Does the Quality of Corporate Governance Affect Firm Valuation and Risk? Evidence from a Corporate Governance Scorecard in Hong Kong*
Yan-Leung Cheung(School of Business, Hong Kong Baptist University)
Aris Stouraitis(Department of Economics and Finance, City University of Hong Kong)
Weiqiang Tan(School of Business, Hong Kong Baptist University)

Using Hong Kong firm data, we construct an index of corporate governance during 2002–2005, which scores the corporate governance practices of listed companies from the public shareholders’ perspective based on the Organization for Economic Corporation and Development Principles of Corporate Governance. The findings show that family firms and firms with concentrated ownership structures are associated with bad corporate governance. The evidence also shows that these firms improve their corporate governance practices slower than their peers. Overall, the quality of corporate governance is very significant in explaining future company stock returns and risk. Good corporate governance is associated with both higher stock returns and with lower risk. Improvements in corporate governance are associated with significantly higher stock returns and lower company risk.

*We appreciate helpful comments received from the anonymous referee and Sudipto Dasgupta (the editor). Stouraitis thanks City University of Hong Kong for their financial support (project no. 9360075).

keywords:

Managerial Performance and Closed-End Country Fund Premiums: A Lead or Lag Relationship?*
Iuliana Ismailescu(Lubin School of Business, Pace University)
Ben Branch(Isenberg School of Management, University of Massachusetts)

Herein, we examine whether changes in closed-end country fund premiums lead and/or lag management performance. Using a sample of 46 country funds and a time period of 11 years, we find evidence of a significant negative relationship between past performance and current fund premiums, but no support for the hypothesis that past premiums are indicative of future performance. Furthermore, the above results are driven primarily by the emerging market funds. The difference between emerging market and developed market fund premiums’ response to past performance, although less obvious, continues to hold in the crises period, but vanishes in the tranquil period.

*We thank Hossein Kazemi, Nikunj Kapadia, John Buonaccorsi, seminar participants at the 2008 FMA Meetings, 2008 EFA Meetings, 2007 North Eastern Business Association Meetings, and University of Massachusetts, Amherst for their insightful comments and suggestions, and Thomas Kunkel, Serkan Askar, Ian Beatty, and the Center for International Securities and Derivatives Markets for data assistance and support. All remaining errors are ours.

keywords:

Foreign Investors’ Reaction to Lower Profitability ? The Role of Information Asymmetry*
Tom Berglund(Hanken School of Economics)
P. Joakim Westerholm(University of Sydney)

Owners of firms in trouble are more exposed to moral hazard problems than owners of successful firms. Foreign owners who face higher costs to monitor the firm should be more vulnerable to these problems than domestic ones. Consequently, a downward revision in a firm’s expected future earnings should push foreign investors to sell their shares to a larger extent than domestic investors. We test this hypothesis on profit warnings issued at the Helsinki Stock Exchange. Our results reveal that in the wake of profit warnings foreign investors will predominantly sell, while domestic investors pick up the net sales by foreigners. Differences in the scale of the foreign investor sell-out reaction are explained by a number of variables. The most significant one is our proxy for the magnitude of surprise in the warning. The reaction also increases with the degree of perceived information asymmetry for the firm that issued the warning, while foreign members on the firm’s board have a moderating impact. By contrast, a number of general corporate governance-related variables have no statistically significant impact on the reaction.

*Comments received when presenting the paper at the Corporate Finance Day at K.U. Leuven, the joint finance seminar at the Helsinki School of Economics, research seminars at the Bank of Finland and at Monash University, the Helsinki Center for Economic Research, Yale University, Bank of Slovenia, CERGE-EI, Prague, and University of Bath are gratefully acknowledged. We are also grateful for competent research assistance provided by Christian Hohentahl and Henrik Keinonen, proofreading by Angelo Aspris, and for financial support provided by Stiftelsen Svenska Handelshögskolan (Tom Berglund) and the University of Sydney Research and Development Grant Scheme (Joakim Westerholm).

keywords:

On the Behavior and Determinants of Risk-Based Capital Ratios: Revisiting the Evidence from UK Banking Institutions*
William B. Francis(Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve System)
Matthew Osborne(Economics of Financial Regulation Department, Financial Services Authority)

Using bank-level panel data from the United Kingdom, this paper investigates the factors that influence banks’ choice of risk-based capital ratios. The study focuses on evaluating the role of regulatory capital requirements. Findings indicate that such requirements, even when not binding, affect banks’ capital management practices and suggest that banks maintain targeted buffers above regulatory thresholds. That behavior differs across several dimensions, including bank size, nearness to regulatory minimum, reliance on core (equity) capital and exposure to market discipline. Capital ratios also vary over the economic cycle. These findings have implications for the ongoing review of international capital standards.

*This paper was written while the first author was an economist at Financial Services Authority. The views expressed in this paper are those of the authors and do not represent those of the Federal Reserve Board or Financial Services Authority. The authors wish to thank Peter Andrews, Jesús Saurina and an anonymous referee for helpful comments on this paper.

keywords: