Governance and Finance

In recent decades, corporate governance no longer focuses on maximizing shareholder value but on balancing all stakeholders' interests. Corporate governance is then viewed more broadly as the nexus of rules, practices, and processes that determine the objective of a firm. Absent good governance, shareholders might realise inferior returns, creditors might lose interest payments, business partners might suffer from contract breaches, and employees might lose their future career opportunities (e. g., managers that used to work for Enron). High-quality governance ensures that all stakeholders' capital is effectively managed. Firms benefit from good governance in various ways, such as a higher valuation, a lower cost of capital, better talent attraction, and higher customer loyalty, for example. 

The research group “Governance and Finance” studies traditional and modern views of corporate governance in financial markets and contributes to the literature in two ways. First, it contributes to understanding the effectiveness of different governance mechanisms' roles in talent selection, incentive, and retention. Individuals carry out corporate objectives, and good governance must ensure that the most qualified talent is allocated to the optimal position, exerts optimal effort, and stays with the firm. For example, the most important duty of the board of directors is to select, incentive, and retain the most talented/suitable CEO. 

Second, this group also investigates how various forces in credit market impact corporate governance. Various stakeholders seek to influence corporate strategy differently with recent advances in the financial market. For example, the rise of common ownership might reduce firms' incentives to compete, the increase of active ownership might suddenly switch firms' investment strategies (i. e., shareholder activism), and the participation of shareholders in the credit market provides opportunities to internalise the shareholder-creditor conflicts. This group's research seeks to advance the knowledge of different stakeholders' methods and their effectiveness in influencing governance objects.

Workpackage 1: Talent Selection, Incentive, and Retention

Workpackage 2: Stakeholders and Governance
 

Research Cluster
Financial Resilience and Regulation

Your contact

Professor Shuo Xia, PhD
Professor Shuo Xia, PhD
- Department Financial Markets
Send Message +49 345 7753-875 Personal page LinkedIn profile

Refereed Publications

cover_pacific-basin-finance-journal.jpg

The Effect of Language on Investing: Evidence from Searches in Chinese Versus English

Hui-Ching Chuang Iftekhar Hasan Yin-Siang Huang Chih-Yung Lin

in: Pacific-Basin Finance Journal, June 2021

Abstract

This study examines the language effect on investing behavior in local stock markets for local- and foreign-language investors using Google search records. First, we find that attention to a local language stimulates attention to a foreign language, increases abnormal news coverage, and has better predictability on stock returns. Second, investors who do Google searches in the local language react faster to a news event's shock than those who search in the foreign language. Third, only attention to the local language can reduce the price drift of an earnings surprise. Last, firm-level information asymmetry is a channel for local advantage. Therefore, we suggest that investors who use a stock market's local language have a local advantage when seeking more profitable investment opportunities in that stock market.

read publication

cover_entrepreneurship-theory-and-practice.png

Equity Crowdfunding: High-quality or Low-quality Entrepreneurs?

Daniel Blaseg Douglas Cumming Michael Koetter

in: Entrepreneurship, Theory and Practice, No. 3, 2021

Abstract

Equity crowdfunding (ECF) has potential benefits that might be attractive to high-quality entrepreneurs, including fast access to a large pool of investors and obtaining feedback from the market. However, there are potential costs associated with ECF due to early public disclosure of entrepreneurial activities, communication costs with large pools of investors, and equity dilution that could discourage future equity investors; these costs suggest that ECF attracts low-quality entrepreneurs. In this paper, we hypothesize that entrepreneurs tied to more risky banks are more likely to be low-quality entrepreneurs and thus are more likely to use ECF. A large sample of ECF campaigns in Germany shows strong evidence that connections to distressed banks push entrepreneurs to use ECF. We find some evidence, albeit less robust, that entrepreneurs who can access other forms of equity are less likely to use ECF. Finally, the data indicate that entrepreneurs who access ECF are more likely to fail.

read publication

cover_review-of-quantitative-finance-and-accounting.jpg

Agency Cost of CEO Perquisites in Bank Loan Contracts

Chia-Ying Chan Iftekhar Hasan Chih-Yung Lin

in: Review of Quantitative Finance and Accounting, May 2021

Abstract

This study investigates the association between CEO perquisites and bank loan spreads. We collect detailed data on CEO perquisites from the proxy statements of S&P 500 firms between 1993 and 2015 to study this issue. The empirical evidence supports the agency cost view that the lending banks demand significantly higher returns (spread), more collateral, and stricter covenants from firms with higher CEO perquisites. We further confirm that the effect of these perquisites remains after we control for various corporate governance and agency cost factors. We conclude that banks consider CEO perquisites as a type of agency cost when they make lending decisions.

read publication

cover_finance-research-letters.png

VC Participation and Failure of Startups: Evidence from P2P Lending Platforms in China

Iftekhar Hasan Xiaoyang Li

in: Finance Research Letters, May 2021

Abstract

We investigate how VC participation affects the failure of startups. Using a unique dataset of the survival of peer-to-peer (P2P) platforms in China, we identify two types of failures, bankruptcy, and run off with investors' money. The Competing Risk Model results show that while VC participation reduces bankruptcy hazard, it has little impact on the runoff failures. The findings are robust to the use of matched subsamples that disentangle the influence of pre-investment screening by VC. Further analysis of exit routes reveals that conditional on failure, VC participation is associated with a higher chance of running for the exit.

read publication

cover_journal-of-international-financial-markets-institutions-and-money.jpg

Are Credit Rating Disagreements Priced in the M&A Market?

Iftekhar Hasan He Huang Thomas To

in: Journal of International Financial Markets, Institutions and Money, May 2021

Abstract

This paper examines the effect of credit rating disagreements on merger and acquisition (M&A) decisions. We show that acquirers with split ratings prefer to use stock to finance their acquisitions. More importantly, we find that acquirers with split ratings experience lower announcement returns. Further analysis shows that overpayment by acquirers with split ratings is concentrated in acquirers with entrenched managers. Our results are robust to alternative identification strategies. Overall, our evidence indicates that credit rating disagreements are heavily priced in the M&A market.

read publication

Working Papers

cover_DP_2024-23.jpg

From Shares to Machines: How Common Ownership Drives Automation

Joseph Emmens Dennis Hutschenreiter Stefano Manfredonia Felix Noth Tommaso Santini

in: IWH Discussion Papers, No. 23, 2024

read publication

cover_DP_2024-03.jpg

Poison Bonds

Rex Wang Renjie Shuo Xia

in: IWH Discussion Papers, No. 3, 2024

Abstract

This paper documents the rise of “poison bonds”, which are corporate bonds that allow bondholders to demand immediate repayment in a change-of-control event. The share of poison bonds among new issues has grown substantially in recent years, from below 20% in the 90s to over 60% since mid-2000s. This increase is predominantly driven by investment-grade issues. We provide causal evidence that the pressure to eliminate poison pills has led firms to issue poison bonds as an alternative. Our analysis suggests that this practice entrenches incumbent managers and destroys shareholder value. Holding a portfolio of firms that remove poison pills but promptly issue poison bonds results in negative abnormal returns of −7.3% per year. Our findings have important implications for the agency theory of debt: (i) more debt may not discipline the management; and (ii) even without financial distress, managerial entrenchment can lead to agency conflicts between shareholders and creditors.

read publication

cover_DP_2023-25.jpg

The Reverse Revolving Door in the Supervision of European Banks

Stefano Colonnello Michael Koetter Alex Sclip Konstantin Wagner

in: IWH Discussion Papers, No. 25, 2023

Abstract

We show that around one third of executive directors on the boards of national supervisory authorities (NSA) in European banking have an employment history in the financial industry. The appointment of executives without a finance background associates with negative valuation effects. Appointments of former bankers, in turn, spark positive stock market reactions. This „proximity premium“ of supervised banks is a more likely driver of positive valuation effects than superior financial expertise or intrinsic skills of former executives from the financial industry. Prior to the inception of the European Single Supervisory Mechanism, the presence of former financial industry executives on the board of NSA associates with lower regulatory capital and faster growth of banks, pointing to a more lenient supervisory style.

read publication

cover_SSRN.png

Poison Bonds

Shuo Xia Rex Wang Renjie

in: SSRN Discussion Paper, 2023

Abstract

This paper documents the rise of "poison bonds", which are corporate bonds that allow bondholders to demand immediate repayment in a change-of-control event. The share of poison bonds among new issues has grown substantially in recent years, from below 20% in the 90s to over 60% after 2005. This increase is predominantly driven by investment-grade issues. We provide causal evidence that the pressure to eliminate poison pills has led firms to issue poison bonds as an alternative. Further analyses suggest that this practice entrenches incumbent managers, coincidentally benefits bondholders, but destroys shareholder value. Holding a portfolio of firms that remove poison pills but promptly issue poison bonds results in negative abnormal returns of -7.3% per year. Our findings have important implications for understanding the agency benefits and costs of debt: (1) more debt does not necessarily discipline the management; and (2) even without financial distress, managerial entrenchment can lead to conflicts between shareholders and creditors.

read publication

cover_DP_2022-23.jpg

Trading away Incentives

Stefano Colonnello Giuliano Curatola Shuo Xia

in: IWH Discussion Papers, No. 23, 2022

Abstract

Equity pay has been the primary component of managerial compensation packages at US public firms since the early 1990s. Using a comprehensive sample of top executives from 1992-2020, we estimate to what extent they trade firm equity held in their portfolios to neutralize increments in ownership due to annual equity pay. Executives accommodate ownership increases linked to options awards. Conversely, increases in stock holdings linked to option exercises and restricted stock grants are largely neutralized through comparable sales of unrestricted shares. Variation in stock trading responses across executives hardly appears to respond to diversification motives. From a theoretical standpoint, these results challenge (i) the common, generally implicit assumption that managers cannot undo their incentive packages, (ii) the standard modeling practice of treating different equity pay items homogeneously, and (iii) the often taken for granted crucial role of diversification motives in managers’ portfolio choices.

read publication
Mitglied der Leibniz-Gemeinschaft LogoTotal-Equality-LogoSupported by the BMWK