomes easy to see how the seminal contributions of Ronald Coase (awarded the Nobel Prize in Economics in 1991) have become the cornerstone of a new institutional economics. In particular, researchers following in Coase’s footsteps have clarified the conditions under which voluntary contracts between private agents can resolve a wide variety of so-called “agency problems.” More than just representing an important discovery of the significance of transaction costs and property rights for the institutional structure and functioning of the economy, Coase’s work has become an important foundation for the theory of contracts and for the whole field of “organization economics.”

We examine voting outcomes on shareholder governance proposals that seek annual elections for all the directors on the corporate board. We relate these voting outcomes to different ownership structure characteristics and a series of variables that are publicly available. The pattern of support indicates that proposals are generally successful when they are supported by large activist groups and when institutions hold a significant fraction of shares outstanding. Our evidence casts some doubt on the efficacy of the Rule 14A-8 mechanism, which limits the amount of information that can be provided to shareholders as part of the proposal.

This paper asks whether market fundamentals can explain the run-up and collapse of Enron’s stock price and price-earnings ratio. We use a variant of the discounted cash flow model proposed by Miller and Modigliani (1961) to show that the growth rates implied by the stock’s valuation have rarely been achieved in recorded business history. We also provide evidence of earnings management by the company that may have contributed to extravagant investor expectations of earnings growth. Between 1990 and 2000 the firm’s reported earnings met or exceeded analysts’ earnings forecasts 77% of the time. Furthermore, beginning in 1997 Enron used asset sales (often to related parties) to generate as much as 83% of its annual earnings.

The 1988 Basel Accord and the proposed revisions to the Accord represent some of the most significant international regulations impacting the financial decisions of firms, in this case, financial services firms, in recent years. The revisions to the Accord incorporate operational risk into the capital, supervisory and market requirements. In our review of the issues in this area, we provide insight into the workings of an important international regulation. We also present suggestions for further research in this area that will become feasible when data on the impact of the new regulations become available after the proposed implementation in 2006.

Accounting firms claim that the risk of costly litigation leads to resignations from high-risk clients, and that these resignations represent an economic inefficiency. This study examines the association between resignations, dismissals and litigation in the computer industry from 1988–1995. Resignations and dismissals appear to be similar, suggesting some dismissals are implicit resignations. Results support a relationship between risk and resignations. Since some characteristics of auditor litigation risk are also characteristic of unprofitable audit engagements, the analysis incorporates the actual litigation experience of sample companies to provide insights into claims of inefficiencies surrounding the switches.