This article analyzes a Chinese Supreme Court case where a government financing vehicle sought to void partnership agreements after the funded private company failed and local officials were convicted of bribery. The article critiques the Supreme Court's "inner-truth" test for false representation, which probes hidden purposes. The article further reveals that the transaction was tainted by "dual agency": the mayor and vice mayor were de facto agents of the financing vehicle yet also covert agents of the borrowers because they accepted bribes. This conflict arose because the financing vehicle lacked genuine corporate independence. Such "confusion of personality" between local governments and their financing vehicles distorts markets, conceals debt, and facilitates corruption, underscoring the need to separate government functions from platform companies.

Various stakeholders have pressed pension funds (PFs) to refocus their investment strategies on environmental, social and governance (ESG) principles; however, limited attention has been devoted to the impact of sustainable investing on PF assets. Using data from the Organisation for Economic Cooperation and Development (OECD) countries from 1999 to 2022 and using the generalised method of moment estimation, we find that the growth of pension assets in countries with high sustainability scores has slowed since the sustainable development goals were adopted. The impact is more pronounced in the European Union (EU) countries. This finding is noteworthy because EU countries are known for their leadership in sustainable development. Capital market returns are the primary channel through which sustainable investing contributes to reduced pension asset growth. Our findings provide policymakers with important information about the unintended costs of addressing climate risk through exclusionary PF policies. In OECD countries with low fertility rates and ageing populations, the cost exacerbates the sustainability challenges that PFs face.

PurposeThis study aims to explore the effect of earnings guidance disclosure on investor reactions to different types of corporate misconduct and chief executive officer (CEO) successor origin.Design/methodology/approachThis study uses a 2 x 2 x 2 between-subjects experiment and manipulates three independent variables: earnings guidance disclosure (present versus absent), the type of corporate misconduct (integrity versus competence) and type of CEO successor origin (insider versus outsider).FindingsThe results indicate that in the absence of earnings guidance disclosure, integrity-related corporate misconduct leads to lower investors' earnings estimates compared to competence-related corporate misconduct. Furthermore, following corporate misconduct, an outsider CEO leads to higher investors' earnings estimates than an insider CEO. In addition, in the absence of earnings guidance disclosure, the impact of CEO successor origin (insider CEO versus outsider CEO) on investors' earnings estimates is more pronounced following integrity-related corporate misconduct than competence-related corporate misconduct. However, when management releases optimistic earnings guidance, such disclosure mitigates differences in earnings estimates resulting from different types of corporate misconduct and CEO successor origin.Practical implicationsThe findings suggest that optimistic earnings guidance can serve as an effective communication strategy to mitigate negative investor reactions following corporate misconduct and CEO succession. The study also offers insights for companies, investors and regulators by highlighting the joint influence of earnings guidance, misconduct type and CEO successor origin on investor judgments, reinforcing the importance of managing investor expectations in the aftermath of reputational crises and leadership transitions.Originality/valueThis study contributes to the understanding of the role of earnings guidance disclosure in influencing investor expectations of future earnings following corporate misconduct and CEO succession.

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This study investigates the impact of state ownership and corporate governance mechanisms on the default risk in China since the sanctioning of default of state-owned firms in 2014.. We find a positive relationship between inside ownership and default risk for both state-owned and non-state-owned firms. Institutional ownership serves as a monitoring mechanism that reduces default risk, irrespective of state ownership. Non-state-owned firms with CEO duality have higher default probabilities. Larger boards and more independent boards reduce the default probabilities of state-owned firms. Pandemic effects are less severe for state-owned firms.

This study investigates the relationships between bank activism and target firms’ debtholder value, shareholder value, and firm performance. We find that bank activists are more likely to target firms with heavier syndicated loan borrowing and lower credit quality than other shareholder activists. Bank activism events are associated with significantly positive abnormal bond returns, and this effect only exists in the subset of observations where bank shareholder activists possess a loan stake in the target firm. The target firms of bank activism exhibit a significant improvement in credit quality, coupled with decreases in syndicated loan interest rate spreads, crash risk, and CEO risk-taking incentives.

This paper provides new evidence on the comparative dynamic effects of CEO inside debt and equity compensation on firm performance as measured by Tobin's Q. In contrast to the extant literature, we find significant empirical evidence supporting the classic Jensen and Meckling (1976) premise that managers should receive debt vs. equity compensation in proportion to the capital structure of the firm. We also provide new evidence showing that the effects of the CEO compensation structure on firm performance are dependent on the CEO's time horizon, as measured by the expected period of employment to retirement. We show that the incremental benefits of equity compensation to performance increase with the CEO's projected time to retirement. A similar, but insignificant relationship is observed for CEO inside debt compensation. Cash compensation is more beneficial to the firm when concentrated near the end of the CEO's tenure.

This paper challenges the stereotypical view that transient institutional investors, characterized by short-term horizons, exacerbate managerial myopia and harm corporate innovation. Our evidence implies that the results of previous studies may have been biased due to endogeneity issues. To address this, a novel measure of shareholder distraction is introduced. We show that an exogenous decline in the monitoring quality of distracted transient institutional shareholders is associated with decreased innovation. This effect is more pronounced when alternative monitoring forces are weaker. The findings suggest that transient institutional investors provide effective monitoring, which acts as a channel that helps alleviate managerial myopia and promote innovation, confirming the theoretical work of Edmans (2009). The validity of our findings is further confirmed through a rich battery of robustness tests.

We examine executive compensation contracts that are directly and explicitly linked to corporate social performance. In particular, we study two types of such contracts, subjective and objective, and the CSR-related variables on which compensation is contracted. We attempt to find which type and underlying CSR variables can most effectively improve CSR ratings. Our results suggest that for objective contracts and subjective contracts, the best performing variables are ethical conduct and social responsibility, respectively. In addition, we study how CSR ratings affect firm performance and risk, and how CSR contracts moderate the effects. We find that both large and small firms with high CSR ratings tend to have a better financial performance in terms of ROA and net profit margin, but the impact of CSR is more pronounced for small firms. CSR contracts in general reduce the impact of CSR ratings on firm performance and risk.

Prior literature finds that earnings management is negatively correlated with institutional ownership. The question is whether institutional investors drive down earnings management of the firms they invest in, or they choose firms with lower earnings management. In this paper, we use the instrument variable design of the Russell 1000 and 2000 indices reconstruction to obtain an exogenous variation in institutional ownership. We find that institutional investors do not drive down earnings management. Instead, institutions choose firms with lower earnings management when they make investment decisions. To further support the preference hypothesis, we add measures of institution preference in the panel regression and find that the negative relation between institutional ownership and earnings management disappears.

This paper investigates the impact of corporate governance and culture background on firms’ environmental performance and CSR disclosure from a global perspective. It also provides evidence of a positive relationship between performance and CSR disclosure, supporting the voluntary disclosure theory. We find that common internal corporate governance best practices (such as CEO non-duality, board with ESG committee and gender diversified board) are associated with better environmental performance and more disclosure of CSR related information. Debt is an effective internal governance vehicle and positively affects firms’ environmental performance and CSR disclosure. Cross-listed firms perform better environmentally and disclose more CSR information. Firms residing in countries with stronger legal systems have less voluntary CSR disclosure, implying that external governance is functional and may partially serve as a substitute for internal governance. In terms of culture influence, we find that firms in countries with low power distance, individualism, femininity, high uncertainty avoidance, and long-term orientation perform better environmentally. Firms in low power distance, collectivistic, feminine, long-term oriented, high uncertainty avoidance and restrained countries disclose more CSR information.

This research investigates how culture moderates the impact of risk on individual investors’ trading behavior in nine Eurozone countries, where risk is measured by conventional and extreme risk. These markets were particularly affected by the global financial crisis, the subsequent European banking crisis, and the European sovereign debt crisis. Using mutual fund flows as proxy of investors’ trading behavior, our evidence indicates that country culture variable significantly affects investor’ trading responsiveness to risk. Specifically, the impact of risk on fund flows is significantly positive and is larger in scale in countries with individualist cultures.

This paper investigates the relationship between default risk and corporate governance for financial firms in 28 countries outside of North America in the post-financial crisis period, where default risk is measured by both credit default swap (CDS) spreads and estimated by a Merton-type model. Reduced default risk helps the stock market rebound during the post-crisis period. Both internal governance variables, including institutional and insider ownership, board composition and CEO power, and external regulatory factors, are examined and they show significant effect on default risk. In addition, the impacts of various governance variables are continent-specific: they have a higher impact on default risk for Asian firms than for European firms. Regulatory factors are important moderators of the governance mechanisms for banks: higher Tier 1 capital ratios reduce both CDS and fundamental default risk; recipients of secret emergency loans from the US Federal Reserve System (the Fed) exhibit lower CDS spreads post-crisis but higher fundamental default probabilities.

Constructing a comprehensive data set of financially distressed firms that restructured their debts from 2000-2014, we find that firms with financial institutions’ debt-equity simultaneous holdings are more likely to restructure out of court than to file for bankruptcy. The effect is stronger when loans are over-secured and when the expected bankruptcy costs are larger. We use mergers of financial institutions and instrumental variable estimations to establish causality. Firms with simultaneous holdings experience higher stock returns and are not more likely to reenter into financial distress. The evidence suggests that the mitigation of shareholder-creditor conflicts results in cost-effective resolutions of financial distress.

We study the effect of financial institutions’ simultaneous holdings of loans and equity; bonds and equity; loans and bonds; and loans, bonds, and equity on the resolution outcome of financially distressed firms. Our results show that simultaneous holdings of debt (loans or bonds) and equity are associated with a higher likelihood of out-of-court restructuring versus bankruptcy. Our identification relies on instrumental regressions and using the merger of financial institutions as a source of exogenous shock to the formation of simultaneous holdings. We further show that the effect of simultaneous holdings on the probability of out-of-court restructuring is stronger when these holders have a larger equity stake in the game and when the expected bankruptcy costs are higher. The combined empirical evidence suggests that simultaneous holdings improve the incentive alignment of debt holders and equity holders to facilitate a cost-effective workout.

This paper investigates the influence of corporate governance structures on the credit risks of Canadian firms from the perspective of bondholders after the 2007-2008 financial crisis. Default probabilities calculated from Black-Scholes/ Merton Distance to Default type models are used to measure firms credit risks. Based on these measures, Canadian financial firms actually show higher risk than non-financial firms over the financial crisis. This may be explained by the high exposure of Canadian financial firms to US markets during the period of the crisis. However, in the transition to the post financial crisis period, the risk of financial firms decreases more rapidly than that of industrial firms. With the exception of board size and CEO duality, most governance mechanisms examine, including insider ownership, board independence, institutional ownership, financial transparency and compensation committee independence, have differential impacts on financial vs. non-financial firms. Finally, we find that Canadian firms headquartered in Quebec have higher credit risks than Canadian firms headquartered in other provinces.

In this paper, we examine how the geographic distance between a firm and its largest institutional investors affects the firm's litigation risk. We show that geographic proximity between the firm and its largest institutional shareholders reduces the incidence of a lawsuit. Moreover, we find that geographic proximity affects the relationship between institutional investors' ownership and the litigation risk of their portfolio firms. These findings indicate that geographically proximate investors may have an informational advantage over investors who are located far away, and that this advantage manifests itself in more effective monitoring of firm management, and consequently, in lower litigation risk.

This paper explores stock market reactions to corporate social performance. We construct a value-weighted portfolio based on the list of “100 Best CSR companies in the world” published on the Forbes’ website by Reputation Institute. This portfolio yields statistically significant annual abnormal returns of 1.81% and 1.26%, by controlling for Carhart four factors and Fama-French five factors, respectively (2.41% and 1.84%, respectively for an equal-weighted portfolio). Moreover, such abnormal returns decrease as time passes, especially after the inaugural publication of the CSR lists in 2013. Furthermore, we find that companies with better social performance are more likely to have positive earnings surprises, and that their returns are more sensitive to earnings surprises. The results have three implications: firstly, CSR reputation contributes positively to a firm's short-term superior equity performance; secondly, the CSR lists facilitate market correction of mispricing intangibles such as CSR reputation — abnormal returns decrease as the market gradually learns about the value of firms’ social performance; lastly, the paper contributes to the socially responsible investing (SRI) screens and provides guidance for investors who would like to do well financially by doing good socially.