GCGC (4): Challenging the Accepted
The Global Corporate Governance Colloquia (GCGC) is a global initiative to bring together the best research in law, economics and finance relating to corporate governance at a yearly conference held at 12 leading universities in the Americas, Asia and Europe. The 2019 event was hosted by the Research Center SAFE (Sustainable Architecture for Finance in Europe) at the House of Finance and Goethe University. This article is the fourth in a four-part summary of the conference which seeks to highlight some of the interesting new work and research questions that were addressed at the event.
Contextualising the link between firm value and corporate governance
An early study presented by Prof. Merritt Fox (Columbia Law School) re-examines the empirical link between corporate governance and firm performance with an emphasis on why there is a strong relationship between firms best at creating shareholder value and those rated highly by the established corporate governance indices. The paper hypothesises that the link between governance and performance depends centrally on context. This hypothesis is found to be consistent with data as it is found that an improved governance index score is associated with a much larger increase in Tobin’s Q, a measure of firm value creation, in the accounting scandal years as opposed to comparably sized rating improvements occurring in the surrounding years. The study illustrates the importance of context by exploring circumstances when a firm’s governance structure can operate a signal of the quality of its management. The idea is that better managers, on average, are more likely to choose a highly rated governance structure than are bad managers because a structure garnering a high rating increases the risk of job loss more for bad managers than for good ones. The hypothesis suggests that a positive signal, which leads to an increased share price and firm value, would be particularly strong in a period where there was unusually high uncertainty about the quality of firm managers. Consequently, the period 2001-2002, characterized by an unprecedented cascade of corporate accounting scandals that was associated with high levels of market uncertainty, can be compared with surrounding and less uncertain timeframes (1992-2000 and 2003-2006). The paper concludes that the impact of governance is in important respects contextual, depending on the particular circumstances of the time involved and the particular characteristics of the firms involved.
Demonstrating the frailties of the Related Party Transactions (RPT) Index
Prof. Dan Puchniak (National University of Singapore) presented early work critiquing the widely used World Bank's RPT Index. The World Bank’s influential Doing Business Report (DBR) has been a key platform for the American-driven dissemination of global norms of good corporate governance, and a prominent part of the DBR is the related party transactions (RPT) index, which ranks 190 jurisdictions from around the world on the quality of their laws regulating RPTs. According to the RPT Index, the regulation of RPTs in Commonwealth Asia’s most important economies is stellar. In the 2018 RPT Index, Singapore ranked 1st, Hong Kong and Malaysia tied for 3rd, and India came in at 20th. However, despite the uniformly high RPT Index scores in all of Commonwealth Asia’s most important economies, empirical, case-study, and anecdotal evidence overwhelmingly suggests that there are in practice significant inter-jurisdictional and intra-jurisdictional differences in the actual function and regulation of RPTs in Commonwealth Asia. The study asserts that demonstrating the frailties of the RPT Index is important in practice because jurisdictions – especially developing ones – commonly look to it when reforming their laws. First, it appears that the RPT Index overly emphasizes the role played by a jurisdiction’s formal corporate and securities laws in determining the effectiveness of its RPT regulation, and it fails to pay due regard to its corporate culture and rule of law norms in determining the efficiency of its RPT regulation. Second, the RPT Index erroneously assumes that controlling shareholders are a homogeneous group driven by similar incentives. Third, the general assumption that RPTs per se are evidence of defective corporate governance and that stricter regulation of RPTs consequently equates to “good law” is erroneous. The shortcomings of the RPT index were discussed in detail, putting it in the context of other poorly conceived corporate governance indices and the question was posed whether, with some corrections, the RPT index could be usable—either by the World Bank in which case there would be real consequences, or for research purposes.
Does more managerial ownership destroy value?
Using more than 50,000 firm-years from 1988 to 2015, a study presented by Prof. René Stulz at the conference, showed that the empirical relation between a firm’s Tobin’s Q (measuring firm value) and managerial ownership is systematically negative. The study demonstrates that by restricting the sample to larger firms as in the prior literature, their findings are consistent with the literature, thereby showing that there is an increasing and concave relation between firm value and managerial ownership. The study further shows that these seemingly contradictory results are explained by cumulative past performance and liquidity; Better performing firms have more liquid equity, which enables insiders to more easily sell shares after the IPO, and they also have a higher firm value.
The next GCGC Conference will take place on 12-13 June 2020 at Seoul National University, South Korea. Submissions are now being accepted (deadline 13 September). Click here for details.
"Illuminating the Corporate Governance Black Hole: Contextualizing the Link to Performance", Merritt B. Fox, Ronald J. Gilson, and Darius Palia (2019)
"Related Party Transactions in Commonwealth Asia: Complicating the Comparative Paradigm "Dan W. Puchniak and Umakanth Varottil (2019)
Fabisik, Kornelia and Fahlenbrach, Rüdiger and Stulz, Rene M. and Taillard, Jérôme, Why Are Firms With More Managerial Ownership Worth Less? (December 4, 2018). Fisher College of Business Working Paper No. 2018-03-024; Swiss Finance Institute Research Paper No. 18-75; European Corporate Governance Institute (ECGI) - Finance Working Paper No. 587/2018. Available at SSRN: https://ssrn.com/abstract=3295797 or http://dx.doi.org/10.2139/ssrn.3295797
GCGC Conference Hosts by year:
2015 – Stanford University, USA
2016 – Swedish House of Finance, Sweden
2017 – University of Tokyo, Japan
2018 – Harvard University, USA
2019 – Frankfurt University, Germany
2020 – Seoul University, Korea
2021 – Yale University, USA
2022 – University of Oxford, UK
2023 – Peking University, China
2024 – Columbia University, USA
2025 – Imperial College London, UK
2026 – National University of Singapore
GCGC Secretary General
Professor Marco Becht
About the Global Corporate Governance Colloquia (GCGC)
The Global Corporate Governance Colloquia (GCGC) is a conference series, which, for an initial period of 12 years, brings together the best research in law and finance relating to corporate governance each year. The conferences, which are organised by the ECGI, are held in turn at 12 major universities that are leaders in the fields of law and finance in the Americas, Asia and Europe.
These conferences attract invited and contributed research papers of the highest scholarly quality. It includes at least one session devoted to the region or country where the conference takes place. These events are primarily “academic to academic” conferences with a few high profile participants from industry and the public sector.
The launch conference was held at Stanford University in June 2015, and since then has also convened in Stockholm, Tokyo, Harvard and Frankfurt. Each University partner of the series will host the conference once in a 12 year period.
The 12 hosting institutions are:
Columbia University, Goethe University Frankfurt, Harvard University, Imperial College London, National University of Singapore, Peking University, Seoul National University, Stanford University, Swedish House of Finance, University of Oxford, University of Tokyo and Yale University.
The aim of the conference series is to attract current research papers of the highest scholarly quality in the field of corporate governance. The conferences are primarily 'academic to academic' events with some participants from industry and the public sector including the practitioner partners of GCGC and other invited panelists. The current practitioner partners are Zurich Insurance Group, and Japan Exchange Group (JPX) and others may be considered.
About the European Corporate Governance Institute
The ECGI is an international scientific non-profit association which provides a forum for debate and dialogue between academics, legislators and practitioners, focusing on major corporate governance issues and thereby promoting best practice.
Its primary role is to undertake, commission and disseminate research on corporate governance. Based upon impartial and objective research and the collective knowledge and wisdom of its members, it can contribute to the formulation of corporate governance policy and development of evidence based best practice.
In seeking to achieve the aim of improving corporate governance, ECGI acts as a focal point for academics working on corporate governance in Europe and elsewhere, encouraging the interaction between the different disciplines, such as economics, law, finance and management.