Corporate governance practices evolve out of the balance of power between corporate insiders and outside investors. The Asian crisis of 1997-98 and the subsequent focus on corporate governance in the region have created the conditions for a shift in this balance of power (i.e. outside investors have demanded improvements in governance practices). As a result, each country has implemented corporate governance codes advising companies how to improve their governance and disclosure practices. However, as the codes are voluntary there has been considerable debate as to whether all companies are making adequate improvements. For those companies that have improved their governance practices, the question also remains as to whether these improvements have been effective in reducing agency costs and therefore improving firm value and performance. This thesis investigates the issue from three perspectives. Chapter two examines whether the board governance practices of East Asian companies have improved since the crisis. Chapter three determines whether the disclosure practices of East Asian companies have improved in the years after the crisis. Chapter four investigates the use of US and European cross-listings as a bonding mechanism in the years around the crisis.
Chapter two examines the adoption of major board-related corporate governance code recommendations by large non-financial companies in seven East Asian nations and investigates whether improvements in these board governance mechanisms have been associated with increased operating performance and market value. The results indicate that companies from Hong Kong, Indonesia, Malaysia, Singapore, South Korea and Thailand, but not Taiwan, have been active in improving their board governance since the crisis. At the firm-level, family-owned companies and companies with concentrated ownership started with worse board governance and have been least likely to improve their board governance since the crisis. Splitting of the positions of Chairman and CEO, creation of audit and nomination committees and improvements in overall board governance are found to have a positive relationship with subsequent operating performance and/or market value.
Chapter three examines whether East Asian companies have improved their disclosure practices since both the crisis and the introduction of corporate governance codes. Disclosure practices are measured through the properties of analyst’s forecasts. The results show that the introduction of the codes has been associated with lower analyst forecast error and a leveling out of disclosure practices across companies (larger improvements in companies that were previously poorer disclosers). The codes are also found to have an indirect effect on company disclosure practices through their effect on company governance practices. This suggests that the codes have had both a significant direct effect and a significant indirect effect (through increased board independence) on company disclosure practices.
Chapter four examines the bonding implications and long-term wealth effects of Asian companies cross-listing on US and European stock exchanges. If the bonding hypothesis is correct one would expect to find: (1) a permanent cross-listing premium created around the time of cross-listing, (2) a higher cross-listing premium for companies that cross-list on exchanges with better investor protection, and (3) a higher cross-listing premium for companies from countries with poorer investor protection. The results indicate that companies intending to cross-list are already valued higher than comparable companies and that they lose value following cross-listing. This suggests that companies strategically choose to cross-list at their peak performance. Following the drop in value after listing, cross-listed companies are generally found to be worth less than non-cross-listed companies in the long term.
Overall, the results are consistent with a shift in the balance of power toward outside investors since the crisis. There have been significant improvements in the board governance and disclosure practices of the average Asian company since the crisis. However, the improvements have not been consistent across all companies. In particular, family-owned companies continue to maintain weaker governance and disclosure practices than other companies. Assuming that the code recommendations are appropriate for all companies, the challenge for the future is coming up with suitable ways to entice family-owned companies and other reluctant companies to improve their corporate governance practices. In this regard, cross-listing on US and European exchanges does not seem to be a viable alternative for improving their governance practices.