Corporate Governance’s Role in the Risk-Return Paradox - New Evidence from Indian Firms

Prior empirical research emphasises ‘troubled’ firm context and ‘quality management’ perspective as reasons for a ‘paradoxical’ or negative risk-return association for firms. But, to the best of our knowledge, no studies examine the role of individual corporate governance mechanisms in influencing such a ‘paradox’. Therefore, the study investigates this issue by classifying 675 sample Indian firms over the period 2000-2017 into high performing and low performing firms in line with the strategic reference point theory and the behavioural theory. To fulfil study objectives, it uses four different firm-return measures and estimate firm-level risk with standard deviations of each return measures previous 5 years’ values on a rolling basis. In the univariate model, the study uses the notion of target (reference) return level under firm’s own and social aspiration levels in time-variant and market cycles contexts, and then compute Kendall’s correlations in between distance from such targets and their standard deviations. The study also carries out a multivariate regression model with necessary controls to further validate its univariate findings. The study results report significant influential role that board size and women directors’ presence play in both high and low performing firms’ ‘paradoxical’ risk-return association. On the contrary, board meetings, busy board and board tenure develops a risk-return ‘paradox’ for high performing firms only. These results hold true across my return measures, strategic reference points, market cycles and corporate governance regimes after controlling for firm- and industry-level heterogeneities under both univariate and multivariate analyses.

Factors Influencing Retail Investors’ Trading Behaviour in the Thai Stock Market

This paper investigates trading behaviour among Thai retail investors in 2016. Using detailed survey data from 491 investors, we examine the characteristics and behavioural patterns that lead to investor bias. Empirical results in the behavioural finance literature indicate that retail investors may not behave reasonably. Behavioural biases may influence investor decisions and affect financial markets. These studies, however, are limited to subsamples of the overall investor groups studied and mainly focus on developed markets. We find that biases are common among investors and that men are more overconfident than women. Moreover, we discover that investors with more experience in trading are less likely to hold their stocks for long periods of time. Further, investors aged 45 and younger hold more diversified portfolios. Another finding is that participants with an income of more than 50,000 Baht a month and/or who employ a number of brokers hold more diversified portfolios. This evidence is consistent with the findings that have been reported for Turkey, India, and Vietnam, indicating that demographic factors are useful for distinguishing between investors in terms of the level of overconfidence bias they exhibit. This result confirms that demographic factors play a role in differentiating and classifying retail investors and should motivate future researchers to consider these factors in their research.

The Role of Internal Audit in Risk Management from the Perspective of Risk Managers in the Banking Sector

The present paper aims to identify the role of internal audit function in risk management from the perspective of risk managers in banks operating in Palestine, with a review of the concept, importance, objectives, and principles of internal audit and its role in risk management for banks. The target population is the risk managers in the banks operating in Palestine. The major findings in the presented paper. First, the main factor in risk management is the risk manager's efficiency, and the internal auditing focuses on evaluating the risk management department and ensuring the efficiency of risk management practices in dealing with these risks. Second, the internal audit departments in the banks operating in Palestine participate in providing advice, suggestions and recommendations for the risk management department. Based on the results, the board of directors and senior management in these banks should continue to pay attention to the risk management department, and the need for coordination between these departments to achieve the best results at the banking and economic levels.

Exploring Changing Requirements of Financial Statement Audit Reports via a Morphogenetic Approach

There has been an ongoing concern with the quality of financial audit reports issued by registered public accounting firms in relation to financial accountability and transparency of the financial statements. In July 2009 the Public Accounting Oversight Board (PCAOB) released a concept paper outlining changes to the requirements of financial audit activities such as the inclusion of the engagement partner’s signature on the financial audit reports. The aim of these new requirements was to improve the accountability of engagement partners as well as enhance the perception of transparency of the audit reports. However, the contribution and effectiveness of these requirements to improve accountability and transparency of audit reports for various stakeholders relying on the audited financial information is questionable. This study explores the impact and effectiveness of changes to auditing regulation and processes through the application of Archer’s (1995) morphogenetic approach which is based on social conditioning, social interaction, and social elaboration where the structural influences provides the environment for agents to differentiate themselves. In addition, this study demonstrates how proposed regulation changes mould the qualities of audit regulation, the profession and the auditor whose perspectives deserved to be noticed from the dominant constituencies structured by the propositions of a morphogenetic analysis.

Editorial. Volume 15, Issue 4.

Editorial Volume 15 Issue 4

Human Rights from a Social Accounting Perspective in a Post-conflict Environment: The Case of Sri Lanka

This paper examines how three decades of civil conflict in Sri Lanka has impacted the perceptions of the accounting practitioners with regard to human rights (both during and post-conflict). Using the legitimacy lens in social accounting and the role of the state-supported accountancy body - Institute of Chartered Accountants Sr Lanka (CASL) human rights case is investigated. Specifically, the study’s scope is on rights and the degree of legitimacy formation for which accounting associations are accountable for human rights disclosure in a post-conflict environment in an emerging economy. The study interprets documentary evidence and a survey data that was administered among the members of the CASL. The findings reveal that the civil conflict had not hindered the accountants being in parallel with the legitimacy of social accounting notions adopted by the Western world in the disclosure of human rights. At the individual response level, they perceive that the accounting discipline as agents to promote human rights disclosure in business entities. Despite the fact, that this study has a low response rate, what is generalisable is an understanding of the processes and mechanisms which relate to the way the accountants perceived human rights by themselves. The practical implication indicates that urgent measures need to be undertaken to mainstream the legitimate human rights obligations of business entities since there is no one-size-fits-all strategy in a post-conflict environment. The social implication is that awareness of human rights issues, especially among the next generation of accountants is vital since this transformation would enable them not only to be technically competent but also to be ethical in a post-conflict environment. The study contributes to the literature on perceptions of human rights in a post-conflict environment from a social accounting perspective in an emerging economy.

AABFJ Moving Towards History Papers

Editorial

Antecedents of Firm’s Risk-play – A Structural Equation Modeling Approach in an Emerging Market Context

Firm-risk and managerial risk-taking though distinct are used interchangeably in empirical literature. Here, we identify these two distinctly by examining different proxies for them. We use income stream uncertainty and accounting beta to proxy firm-risk, and market risk and capital intensity ratio represent managerial risk-taking. Once defined, our objective is to find the antecedents of both these by using the most advanced structural equation modelling (SEM) approach from created constructs of performance, psychological, corporate governance, shareholding patterns, fundamental valuation and firm’s characteristics drivers. We formulate seven hypotheses based on empirical literature representing these constructs. We use data of 269 Indian firms for 18 (1999-2017) years to run SEM and then analyse our results individually and combinedly. SEM is used here to test the unidimensionality of the seven constructs (consisting of 19 drivers) and to analyze these drivers (i.e. antecedents) influence on firm-risk and managerial risk-taking i.e. firm’s risk-play. Results prove that present firm-performance, corporate governance drivers, promoters’ shareholding and firm’s characteristics are driving firm’s risk-play. However, fundamental valuation drivers have no role to play in influencing income stream uncertainty, systematic operating risks and managerial risk-attitudes. Psychological drivers and foreign shareholdings act only as a catalyst of firm-risk.

Does Corporate Governance Have a Say on Dividends in Australian Listed Companies?

This paper investigates whether corporate governance has an impact on dividend policy in Australian listed firms. The empirical studies of corporate governance and dividend policy in the Australian context tend to have a limited scope and the findings are mixed. Unlike the existing literature, this paper provides a more comprehensive examination of the relationship between dividend policy and corporate governance mechanisms. Using a sample of 1,438 firm-year observations for the period of 2005 to 2011 and the panel data approach, this study finds that dividend payout is significantly positively (negatively) correlated with board size, board independence, institutional ownership and use of a Big-4 audit firm (CEO duality and managerial ownership). Moreover, dividend yield is significantly positively (negatively) correlated with managerial ownership (foreign ownership). These findings suggest that dividend policy and corporate governance mechanisms are complementary i.e. firms paying higher dividends are more likely to engage in good governance practices as well as having strong monitoring and control systems in place and therefore both dividend policy and corporate governance are considered as effective tools in reducing agency costs.

Corporate Social Performance and Use of Debt: an Examination of Australian Companies

This study examines whether the corporate social performance (CSP) activities of firms influence the structure of debt in the Australian context. Long-term debt is often associated with higher monitoring by lenders, which suggests that firms may benefit from using long-term debt strategically. Short-term debt arises from regular business dealings with a number of primary stakeholders such as customers, suppliers, employees and lenders. We propose in this study that businesses that are committed to improving CSP outcomes may reduce use of short-term debt contributing to building sustainable long-term relationships with the primary stakeholders. We therefore investigate whether firms that prioritise CSP favour long-term debt or short-term debt. Using a sample of Australian Securities Exchange (ASX) listed firms, this study finds that the level of CSP is not associated with long-term debt use, but there is a significant negative association between CSP and the short-term debt usage. This finding suggests that firms with stakeholder-friendly policies reduce their use of short-term debt rather than long-term debt. The reduced use of short-term debt helps resolve possible conflicts between the primary stakeholders and a firm, thus this study presents evidence supporting stakeholder theory and conflict-resolution hypothesis.