This paper examines the influence of national culture on corporate governance. We postulate that national culture can shape the contracting environments by serving as an informal constraint that affects incentives and choices in corporate governance. We hypothesize that national culture can explain cross-country variations in corporate governance after controlling for legal, political, financial, and economic institutions. We develop a Rule Preference Index as a proxy of national culture for a sample of 12,909 firm-year observations from 41 countries. Employing a hierarchical linear modeling approach to isolate the effects of firm-level and country-level variables, we find robust evidence that firms (and countries) with a higher Rule Preference Index tend to have better corporate governance.
PurposePrevious literature provides mixed evidence about the effectiveness of a code of ethics in limiting managerial opportunism. While some studies find that code of ethics is merely window-dressing, others find that they do influence managers' behavior. The present study investigates whether the quality of a code of ethics decreases the cost of equity by limiting managerial opportunism.Design/methodology/approachIn order to test the hypothesis, the authors perform an empirical analysis on a sample of US companies in the 2004–2012 period. The results are robust to a battery of robustness analyses that the authors performed in order to take care of endogeneity.FindingsEmpirical results indicate that a higher quality code of ethics is associated with a lower cost of equity. In other words, firms with a more comprehensive code of ethics and better-designed implementation procedures limit managerial opportunism and pay a lower cost of equity because they are perceived by investors to be less risky.Research limitations/implicationsPractical implicationsSocial implicationsOriginality/valueThe authors contribute to the literature in two ways. First, by looking at the market reaction to the code of ethics, thus capturing all its indirect possible benefits and second, by measuring not only the existence but also the quality of a code of ethics. Based on the results, policymakers may choose to further promote codes of ethics as an effective corporate governance mechanism.
Purpose
The purpose of this paper is to investigate the impact of investor sentiment on timely loss recognition by examining a sample of firms for the period 1988-2015.
Design/methodology/approach
The authors use the accruals-based model of Ball and Shivakumar (2005) and a sentiment measure in their primary analysis. Supporting analyses include an extension of Simpson (2013) using an abnormal accruals analysis with subsamples of firms with bad news, the use of a Khan and Watts (2009) quarter firm-level measure of conservatism and an investigation of the monitoring role played by financial analysts.
Findings
The study finds that managers strategically report more losses in high sentiment periods than in low sentiment periods. This loss timing behavior results in an average 37.8 per cent increase in the acceleration of loss recognition. This study additionally finds a negative correlation between investor sentiment and abnormal accruals when managers are reporting bad news, and that a greater number of financial analysts following a firm curtails managers’ acceleration of loss recognition in high sentiment periods.
Originality/value
This study contributes to the corporate disclosure literature by showing that managers strategically recognize losses, and such behavior is more prevalent in high sentiment periods. Managers take advantage of prevailing investor sentiment to accelerate losses in high sentiment periods to mitigate market penalties from reporting bad news.
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