Who benefits from political connections?
Minority investors or controlling shareholders

Lihong Wang, Xiamen University
Philip T. Lin, Shantou University

Abstract
Using a sample of Chinese privately controlled firms listed on the Shanghai Stock Exchange during 2003–2012, this paper empirically examines the relation between politically connected independent directors and firm value creation and value expropriation. Our empirical results show that having politicians as independent directors helps listed privately controlled firms to increase subsidies received from the government as well as obtain an ease of access to long-term bank financing. In contrast, we discern that a large fraction of politically connected independent directors increases the magnitude of related-party transactions between the listed firms and their controlling parties, suggesting wealth expropriating from minority shareholders. Finally, when exploring the net effects of political connections, the presence of politically connected independent directors promotes firm profitability and adds residual value to Chinese listed privately controlled firms.

Keywords: Political connections, value creation, value expropriation, independent directors, minority investors

Individualist-Collectivist Culture, Ownership Concentration and Earnings Quality

Chan Lyu, Macau University of Science and Technology
Desmond Chun Yip Yuen, University of Macau
Xu Zhang*, University of Macau

Abstract
In this study we explore the effects of individualist-collectivist culture, an important dimension of national cultures, on the entrenchment incentives of large shareholders. Specifically, we investigate how individualist-collectivist culture affects the relationship between ownership concentration and earnings quality. We predict that the social connections among corporate insiders are stronger in collectivist societies, thus reducing corporate monitoring efficiency and exacerbating agency problems. Consistent with our prediction we find the poor earnings quality that normally goes hand-in-hand with concentrated ownership, is improved when the firm’s national culture is individualist. We further find that the poor earnings quality induced by ownership concentration is more pronounced in East Asia, where cultures are rooted in Chinese cultures and collectivism. This study sheds light on the role that individualist-collectivist culture plays in shaping corporate insiders’ ethical behavior.

Keywords: Earnings quality, ownership concentration, cultures, individualism, collectivism

The contingent effect of analyst coverage: how does analyst coverage affect innovation and Tobin’s Q?

Sung Hwan Jung*, The University of Suwon

Abstract
This study hypothesizes that the relationship between analyst coverage and innovation (Tobin’s Q) is U-shaped. My results support this hypothesis. Specifically, I find that as a firm’s analyst coverage increases, innovation (Tobin’s Q) declines at first, reaching a low point at moderate levels of analyst coverage, and increase thereafter. These findings suggest that firms can transform its investments in the relationship with the analyst community into firm performance only after they make substantial investments in the relationship.

Does Stronger Intellectual Property Rights Protection Matter in Developing Local R&D Outsourcing Strategy?

Wen-Bin Chuang*, National Chi-Nan University
To-Han Chang, Nanhua University
Hui-lin Lin, National Taiwan University

Abstract
This study examines whether the intellectual property rights (IPR) protection in the host countries has a significant moderating effect on the relationship between local R&D outsourcing strategy and subsidiary productivity. Due to the subsidiary mandate in the host country being categorized as exploitation-orientation or exploration-orientation, we further examine whether there is a different moderating effect for different types of a subsidiary mandate. This analysis takes advantage of the data-set on Taiwan-based subsidiaries and the IPR indices by the World Economic Forum over the 2006–2009 period. The empirical results show that a stronger degree of IPR protection is, on average, found to play a significant moderating role in the influence of R&D outsourcing strategy based on local collaboration relationships. Interestingly, the moderating effects are found to differ between exploitation-orientation and exploration-orientation.

Keywords: R&D outsourcing, IPR protection, Subsidiary productivity

The Optimal Tariff Structure and Foreign Penetration

Susumu Cato*, The University of Tokyo

Abstract
This study investigates tariff policies as a means of improving economic welfare. The government sets the tariff so as to maximize domestic welfare against foreign penetration. We examine the relationship between the optimal tariff structure and the degree of penetration. We find that the optimal tariff rate is non-monotonically related with the degree of penetration (inverse U-shape). We also show that intermediate degrees of foreign penetration are harmful for economic welfare.

The effects of globalization on regional inequality in a model of semi-endogenous growth and footloose capital

Katsufumi Fukuda*, Hiroshima University

Abstract
We show that manufacturing firms tend to locate only in northern regions when transportation costs are not high, and in both northern and southern regions when transportation costs are high. We made this determination through the use of a semi-endogenous research and development growth model that reflects international trade, footloose capital, and local knowledge spillover. Regional income inequality—defined here as differences in per-capita expenditure relative to the price index—decreases in the former scenario following globalization, as the northern share of expenditure does not change. This lack of change stems from there being a constant and exogenous growth rate. Additionally, the northern price index does not change, even as the southern price index decreases.

An anatomy of China’s eco-efficiency gains: the role of FDI

Chia-Hui Lu, City University of Hong Kong
Yu Pang*, Hong Kong Polytechnic University

Abstract
This paper quantifies the role of FDI in the remarkable fivefold gains in eco-efficiency in China’s manufacturing during the period 1995–2006. We refine the conventional index decomposition method and apply it to China’s emission. We find that (i) foreign-invested enterprises (FIEs) have shifted production toward cleaner industries; (ii) the better abatement technique of FIEs explains 23% of the eco-efficiency gains; and (iii) another 69% of the eco-efficiency gains come from by progress in domestic firms’ abatement technique, which is associated with forward environmental spillovers from FIEs. Findings (ii) and (iii) lend support to the so-called Pollution Halo Hypothesis.

Keywords: foreign direct investment, eco-efficiency, spillovers, China

Audit fee pressure and audit risk: evidence from the financial crisis of 2008

Catherine Heyjung Sonu, Korea National Open University
Hyejin Ahn*, Seoul National University
Ahrum Choi, Hong Kong Baptist University

Abstract
This paper investigates whether the downward pressure on audit fees during crisis affects the audit fee structure. The empirical results reveal the following: First, audit fees dropped significantly during the financial crisis period. Second, auditors respond differently to small clients and risky clients when facing downward pressure on audit fees. Finally, the above mentioned findings are more pronounced when the client is under high pressure to reduce expenses. Collectively, the above results provide useful insights into how auditors behave when they are under pressure to reduce audit fees.

Ex-post examination of mergers: effects on retail prices

Koki Arai*, Shumei University

Abstract
Merger control can be assessed simply by observing price movements of the product in question. In this study, three ex-post merger evaluations show statistically significant increase in price. Thus, in each case, the change in market power is analyzed in terms of changes in market sales and market share. The analyses indicate that market sales values increased, but market share decreased significantly. Although several studies showed the market price situation before and after a merger, this study is the first to analyze the appropriateness of merger control in terms of market sales and market share. In addition, one of the merging parties was likely to reposition its production lines, indicating that mergers and acquisitions may be used as a tool for strategic product differentiation. That is, under such merger regulations, leading examples of a merging party developing a marketing strategy are indicated.

Product market competition on the effectiveness of internal control

Seon Mi Kim, Chonnam National University
Yura Kim*, University of Seoul

Abstract
This paper investigates the impact of product market competition on a firm’s internal control system, which is an important corporate control mechanism. We measure the effectiveness of a firm’s internal control system based on the material weakness disclosure under Section 404 of the Sarbanes-Oxley Act (SOX). Using several measures to capture different dimensions of product market competition, we find that firms operating in competitive markets are more likely to have material weakness under Section 404 of the SOX; further, they are more inclined to disclose multiple internal control weaknesses. These results are robust after controlling for both internal and external governance mechanisms. The results indicate that market competition reduces the effectiveness of internal controls over financial reporting and hampers the quality of a firm’s information environment.

Keywords: Product market competition, internal control effectiveness, material weakness, corporate governance

Bank connections and corporate risk-taking: evidence from China

Shengbao Zhai, Anhui University of Finance and Economics Lu Xie*, Renmin University of China
Sheng Zhang*, Zhongnan University of Economics and Law

Abstract
This paper examines the impact of bank connections on corporate risk-taking. The results show that firms with bank connections exhibit a higher degree of corporate risk-taking than firms without bank connections, and that the difference is more prominent in provinces with a poor financial environment. Specific types of bank connections – executive and cross-shareholding connections – are further examined and we find that the effect only exists in firms with executive and bank-holding connections, not in firms connected to banks as shareholders. This demonstrates that having bank connections prompts firms to undertake more risk-taking projects and increases the magnitude of corporate risk-taking.

Keywords: Bank connections, corporate risk-taking, financing capability, related loans, financial environment

How does human resource investment in internal control affect audit reporting lag?

Il-Hang Shin, Yonsei University
Ho-Young Lee*, Yonsei University
Hyun-Ah Lee, Gachon University
Myungsoo Son, California State University

Abstract
The Korean government requires listed firms to disclose the total number of employees engaged in the implementation of internal controls (hereafter, IC personnel) and the number of IC personnel in accounting, finance, information technology and systems departments, and other related functional areas. Using data unique to Korea, this study examines the effect of human resource investment in internal control on audit reporting lag (ARL). We employ quantitative and qualitative measures for the IC personnel, and the ARL is measured by the time between the fiscal year-end and the audit report date. We find an insignificant association between the quantitative measure (the number of IC personnel) and ARL. On the other hand, we find that the qualitative measure (the average experience of the IC personnel) reduces the audit time, thereby decreasing the ARL. This result highlights the importance of qualitative aspect in investments in IC personnel, which could be useful for firms that desire to reap the best result from the investment. Further analysis shows that investments in IC personnel at other departments as well as accounting and finance department increase audit efficiency. We confirm the robustness of our results through a series of additional analyses.

Keywords: Internal control, human resources, audit reporting lags, timeliness of financial reporting

Pension accruals and share prices: evidence from the amortization costs of transition amounts

Takafumi Sasaki*, Tokyo University of Science

Abstract
This article investigates whether the market rationally evaluates the economic value of pension plans by focusing on the impacts of amortization costs of transition amounts on share prices. Because the amortization costs of transition amounts are cost attributed to the old deficits that appeared in the adoption year, they do not contain new additional information unless managers deliver private information through accountings choices. The data-set is from Japanese firms after the adoption of the postretirement accounting standard wherein recognition costs of transition amounts had a huge impact on the bottom-line earnings of sponsoring firms. We find that investors evaluate the amortization costs of transition amounts as though they hold new, value-relevant information. On the other hand, we do not have clear evidence that managers deliver private information through accounting discretions on the amortization of transition amounts.

Keywords: Pensions, pension accounting, earnings management

Credibility of voluntary disclosure in financial firms

Shirley J. Ho, National Chengchi University

Abstract
Financial firms are more vulnerable to the investors’ lacking in confidence, and a speculative run could happen when all investors lose their confidence and withdraw simultaneously. In addition to the existing discussions on endogenous misreporting cost such as reputation, propriety and social norm effects, this paper demonstrated that the threat of speculative run can serve as an endogenous misreporting cost which prevents the bank manager from lying in their voluntary disclosures. Hence, voluntary disclosures such as management earnings forecast can be informative, and the degree of information revelation will be positively related to depositors’ perspectives on the random investment shock.