Transparency and Governance in a Global World: Volume 13

This is a conceptual overview of transparency from the global and interdisciplinary perspectives. It briefly develops a conceptual framework on transparency as to how it relates to governance and market environments, outlines conditions for transparency, and presents hypotheses concerning the level of transparency in a global world. It then summarizes 12 papers included in the research volume.

In this study, we investigate whether higher institutional ownership is related to better internal controls and whether better internal control is associated with a higher quality of transparency.

Business group affiliation seems to make a firm more opaque. The benefits of group affiliation (internal market transactions) and the negative aspects of group affiliation (agency problems of group control) both may make group firms more opaque than non-group firms. Using the opacity index developed by Anderson, Duru, and Reeb (2009), this paper reports that Korean group firms are more transparent than non-group firms after the Asian financial crisis (1997–1998) and this leads to better performance of group firms. The improved transparency results from disappeared internal market benefits and diminished agency problems. These results are robust after controlling for the size of internal markets of groups, industry diversification, the existence of group inside financial institutions, and endogeneity.

The purpose of this chapter is to discuss the relation between tax reporting and financial reporting, their influence on transparency, and empirical implications.

This international empirical study analyses the relation between board transparency, CEO monitoring policy and financial performance.

This chapter examines the sensitivity of executive incentive compensation to market-adjusted returns and changes in earnings for high-tech (HT) firms vis-à-vis firms (NHT) in other industries. Consistent with the hypotheses, this chapter uncovers the following evidence: First, the sensitivity of executive bonus compensation to market-adjusted returns is weaker and more symmetric for HT firms than for NHT firms (a control group), which implies that the problem of ex post settling up, documented in Leone et al. (2006), may be far less serious in HT firms than in NHT firms. Second, the sensitivity of executive incentive compensation to earnings changes is generally more symmetric for HT firms than for NHT firms, which is consistent with the view that HT firms engage in more conservative financial reporting than NHT firms. Third, the sensitivity of executive equity-based compensation to market-adjusted returns is significantly negative for HT firms compared to NHT firms when bad earnings news is announced. The results imply that HT firms, with a strong motive to attract and retain their highly talented executives, judiciously use both short-term and long-term incentive compensation schemes by compensating for a reduction of short-term incentive pay with an increase in long-term incentive pay. The issue of executive compensation has been a longstanding one in the United States and Canada, and the issue of executive compensation-performance sensitivity for HT firms is also relevant in this era of the information technology (IT) revolution, especially when prior research has shown that HT firms differ from NHT firms in their market-valuation process.

This study examines the differences in corporate transparency between subsidiaries of multinational corporations (MNCs), and domestic corporations (DCs) in India.

I analyze cash flow and transparency characteristics of listed infrastructure investment companies and funds and compare this unique infrastructure sample with a non-infrastructure reference group. I confirm the common hypothesis that infrastructure investments provide more stable cash flows than non-infrastructure investments. However, I do not find that investors positively value this cash flow stability. Instead, more volatile cash flows are valued with a premium. On the other hand, earnings management is valued with a discount. Together with a punishment for complex financial and governance structures this indicates a punishment for a lack of transparency by investors. My chapter also offers evidence that infrastructure investments in general are valued with a positive “infrastructure premium” that is not driven by more stable cash flows. I find additional evidence that sector specifics and regulatory risk play a significant role for the valuation of infrastructure investment companies and funds.

This study analyses the influence of the recent economic downturn on earnings management (EM), as well as the manipulation of real activities through cash flow from operations (CFO), with a sample of Spanish listed firms from 2004 to 2009.

We find evidence that the recent economic downturn has changed the patterns of firms’ EM. On the one hand, the crisis influence higher earnings generation as indebtedness increase. On the other hand, results support the hypothesis of an opportunistic behaviour of managers with higher firm market valuation. They have incentives to reduce earnings during the recession and push earnings for the recovery phase of the business cycle.

The study finds also a significant relationship between EM and abnormal CFO generation. The downturn influences positive abnormal CFO generation with indebtedness, as well as negative abnormal CFO generation with firm size and market valuation. It has no significant influence through abnormal accruals on abnormal CFO generation.

In this study, I investigate analysts’ ability to process public information for investors by examining price reactions to a sample of analysts’ recommendation revisions issued shortly after quarterly earnings announcements. I find that these recommendation revisions are used by investors to reassess the valuation implications of announced earnings. Confirmatory (contradictory) recommendation revisions that have the same (opposite) sign as prior earnings surprises can cause investors to revise their beliefs about the valuation implications of announced earnings upward (downward) and thus cause price reactions that are positively (negatively) associated with prior earnings surprises. In addition, I find that as the information complexity of earnings announcements gets higher, these recommendation revisions play a more important role in helping investors understand the valuation implications of announced earnings. Finally, I find that analysts’ ability to interpret the valuation implications of announced earnings for investors has remained at a similar level since the adoption of Regulation Fair Disclosure. Overall, this study provides additional evidence on how analysts help improve corporate information environment.

This study investigates whether broker anonymity impairs the ability of the market to detect informed trading in the lead up to takeover announcements. Our research represents the first study in this area to analyse the effects of broker anonymity in the context of significant information asymmetry. Results indicate that informed traders are less detected, and therefore better off when broker identifiers are concealed. This finding has important policy implications for exchange officials deciding whether or not to reveal broker identifiers surrounding trades, especially considering that almost all prior research suggests that broker anonymity is correlated with improved liquidity.

This chapter contributes to the continuous debate on the effects of public information. The debate initiated with Morris and Shin (2002) who showed that heightening the precision of public information can be detrimental to welfare in a beauty contest framework, because when agents have both private and public information, they may overreact to the public information since it acts as a focal point. If the private agents overreact to public information, then a policy of limited transparency may be warranted. Some researchers suggest partial announcement (limited publicity), others propose to disseminate the public information privately to each agent (limited precision) with some idiosyncratic noise in order to reduce overreaction. Those chapter, however, miss the following fact; they don’t take into account the interaction between private sector and the central bank. We extend those studies by setting the framework as a two-player monetary policy game between the central bank and the private sector by allowing explicitly for a central bank to be one of the many contributors of the public signal. We show (1) how introducing a certain degree of opacity affects both players and determines the conditions under which an intermediate transparent strategy improves the outcome of the private sector, as well as of the central bank. We find that reducing transparency doesn’t affect the two players in the same way. (2) It turns out that respective players’ losses are strictly identical when the central bank implements the optimal degree of transparency or the optimal degree of publicity. We establish then an equivalence relationship in terms of effects between publicity and transparency for both actors.

Governance and opacity issues have increased since the early 1990s and several governance indicators are introduced by international organizations and NGOs. The governance indicators have been used in various sectors, directly affecting a nation's political reputation. This study analyzes the context of governance and opacity in Argentina and Chile and assesses the relationship between the cultural pattern and the functioning of institutions. A first approximation to the analysis of Argentina and Chile seems to lead to the conclusion of the existence of homogeneity between them as a result of a similar background. However, differences in geography and history generate different societal norms, and functioning of institutions within them. Chile's geographical isolation and limited natural resources leads the country toward economic growth and political stability. By contrast, in Argentina, populist regimes undermine the foundations of its economy while its middle class struggles and loses public trust. The various factors interactively affect quality of public policies and governance and, consequently, are conducive to differences in the perceived and real levels of opacity between both countries. Is corruption a culture-specific issue? If yes, then, is governance a consequence of culture too? Therefore, it is important to interpret a context behind governance in order to establish appropriate anticorruption reform in practice. This chapter seeks to address some of these issues by means of a case study comparison between Argentina and Chile and contribute to the understanding of the context in which negotiations may occur when FDI and M&A deals take place.