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EDITORIAL

Law, finance, and the international mobility

of corporate governance

Douglas Cumming1,Igor Filatotchev2,3, April Knill4,David Mitchell Reeb5 andLemma Senbet6,7

1Schulich School of Business, York University,

Toronto, ON, Canada; 2City, University ofLondon, 106 Bunhill Row, London EC1Y 8TZ, UK;3Vienna University of Economics and Business,

Vienna, Austria; 4Florida State University,Tallahassee, FL, USA; 5Department of Finance,

National University of Singapore, Singapore,

Singapore; 6Robert H. Smith School of Business,

University of Maryland, College Park, MD, USA;7African Economic Research Consortium (AERC),

Nairobi, Kenya

Correspondence:I Filatotchev, City, University of London, 106Bunhill Row, London EC1Y 8TZ, UKe-mail: [email protected]

AbstractWe introduce the topic of this Special Issue on the ‘‘Role of Financial and Legal

Institutions in International Governance’’, with a particular emphasis on anotion of ‘‘international mobility of corporate governance’’. Our discussion

places the Special Issue at the intersection of law, finance, and international

business, with a focus on the contexts of foreign investors and directors.Country-level legal and regulatory institutions facilitate foreign ownership,

foreign directors, raising external financial capital, and international M&A

activity. The interplay between the impact of foreign ownership and foreigndirectors on firm governance and performance depends on international

differences in formal/regulatory institutions. In addition to legal conditions,

informal institutions such as political connections also shape the economic

value of foreign ownership and foreign directors. We highlight key papers in theliterature, provide an overview of the new papers in this Special Issue, and offer

suggestions for future research.

Journal of International Business Studies (2017) 48, 123–147.doi:10.1057/s41267-016-0063-7

Keywords: law and finance; corporate governance; mobility; foreign investors; directors;political connections

INTRODUCTIONInternational Business (IB), economics and finance scholars havedeveloped a significant body of research focused on the interna-tional mobility of capital, labor and goods. Two main theoreticalapproaches to international business strategy – internalizationtheory and the resource-based view (RBV) – assume that the mostefficient firm strategy will be that which maximizes rents from thefirm-specific assets and thus maximizes the long-run value of thefirm. The role of management in such theories is essentially toidentify and implement this efficient strategy. Organizationalcontrol processes are equally important in terms of creating valuein the context of globalization. These processes facilitate account-ability, monitoring and trust within and outside of the firm, andshould ultimately lead to improvements in the firm’s performanceand long-term survival.

Although prior IB and international finance studies have iden-tified a number of governance factors that may affect globalstrategy both at the headquarter and subsidiary levels of amultinational company (MNC), this research generally considerscorporate governance functions and processes as being location-

Received: 21 November 2016Accepted: 12 December 2016Online publication date: 10 February 2017

Journal of International Business Studies (2017) 48, 123–147ª 2017 Academy of International Business All rights reserved 0047-2506/17

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specific (Filatotchev & Wright, 2011). The underly-ing assumption in the vast majority of governancepapers in the context of globalization is thatgovernance is immobile, and various governancemechanism are location-bound unlike interna-tional flows of factors of production, goods andservices that form a core research area of IB. Thefocus in traditional international business has beenon labor, capital, and goods, as well as the controlprocesses around these inputs. Common controland governance processes facilitate trust within andoutside of a firm. In a repeated game, trust plays arole that limits defections. Ownership or foreigndirect investment (FDI) in an international businesscontext is the key to creating a repeated game.Therefore FDI may facilitate the creation of trustthrough the overseas extension of governancepractices.

Corporate governance research from an IB per-spective has traditionally not considered the mobil-ity of corporate governance. However, there is agrowing body of theoretical and empirical evidencepointing out that corporate governance structuresand processes are becoming increasingly mobileinternationally. Mobility of corporate governancein this context refers to scenarios where firmsexport or import governance practices in the pro-cess of internationalization. For example, a firmmay export its governance practices to its acquisi-tion target in an overseas location. Likewise, a localfirm may import overseas governance practices byappointing foreign directors on its board or attract-ing foreign investors through a cross-listing on aforeign exchange. In this introduction, we focus onfour related channels through which corporategovernance may be internationally mobile andhighlight the contributions of the papers in thisSpecial Issue: (1) international mergers and acqui-sitions (Ellis, Moeller, Schlingemann, & Stulz, 2017;Renneboog, Szilagyi, & Vansteenkiste, 2017), (2)foreign ownership (Aguilera, Desender, Lopez-Puer-tas, & Lee, 2017; Calluzzo, Dong, & Godsell, 2017),(3) foreign political connections (Sojli & Tham,2017), and (4) foreign directors (Miletkov, Poulsen,& Wintoki, 2017). Overall, the recognition ofcorporate governance mobility presents an impor-tant opportunity for further theory building in thecontest of both IB and finance research, and this is afocal point of this Special Issue.

Further, we build on an established tradition in theIB and finance areas focused on the role of formaland informal institutions and show that themobilityof corporate governance is strongly associated with

diverse institutional contexts within firms operatedomestically and globally. As Bell, Filatotchev, &Aguilera (2014) argue, firms are embedded in differ-ent national institutional systems, and they experi-ence divergent degrees of internal and externalpressures to implement a range of governancemechanisms that are deemed efficient in a specificnational context. Therefore we suggest that formalinstitutional factors such as legal or regulatory, aswell as informal (cognitive and cultural) institutionsmay shape the process of governance mobility.Likewise important is that cross-national institu-tional differences may pose a barrier for an interna-tional transfer of governance practices.The ideas of mobile governance in different

institutional contexts form a theoretical founda-tion for the papers included in this Special Issue.The call for papers for this Special Issue drew 84submissions written by authors stemming from 24nations. Thirteen papers were accepted for a paperdevelopment workshop in London in February2016, and six of those papers appear in this SpecialIssue (an additional three appear in regular JIBSissues). Taken together, these papers provide anovel contribution to IB research by focusing oninternational dimensions of corporate governancemobility and the implications of macro-level,institutional factors on the governance processesand outcomes across national borders.This introduction to the Special Issue is organized

as follows. The next section discusses institutionalaspects of corporate governance. The section there-after discusses the mobility of corporate gover-nance. We then introduce the specific topicspertaining to mobility in the case of internationalmergers and acquisitions, foreign owners, andforeign directors. We provide evidence of thegrowing importance of these topics in relation tomore traditional topics in international business.The last section offers concluding remarks andsuggestions for further research.

INSTITUTIONAL ASPECTS OF GOVERNANCEIn their seminal review of corporate governanceresearch, Shleifer & Vishny (1997 p. 773) providethe following definition of corporate governance:‘‘Corporate governance deals with the agencyproblem: the separation of management andfinance. The fundamental question of corporategovernance is how to assure financiers that they geta return on their financial investment.’’ As corpo-rate governance research has evolved, studies have

Law, finance, and the international mobility Douglas Cumming et al

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broadened the definition of ‘‘good governance’’ byconsidering it as a process-driven function thatfacilitates value creation. These processes developover time across countries and within firms. Thefinancial impact of good governance on the firm isunambiguously positive, both in terms of short-term efficiency outcomes and longer-term sustain-ability of the business. Perhaps most intuitive isthat good governance, which minimizes thechance of managerial tunneling – defined by John-son, La Porta, Lopez-de-Silanes, & Shleifer (2000) asthe expropriation of corporate assets or profits –leads to an enhanced capability of the firm to raiseexternal capital (Aggarwal, Klapper, & Wysocki,2005). Gompers, Ishii, & Metrick (2003) andBebchuk, Cohen, & Ferrell (2009) provide impor-tant metrics for the robustness of governance at thefirm level and find that good governance firms havehigher firm value, profits, and sales growth. Thefinance literature also suggests that good gover-nance leads to an increase in Tobin’s Q (Daines,2001) and higher firm value in M&A (Cremers &Nair, 2005), among other factors. The drivers of‘‘good governance’’ and its financial benefits cancome from monitoring by the Board of Directors(see, e.g., Huson, Parrino, & Starks, 2001), institu-tional investors (see, e.g., Li, Moshirian, Pham, &Zein, 2006), creditors (Nini, Smith, & Sufi, 2012),whistle blowers (Dyck, Morse, & Zingales, 2010)and the market for corporate control (Masulis,Wang, & Xie, 2012).

Management and IB perspectives have furtherbroadened research on ‘‘good corporate gover-nance’’ by considering different organizationaland institutional contexts as well as their effectson the firm’s internationalization. Some studies, forexample, indicate that monitoring, though impor-tant, is not the only function of corporate gover-nance. Indeed, good governance can also be viewedas having top managerial competency (Kor, 2003)or investment in firm-specific human capital thatcan enhance the quality of decision-making (Ma-honey & Kor, 2015). Governance is particularlyimportant to firms in less competitive industries(Giroud & Mueller, 2011) or in family-controlledfirms (Anderson & Reeb, 2004). Importantly, goodgovernance provides legitimacy to managerialactions (Lipton & Lorsch, 1992; Aguilera & Jackson,2003) such that investors feel protected frommanagement consuming private benefits of con-trol. The extent of this legitimacy can differ acrosscountries depending on laws, culture and levels ofcorruption (Judge, Douglas, & Kutan, 2008).

A growing number of studies suggest that firm-level governance mechanisms are institutionallyembedded (e.g., Aguilera & Jackson, 2003; Bell et al.,2014; McCahery, Sautner, & Starks, 2017), and theirfunctioning as well as organizational impact may bedifferent, even in country settings that appearsimilar legally. This leads to two significant exten-sions of previous research based on a universalisticagency framework. First, governance problems atthe firm level are not universal; they may differdepending on the firm’s institutional environment.Second, the effectiveness of governance remediesaimed at mitigating agency conflicts may dependon formal and informal institutions. ‘‘Law andfinance’’ research has made the first inroads intoexploring how national settings may lead to differ-ent firm-level governance models around the world.In seminal papers, La Porta, Lopez-de-Silanes,

Shleifer, & Vishny (1997, 1998, 2000) and La Porta,Lopez-de-Silanes, Pop-Eleches, & Shleifer (2004)suggest that legal origin is influential in a nation’sprotection of outside investors (investors otherthan management or controlling shareholders),which the authors suggest is largely the purposeof corporate governance. Though legal tradition(‘‘common law’’ and ‘‘civil law’’) succeeds inexplaining many cross-sectional differences in cor-porate finance, critics argue that these broad cate-gories belie the true complexity of a nation’s legalsystem. The US and UK economies serve as a goodexample. While both countries belong to the same‘‘Anglo-Saxon’’ model of corporate governance,describing their legal environment solely as com-mon law ignores differences in formal and informal‘‘rules of the game’’ that may significantly impactthe forms and efficacy of corporate governancemechanisms in the two countries. Consistent withthis notion, Short & Keasey (1999) suggest thatmanagers in the UK become entrenched at higherownership levels than managers in the US. Theyattribute this difference to better monitoring andfewer firm-level takeover defenses in the UK. Bru-ton et al. (2010) and Cumming &Walz (2010) showthat performance outcomes of ownership concen-tration and retained ownership by private equityinvestors may differ depending on the legal systemand institutional characteristics of the privateequity industry in a specific country.Characteristics of Boards of Directors, such as

goals, structure and representation may likewise beexpected to differ across institutional contexts,even within broad institutional categories.Wymeersch (1998), for example, finds that in some


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countries, the law does not specifically dictate therole of the board of directors, so its priorities maywell differ from the typical shareholder wealthmaximization. Regarding board structure, somejurisdictions have two-tier boards while others haveunitary boards. Rose (2005) suggests that the uni-tary (or one-tier) boards are typically from commonlaw nations and two-tier boards predominate incivil law nations, however, Danish firms haveadopted aspects of both. Moreover, O’Hare (2003)suggests that there may be an increase in oversightif firms with unitary systems change to a two-tierstructure. Regarding representation on boards,nations differ with regard to their take on thewisdom of including directors that are insidersversus outsiders (Adams & Ferreira, 2007) as well aslocal versus global (Masulis et al., 2012).

A large literature, much of it in the accountingfield, suggests that information environment,which includes the extent of corporate disclosure,reporting standards, the reliability of financialreporting, etc., is important to corporate gover-nance (Bushman, Piotroski, & Smith, 2004; Leuz &Wysocki, 2016). Corporate disclosure of informa-tion through publicly accessible accounting state-ments serves to enhance investor trust (Bushman &Smith, 2001). Much of this literature examines theuse of financial accounting in managerial incentivecontracts. This research has been examined in thecontext of takeovers (Palepu, 1986), boards ofdirectors (Anderson et al., 2004), shareholder liti-gation (Skinner, 1994) and debt contracts (Smith &Warner, 1979). The worldwide adoption of Inter-national Financial Reporting Standards has been animportant development in this literature and hasmotivated research in this area. The positive impactof enhancing reporting standards around the globeis arguably evidence consistent with the notionthat disclosure is an important mechanism incorporate governance.

Related to both the finance and accountingliterature, the legal structure in a nation plays acentral role in corporate governance of firms.Though firms may adapt to poor legal environ-ments individually (Coase, 1960), research suggeststhat regulation leads firms to develop good gover-nance. Mandatory disclosure can serve to reveal thetrue quality of a firm overall, and even managers atthat firm (Wang, 2010). Firms can opt into regula-tory environments by bonding to external legalenvironments that enhance legal requirements(e.g., with cross-listing) or opt out through goingprivate, delisting or even foreign incorporation.

Much of this literature examines changes in regu-lation in the US such as Regulation Fair Disclosureand Sarbanes–Oxley, but there are some interna-tional studies, such as Leuz, Nanda, & Wysocki(2003) and Dyck & Zingales (2004) that corroboratethe positive association between corporate gover-nance and a legal system that mandates disclosure.Some studies highlight the costs of regulation, bothdirect and indirect (e.g., Coates & Srinivasan,2014), suggesting that the mandatory nature ofdisclosure is not as straightforward as its relation tocorporate governance might imply.To summarize, prior law, economics, finance and

IB studies not only explore efficiency and effective-ness of various governance practices, but alsoidentify significant national differences in howthese practices are implemented at the firm level.In the following sections, we take this collectivebody of research a step further and discuss hownational differences may facilitate or create barriersfor the mobility of governance practices acrossnational borders.

MOBILITY OF GOVERNANCEAn integration of the mainstream IB research withinstitutional theory from finance, law and eco-nomics, provides new interesting dimensions to thediscussion of corporate governance mobility. Tra-ditional IB studies have identified how differentforms of institutional distance may affect the wayMNCs tap into international factors markets anddevelop their strategies in terms of global diversi-fication of their product and services (Brouthers,2002; Tihanyi, Griffith, & Russell, 2005). What isnot clear, however, is how these institutionalfactors may affect the exporting of governanceand its implications.Given the predominant focus in extant literature

on internal, organizational aspects of corporategovernance, there is limited prior work on potentialroles of the firm’s institutional environments interms of their impact on the link between gover-nance factors, international business strategy andultimately performance. Aguilera & Jackson (2003),for example, suggest that because business organi-zations are embedded in different national institu-tional systems, they will experience divergentdegrees of internal and external pressures to imple-ment a range of governance mechanisms that aredeemed efficient in a specific national context.Therefore contrary to the universalistic predictionsof agency-grounded research, different social,


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political and historic macro-factors may lead to theinstitutionalization of very different views of firms’role in society as well as what strategic actions andtheir outcomes should be considered as acceptable.

More recent sociology-grounded research sug-gests that governance is a product not only ofcoordinative demands imposed by market effi-ciency, but also of rationalized norms legitimizingthe adoption of appropriate governance practices(Bell et al., 2014). Legitimacy is the ‘‘generalizedperception or assumption that the actions of anentity are desirable, proper, or appropriate, withinsome socially- constructed system of norms, values,beliefs, and definitions’’ (Suchman, 1995, p. 574).This perspective focuses less attention on theindividual efficiency outcomes of structural gover-nance characteristics that are at the core of agencyperspective, and instead concentrates more ontheoretical efforts to understand how governancemechanisms affect the firm’s legitimacy throughperceptions of external assessors, or the stakeholder‘‘audiences’’.

Research within institutional theory and socialpsychology fields differentiates between varioustypes of legitimacy judgments that include, inaddition to instrumental (pragmatic), also cogni-tive and moral dimensions. More specifically,institutional theorists predict that regulative, nor-mative and cognitive institutions put pressure onfirms to compete for resources on the basis ofeconomic efficiency. However, institutional pres-sures may also compel firms to conform to expectedsocial behavior and demands of a wider body ofstakeholders. In other words, the ability of organi-zation to achieve social acceptance will depend on,in addition to efficiency concerns, the ability of itsgovernance systems to commit to stewardshipmanagement practices, stakeholders’ interests, andsocietal expectations.

These theoretical arguments may have far-reach-ing implications for corporate governance in an IBcontext. First, the firm’s quest for legitimacy maylead to changes in its corporate governance prac-tices and processes. For example, some firms, inaddition to enhancing the monitoring capacity ofboards, may also incorporate stakeholder engage-ment mechanisms into their formal governancestructures by assigning responsibility for sustain-ability to the board and forming a separate boardcommittee for sustainability. Consistent with thisnotion, the co-determination system of corporateboards in Germany ensures that representatives ofkey stakeholders, including employees, have a

direct say in governance matters. A system ofremuneration that involves not only financialperformance benchmarks, but also factors associ-ated with longer-term sustainability may beanother governance factor contributing to morallegitimacy. Similarly, some companies introducewider performance criteria and definitions of risk intheir risk-movement systems that use non-financialindicators. Therefore unlike studies in finance,economics, and strategy fields, institutional frame-work considers corporate governance as an endoge-nous, socially-embedded mechanism that may behighly responsive to various legitimacy pressures(Filatotchev & Nakajima, 2014).These arguments shed new light on our notion of

internationally mobile corporate governance bysuggesting that firms may adjust their governancemechanisms strategically when venturing intooverseas factor and product markets. For example,Moore, Bell, Filatotchev, & Rasheed (2012) advancea comparative institutional perspective to explaincapital market choice by firms going public viainitial public offering (IPO) in a foreign market.Based on a sample of 103 US and 99 UK foreignIPOs during the period 2002–2006, they find thatinternal governance characteristics (founder-CEO,executive incentives, and board independence) andexternal network characteristics (prestigious under-writers, degree of venture capitalist syndication,and board interlocks) are significant predictors offoreign capital market choice by foreign IPO firms.Their results suggest foreign IPO firms select a hostmarket where its governance characteristics andthird party affiliations fit the host market’s institu-tional environment. The basis for evaluating suchfit is the extent to which isomorphic pressures existfor firm attributes and characteristics to meetlegitimacy standards in host markets. Thus differ-ences in internal governance characteristics andexternal ties are associated with strategic capitalmarket choices such that an increased fit results in ahigher likelihood of choosing one market overanother. In other words, when firms select betweendifferent stock markets for their foreign IPO, theytry to ‘‘import’’ governance standards that theyperceive as more legitimate by investors in aspecific market. These findings are particularlyimportant given that Syvrud, Knill, Jens, & Colak(2012) find that, on average, foreign IPOs result inless proceeds.Further, research by Bell et al. (2014) focuses

on legitimacy in the stock market, where investorperceptions of the foreign IPO firm’s overall


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legitimacy fall at the intersection of the cognitiveand regulatory institutional domains. Thesedomains are aligned with the firms’ governancebundle and its home country legal environment,respectively. IPO firms originating from countrieswith institutional environments granting weakminority shareholder protections, such as Chinaor Russia, will have to adopt a larger number ofgovernance practices to gain the same level oflegitimacy as IPOs from strong governance juris-dictions. This international mobility of firm- andmacro-level governance factors can go both ways.

In a more recent paper, Krause, Filatotchev, &Bruton (2016) observe that institutional character-istics of foreign product markets influence thestructure of boards of directors of US firms activein these markets. They argue that allocating greater,outwardly visible power to the CEO will build thefirm’s legitimacy among customers who are cultur-ally more comfortable with high levels of powerdistance. Scholars rarely conceptualize boards astools firms can use to manage product markets’demand-side uncertainty, but the results of thisstudy suggest they should. Further, existingresearch in comparative corporate governance(e.g., Aguilera & Jackson, 2003) has argued thatnational institutions affect firm-level governancemechanisms, but this research also focuses almostexclusively on home country institutions. Clearly,institutional characteristics of foreign product mar-kets can also have an effect on a firm’s governance,even if the firm is incorporated and headquarteredin the United States.

To summarize, the legitimacy perspective suggestsnovel dimensions to the notion of corporate gover-nancemobility. From the agency perspective, MNCsmay export/import corporate governance to obtainaccess to superior resources and achieve efficiencyoutcomes. For example, by importing foreign direc-tors, firms in emerging markets can gain access toenhanced managerial expertise and monitoringcapabilities that may help them to be more compet-itive in an international market (Giannetti, Liao, &Yu, 2015). In addition, from an institutional per-spective, MNCs may adjust their governance sys-tems to adhere to expectations and governancestandards in a foreign product and factor markets,and therefore increase their legitimacy among localstakeholders, including investors and customers.These two perspectives differentiating between effi-ciency and legitimacy are not orthogonal, and theextent of governance mobility is determined by acomplex interplay of firm- and industry-level

factors, as well as financial, legal and cognitiveinstitutions in the home and host countries.Institutional factors may also create significant

barriers for corporate governance mobility. In termsof formal institutions, differences in national gov-ernance regulations may impede a transfer ofgovernance practices across national borders. Forexample, until recently the Chinese governmentimposed restrictions on foreign ownership of localcompanies that had a limiting effect on how muchinfluence Western institutional investors may havewhen deciding on various governance matters.Differences in informal institutions, such as cul-ture, may also create barriers for the transfer ofgovernance when, for example, imported gover-nance practices are not considered locally as legit-imate. Cultural differences influence governancenot only directly, but also indirectly through itsinfluence over time in shaping institutions. Forexample, culture can influence governance andother managerial decision-making through beliefsor values that influence individual agents’ percep-tions, preferences, and behaviors. As a result,culture ultimately affects the utilities of agent’schoices, both at the individual level and-as frictionsare always present-at the firm and national levels,when local players may have difficulties adoptingbest governance practices due to behavioral andcognitive biases. Culture also affects governanceand managerial decision-making by influencingnational institutions, which can be viewed as apath-dependent result of cultural influences andhistorical events (David, 1994). Recent examplessurround governance tensions in Japan, China andother South-East Asia economies between localinvestors on one hand, and foreign board membersand CEOs coming from the Western economies,indicating that cultural differences may createbarriers for the transfer of ‘‘good governance’’concepts that local participants in corporate gover-nance mechanisms find difficult to accept.Although our emphasis here was on how institu-tional factors may facilitate the transfer of corpo-rate governance, institutional barriers to thistransfer represent an important but relatively lessexplored area.

SPECIFIC MODES OF TRANSFERRINGGOVERNANCE

If the firm-level corporate governance structuresand their organizational outcomes in terms ofstrategies and performance are institutionally


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embedded, then the extent of governance mobilityas well as its effects on exporting/receiving firms isfar from universal. They may depend on institu-tional differences in home/host locations. Exactlyhow institutional factors affect the mobility ofcorporate governance and its implications dependson firm-level corporate governance, the mode(s) inwhich corporate governance is transferred, and theinstitutional environments from and to whichgovernance is transferred.

The mobility of governance depends on themechanisms used partly because there is differen-tial evidence on the extent to which governancecan be learned, copied, or imitated. Consistent withthis notion, Doidge, Karolyi, & Stulz (2007) findsignificant heterogeneity in firm-level corporategovernance within countries. Prior research hasshown that investors themselves learn about thevalue of governance, and as such the returns toinvestment based on governance disappear overtime. Indeed, Subramanian (2004) shows that theadvantages to incorporating in Delaware differacross small versus large firms and disappear overtime (counter to Daines, 2001). Bebchuk, Cohen, &Wang (2013) show that the value of the Gomperset al. (2003) governance index in predicting stockreturns over time disappears as investors learnabout the value of such governance; that is, theprice of well governed stocks goes up and thereturns go down. Nevertheless, while investorsappear to learn about the value of governance, itis difficult for some firms to observe, learn, andadopt best practices in governance due to differ-ences in internal process of the firm, behavioral andcognitive biases which limit the ability to copy well(Amin & Cohendet, 2000; Klapper & Love, 2004).Learning is local, requires skill acquisition, accli-mation to the right mindset, interactions with theright people, and a thirst for external reputation.Also, learning requires overcoming bad gover-nance. For example, Romano (2005) suggests thatthere are mistakes made by policymakers whenthey adopt minimum governance standards. Policyimplications on governance standards is a partisantopic, however. Involved in these policies are twocontroversial topics: globalization versus national-ization, and government involvement in the cor-porate world. The law and economics/financeliterature is fairly consistent in their conclusionthat legal institutions, both public and private (LaPorta et al., 2006; Jackson & Roe, 2009; Cumming,Knill, & Richardson, 2015), are good for firm accessto capital and financial development in general.

Consistent with this notion, policymakers who findthis research compelling should support legislationsupporting the exporting or importing of goodcorporate governance, especially in nations wherelegal institutions are lacking.At the same time, fairly recent events, such as the

Great Recession, ‘‘Brexit’’ in the UK and an increasein the popularity of nationalism among citizens insome nations have moved some policymakers totake a more protective stance with regard to foreignownership. As international trade and capital flowscontract, the International Monetary Fundacknowledges that globalization is not withoutrisks. Taking into consideration both of thesetrends, it is difficult to discuss with any specificityglobal policy implications.In this Special Issue, the papers comprise analyses

of four types of international transfer of corporategovernance: international M&As (Ellis et al., 2017;Renneboog et al., 2017), foreign investors (Aguileraet al., 2017; Calluzzo et al., 2017, foreign politicalconnections (Sojli & Tham, 2017) and foreigndirectors (Miletkov et al., 2017).The popularity of the international M&A litera-

ture has been growing markedly over time. Figure 1shows that articles that reference internationalbusiness in general have declined over time relativeto articles that reference international acquisitions,shareholder rights, and creditor rights. Some keypapers in the literature on international M&As andrelated topics of loans and creditor rights aresummarized in Table 1. Esty & Megginson (2003),Bae & Goyal (2009), Haselmann, Pistor, & Vig(2010), Cumming, Lopez-de-Silanes, McCahery, &Schwienbacher (2015), and Qi, Roth, & Wald(2017) show that loan structures and debt tranch-ing depend significantly on creditor rights andshareholder rights. In turn, international M&As,which are often financed with significant leverage,depend on access to debt finance and internationallevels of creditor and investor protection. Bris &Cabolis (2008) and Martynova & Renneboog (2008)find evidence that the cross border mergers have ahigher impact on target firms share prices incountries with better investor protection, and whenthe target is from a country of better investorprotection. In the context of leveraged buyouts(LOBs), however, Cao, Cumming, & Qian (2014)find evidence that cross-border LBOs are morecommon from strong creditor rights countries toweak creditor rights countries. Further, LBO premi-ums are lower in countries with stronger creditorrights and lower among cross-border deals. Cao,


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Cumming, Goh, & Qian (2015) show that theimpact of country-level investor protection on dealpremiums is stronger for LBO than non-LBOtransactions.

Two papers in this Special Issue contribute to thisliterature on cross-border M&As. Ellis et al. (2017)show that acquirers benefit from good countrygovernance, such that the acquirer’s stock pricereaction to acquisitions increases with the countrylevel governance distance between the acquirer andthe target. Renneboog et al. (2017) examine theimpact of M&As on bondholders. Bondholderreturns are larger in countries with stronger creditorrights and more efficient claims enforcement.These papers are important, as they show that thecountry-level distance between the acquirer andtarget affects the magnitude of transfer of gover-nance, and this benefit is shared by shareholdersand bondholders alike.

Table 2 highlights key papers in the literature onforeign ownership, foreign political connections,and foreign directors. Figure 2 shows that thesetopics have been substantially increasing in popu-larity over time, in contrast to work on directorsmore generally for example, which has been in

relative decline in recent years. Foreign investorsfocus on different types of stocks, as shown in earlywork by Kang & Stulz (1997). Foreign investors donot destabilize markets (Choe, Kho, & Stulz, 1999).Foreign investment reduces the cost of capital(Stulz, 1999), and financial integration across coun-tries lowers transactions costs and greater economicwelfare (Martin & Rey, 2000), even though foreignmoney managers have transaction costs disadvan-tages (Choe, Kho, & Stulz, 2005). Foreign investorsincrease the expected value of private firms backedby venture capitalists (Cumming, Knill, & Syvrud,2016), The positive effect of foreign ownership onfirm value has been attributed to larger sharehold-ers and higher long term commitment and involve-ment of such shareholders (Douma, George, &Kabir, 2006); however, in some cases internationalownership is associated with deficient environmen-tal standards (Dean, Lovely, & Wang, 2009).Cross-listing enables foreign ownership, and

firms to bond to higher governance standardsabroad to take advantage of more stringent securi-ties laws in a host country’s capital markets (Coffee,2002; Doidge, Karolyi, & Stulz, 2004; Doidge et al.,2007; Karolyi, 2012; Pagano, Roell, & Zechner,

Figure 1 Google Scholar hits on international acquisitions, creditor rights, and related topics. This figure displays the number of

Google Scholar hits as a percentage of the hits in 2008 for different search terms: Acquisitions (54,100 hits in 2008), International

Acquisitions (290 in 2008), Creditor Rights (835 in 2008), Shareholder Rights (1380 in 2008), Shell Companies (288 in 2008), and

International Business (134,000 in 2008).


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Table

1Summary

ofliterature

oninternationalcreditorrights,debtfinance,andM&As

Author(s)

Sample

Data

source

Dependentvariables

Independentvariables

Main

findings

Esty&

Megginson

(2003)

495Project

Loan

Tranch

esin

61

Countries,

1980–2000

Dealogic

Loanware

LoanSyndicate

Size

andStructure

CreditorRights,Legality

Indices,

Institutional

InvestorRatings,

Maturity,

Refinancing,Guarantees,

EmergingMarketBond

Spreads,

SectorVariables

Lenders

structure

loansyndicatesto

facilitate

monitoring

andlow-cost

re-contractingin

countrieswhere

creditors

have

strongandenforceable

legalrights.In

contrast,

lenders

attemptto

deterstrategic

defaultsbycreating

largerandmore

diffuse

syndicateswhentheycannot

resort

tolegalenforcementmech

anismsto

protect

their

claim

s

Bris&

Cabolis

(2008)

39Countries,

1989–2002,Cross-

borderM&A

Secu

ritiesData

Corporation(SDC)

Cumulative

Abnorm

al

ReturnsforAcq

uirer

andTargetFirm

s

CreditorRights,

ShareholderRights,

Corruption,Accounting

Standards,

Cash

Payment,

Firm

-SpecificVariables,

MarketConditions

Variables

Theannouncementeffect

ofacross-bordermergerfor

thetargetfirm

ishigher–relative

toamatching,

domestic

acq

uisition–thebettertheshareholder

protectionandtheaccountingstandardsin

theco

untry

oforigin

oftheacq

uirer.Thisresultisonly

significantin

acq

uisitionswhere

theacq

uirerbuys100%

ofthetarget,

andtherefore

where

thenationalityofthetargetfirm

changes.

Inaddition,thisresultisonly

significantwhen

theacq

uirerco

mesfrom

amore-protectiveco

untry,

whichsuggeststhattargetfirm

savo

idadoptingweaker

protectionviaprivate

contracting.There

isnota

symmetric

effect

ontheacq

uirer’sreturn.Allin

all,

the

evidence

supportstheview

thatthetransferofbetter

corporate

governance

practicesthroughcross-border

mergers

ispositively

valuedbymarkets

withweaker

corporate

governance

Martynova

& Renneboog

(2008)

29Countries,

1993–2001,Cross-

borderM&A

Secu

ritiesData

Corporation(SDC)

Cumulative

Abnorm

al

ReturnsforAcq

uirer

andTargetFirm

s

Difference

betw

een

CreditorRights

and

ShareholderRights

for

TargetandBidderNations,

Firm

-SpecificVariables,

MarketConditionVariables

Whenthebidderisfrom

aco

untrywithastrong

shareholderorientation(relative

tothetarget),part

of

thetotalsynergyvalueofthetakeovermayresultfrom

theim

provementin

thegovernance

ofthetargetassets.

Infulltakeovers,theco

rporate

governance

regulationof

thebidderisim

posedonthetarget(thepositive

spillover

bylaw

hypothesis).In

partialtakeovers,theim

provement

inthetargetco

rporate

governance

mayoccurona

voluntary

basis(thespilloverbyco

ntrolhypothesis).The

data

corroborate

both

spillovereffects.In

contrast,when

thebidderisfrom

aco

untrywithpoorershareholder

protection,thenegative

spilloverbylaw

hypothesis

statesthattheanticipatedtakeovergainswillbeloweras

thepoorerco

rporate

governance

regim

eofthebidder

will

beim

posedonthetarget.Thealternative

bootstrappinghypothesisarguesthatpoor-governance

bidders

voluntarily

bootstrapto

thebetter-governance

regim

eofthetarget.Thedata

donotsupport

this

bootstrappingeffect


131


Table

1(Continued

)

Author(s)

Sample

Data

source

Dependentvariables


Main

findings

Bae&

Goyal

(2009)

48Countries,

1994–2003

LoanPricing

Corporation(LPC)

LoanSize,Lo

an

Maturity,Lo

anSpread

overLIBOR

CreditorRights,

Enforcement,Other

CountryLevelLegal

Variables

Banks

respondto

poorenforceability

ofco

ntractsby

reducingloanamounts,shorteningloanmaturities,

and

increasingloanspreads.

While

strongercreditorrights

reduce

spreads,theydonotseem

tomatterforloansize

andmaturity.Overall,

weshow

thatvariationin

enforceability

ofco

ntractsmatters

agreatdealmore

to

how

loansare

structuredandhow

theyare

priced

Cumming

etal.(2015)

115Countries,

1995–2009

LoanPricing

Corporation(LPC)

NumberofLo

an

Tranch

es,

Spread

Betw

eenLo

an

Tranch

es

CreditorRights,

Enforcement,Other

CountryLevelLegal

Variables

Inadditionto

dealandborrowerch

aracteristics,legaland

institutionaldifferencesim

pact

both

theprobability

of

tranch

ingandthestructure

across

tranch

esofthesame

loan.Strongcreditorprotectionandefficientdebt

collectionleadto

alargersyndicatedloanmarket,

increase

loantranch

ingandreduce

tranch

espreads,

ultim

ately

promotingfirm

access

todebtfinance

Caoetal.

(2014)

Cross-borderLB

Os,

43co

untries,

1995–2007

Dealogic,Thomson

VentureXpert,

Djanko

vetal.(2007),

andLa

Portaetal.

(1998)andSpamann

(2010)

TotalCountryLevel

LBO

Volumeand

Cross-borderLB

O

Volume,Cross-border

LBOs,

ClubDeals,

PremiumsPaid

for

TargetRelative

to

PrevailingStock

Price

CreditorRights,

ShareholderRights,

Eco

nomic

Conditions,

ForeignDirect

Investment,

Firm

-LevelFinancial

Variables,

ClubDeals,

Industry

Conditions

Cross-borderLB

Oinvestmentismore

commonfrom

strongcreditorrights

countriesto

weakcreditorrights

countries.

Clubdealsare

less

commonin

countrieswith

strongercreditorrights,andless

commonin

cross-border

LBOs.LB

Opremiumsare

lowerin

countrieswithstronger

creditorrights,andamongcross-borderdeals

Caoetal.

(2015)

Cross-borderLB

Os

versusnon-LBO

M&As,

43

countries,

1995–2007

Dealogic,Thomson

VentureXpert,

Djanko

vetal.(2007),

andLa

Portaetal.

(1998)andSpamann

(2010)

Premium

Paid

for

TargetRelative

to

PrevailingStock

Price

CreditorRights,

ShareholderRights,

Eco

nomic

Conditions,

ForeignDirect

Investment,

Firm

-LevelFinancial

Variables,

ClubDeals,

Industry

Conditions

Targetshareholders’wealthgain

isM&Asishigherin

countrieswithbetterinvestorprotection.Theim

pact

of

investorprotectionontakeoverpremium

islargerforLB

O

thannon-LBO

transactions.

ClubLB

Osare

pricedlower

thannon-clubdealsafteraccountingforendogeneity

Ellisetal.

(2017)

Cross-border

M&As,

56

countries,

1990–2007

Secu

ritiesData

Company’s

(SDC)

GlobalMergers

and

Acq

uisitionDatabase,

Djanko

vetal.(2007),

andLa

Portaetal.

(1998)

Acq

uirerReturns

CreditorRights,

ShareholderRights,Other

Country-LevelGovernance

VariablesforAcq

uirerand

Target,Differencesin

CountryLevelGovernance

betw

eenAcq

uirerand

Target,Eco

nomic

Conditions,

Industry

Dummies

Acq

uirers

cantransport

thebenefits

from

goodco

untry

governance,so

thattheygain

more

from

acq

uiring

targets

withworseco

untrygovernance

thantheirown.

Theacq

uirer’sstock-price

reactionto

acq

uisitions

increaseswiththeco

untrygovernance

distance

betw

een

theacq

uirerandthetarget


132


2002). But the bonding explanation is incompleteas not all firms desire to cross-list (Coffee, 2002),and there is still a large effect of local nationalgovernance on firm value amongst firms that docross-list (Cumming, Hou, & Wu, 2017). Interna-tional adoption of other jurisdictions’ monitoringtechnology (Cumming & Johan, 2008) and regula-tions (Cumming, Johan, & Li, 2011) can enable theinternational transfer of governance and superiorstock market outcomes such as new listings andliquidity. Regulators adopt from other jurisdictionsmonitoring technology (Cumming & Johan, 2008)and regulations (Cumming et al., 2011) that enablesuperior governance and stock market outcomes.The mobility of governance is also facilitated by

the increasing internationalization of the investorbase. Specifically, global investors include sover-eign wealth funds (SWFs), such as United ArabEmirates’s Abu-Dubai Investment Authority. SWFsmay enforce governance standards in their portfo-lio firms that are different to the general gover-nance practices in a specific location (Knill, Lee, &Mauck, 2012). Moreover, SWFs have a differentialpreference for private firms without a stockexchange listing, particularly in countries withlower legal standards (Johan, Knill, & Mauck,2013), where the lack of transparency is suggestiveof greater agency problems. Once companiesbecome publicly listed, there is substantially moreinformation released to the market, depending onthe legal and cultural factors in a particular country(Boulton, Smart, & Zutter, 2017).Another mechanism that can transfer gover-

nance includes CEO migration. MNCs can exportmonitoring technology and similar practices acrossnational borders, and CEOs that have experience inforeign countries with stronger institutional envi-ronments may transfer knowledge about goodgovernance (Cumming, Duan, Hou, & Rees,2015). Generally, internal control systems andprocesses can be learned, therefore they are trans-ferable/exportable, particularly in the context ofemerging markets (Hoskisson, Eden, Lau, &Wright,2000; John & Senbet, 1998).Further, foreign directors represent another chan-

nel of governance mobility as they may bring goodgovernance standards from their home countries tothe focal firm, especially if it is located in a countrywith low governance standards (Giannetti et al.,2015). Foreign directors have been shown to pos-itively impact firm performance (Choi, Park, & Yoo,2007), particularly when foreign directors havehigher levels of foreign degrees and politicalT

able

1(Continued

)

Author(s)

Sample

Data

source

Dependentvariables


Main

findings

Renneboog

etal.(2017)

Cross-border

M&As,

2000–2013

ThomsonReuters

Eikon,SDC,Zephyr,

andCapitalIQ

Databases,

Database,

Djanko

vetal.(2007),

andLa

Portaetal.

(1998),andSpamann

(2010)

Abnorm

alBond

Returns

CreditorRights,

ShareholderRights,

Eco

nomic

Conditions,

Industry

Dummies

Thebondholders

ofbiddingfirm

srespondmore

positively

todealsthatexpose

theirfirm

toajurisdiction

withstrongercreditorrights

andmore

efficientclaim

s

enforcementthroughco

urts.Theeffectsare

strongerfor

firm

swithhigherassetrisk,longermaturity

bonds,anda

higherlikelih

oodoffinancialdistress

Qietal.

(2017)

CapitalRaisingand

Expenditure

Decisions,

40

countries,

1980–2009

Worldscope,

InternationalFinancial

Statistics,

WorldBank.

Djanko

vetal.(2007),

andLa

Portaetal.

(1998)

DebtFinancing,

CapitalExpenditure

CreditorRights,

ShareholderRights,

Eco

nomic

Conditions,

Industry

Dummies

Creditorrights

are

associatedwithgreaterdebtfinancing

andinvestmentduringeco

nomic

downturns,

but

creditorrights

have

asignificantlysm

allereffect

during

expansions.

Thebeneficialeffectsofcreditorrights

duringrecessionsare

strongerforfirm

sthatare

more

likely

tohave

severe

shareholder-bondholderagency

problems.

Duringrecessions(relative

toexpansions)

strongcreditorrights

are

associatedwithasm

aller

declinein

netcapitalflows

Thistable

summarizestheliterature

onco

untry-levellegalco

nditions,

creditorrights,debtfinance,andcross-borderandinternationalM&As.

Mainfindingsare

quotedorparaphrased.


133


Table

2Summary

ofliterature

oninternationalownership

anddirectors

Author(s)

Sample

Data

source

Dependentvariables


Main

findings

Kang&

Stulz

(1997)

Japan,1975–1991

Pacific-BasinCapital

MarketResearch

Center(PACAP)

ForeignOwnership,

Returns

Firm

-SpecificVariables,

MarketConditions

Foreigninvestors

donothold

nationalmarket

portfolio

sorportfolio

stiltedtowardsstockswith

highexpectedreturns.

Foreigninvestors

hold

disproportionately

more

sharesoffirm

sin

manufacturingindustries,

largefirm

s,andfirm

s

withgoodaccountingperform

ance,low

unsystematicrisk,andlow

leverage.Controlling

forsize,there

isevidence

thatsm

allfirm

sthat

export

more

firm

swithgreatershare

turnover,

andfirm

sthathave

ADRshave

greaterforeign

ownership

Choeetal.

(1999)

OrderandTradeData,

1993–1997,Korean

Publicly

ListedFirm

s

KoreaStock

Exch

ange,co

mpiled

bytheInstitute

of

Finance

andBanking

(IFB

)atSeoulNational

University

Trading,Order

Imbalances,

Returns,

Volatility

ForeignInvestors,Market

Conditions

There

ispositive

feedback

tradingandherdingby

foreigninvestors

before

theperiodofKorea’s

eco

nomic

crisis.Duringthecrisisperiod,herding

falls,andpositive

feedback

tradingbyforeign

investors

mostly

disappears.There

isnoevidence

thattradesbyforeigninvestors

hada

destabilizingeffect

onKorea’s

stock

market.In

particular,themarketadjustedquicklyand

efficientlyto

largesalesbyforeigninvestors,and

these

saleswere

notfollo

wedbynegative

abnorm

alreturns

Stulz

(1999)

Datastream,

1988–1998,37

Countries

Datastream

Notapplicable

–

correlations

Globalizationreducestheco

stofequitycapitalfor

tworeasons.

First,theexpectedreturn

that

investors

requireto

invest

inequityto

compensate

them

fortherisk

theybeargenerally

falls.Seco

nd,theagency

costswhichmake

ithard

andmore

expensive

forfirm

sto

raisefunds

beco

meless

important

Martin

&

Rey(2000)

Notapplicable

–

theoreticalmodel

Notapplicable

Notapplicable

Notapplicable

Financialintegrationacross

countriesleadsto

lowertransactionco

stsbetw

eentw

ofinancial

markets,whichtranslate

tohigherdemandfor

assets

issuedonthose

markets,higherasset

prices,

andgreaterdiversification.Financial

integrationbenefits

thelargest

eco

nomyofthe

integratedarea.Only

whentransactionco

sts

beco

mevery

smalldoesfinancialintegrationlead

torelocationofmarkets

inthesm

allest

eco

nomy


134


Table

2(Continued

)

Author(s)

Sample

Data

source

Dependentvariables


Main

findings

Pagano

etal.

(2002)

1986–1998,European

andUSfirm

s

GlobalVantageand

Worldscopedatabases

Cross-listing,Firm

Perform

ance

Measures

(ROA,AssetGrowth,

Tobin’s

Q,Fo

reignSales,

etc

Cross-listing,Firm

Characteristics,

Regional

Variables,

Market

Conditions

In1986–1997,manyEuropeanco

mpanieslisted

abroad,mainly

onUSexch

anges,

while

the

numberofUSco

mpanieslistedin

Europe

decreased.Thech

aracteristicsandperform

ance

ofEuropeanco

mpaniesdiffersharply

depending

onwhethertheycross-listin

theUSorwithin

Europe.In

thefirstcase,co

mpaniestendto

be

high-tech

andexport-oriented,andpursuea

strategyofrapid

expansionwithnosignificant

leveraging.In

theseco

ndcase,co

mpaniesdonot

grow

more

thantheco

ntrolgroup,andincrease

theirleverageaftercross-listing.In

both

cases,

cross-listingco

mpaniestendto

belargeand

recentlyprivatizedfirm

s,andexpandtheirforeign

salesafterlistingabroad

Doidge

etal.

(2004)

40co

untries,

1995,

1997

Worldscope,and

Supplementary

Sources

Cross-Listing;Tobin’s

QCross-listing,Firm

Characteristics,

Regional

Variables,

Legal

Conditions,

Market

Conditions

Attheendof1997,foreignco

mpanieswith

sharescross-listedin

theUShadTobin’s

qratios

thatwere

16.5%

higherthantheqratiosofnon-

cross-listedfirm

sfrom

thesameco

untry.The

valuationdifference

isstatistically

significantand

reach

es37%

forthose

companiesthatliston

majorUSexch

anges,

evenafterco

ntrollingfora

numberoffirm

andco

untrych

aracteristics.

AUS

listingreducestheextentto

whichco

ntrolling

shareholders

canengagein

expropriationand

therebyincreasesthefirm

’sability

totake

advantageofgrowth

opportunities.

Growth

opportunitiesare

more

highly

valuedforfirm

s

thatch

oose

tocross-listin

theUS,particularly

those

from

countrieswithpoorerinvestorrights

Choeetal.

(2005)

OrderandTradeData,

1996–1998,Korean

Publicly

ListedFirm

s

KoreaStock

Exch

ange,co

mpiled

bytheInstitute

of

Finance

andBanking

(IFB

)atSeoulNational

University

TradePrices,

Cumulative

Abnorm

alReturns

ForeignInvestors,Market

Conditions

Foreignmoneymanagers

paymore

than

domestic

moneymanagers

whentheybuyand

receiveless

whentheysellformedium

andlarge

trades.

Thesample

averagedaily

trade-w

eighted

disadvantageofforeignmoneymanagers

isof21

basispoints

forpurchasesand16basispoints

for

sales.

There

isalsosomeevidence

thatdomestic

individualinvestors

have

anedgeoverforeign

investors.Theexplanationforthese

resultsisthat

pricesmove

more

against

foreigninvestors

than

against

domestic

investors

before

trades


135


Table

2(Continued

)

Author(s)

Sample

Data

source

Dependentvariables


Main

findings

Deanetal.

(2009)

EquityJointVentures

(from

Macau,Taiw

an,

andHongKong)into

China,1993–1996

China’s

Foreign

Eco

nomic

Relations

andTrade,China

StatisticalYearbook,

ChinaEnvironmental

Yearbook

Locationofequityjoint

ventures

EnvironmentalStandards,

Levies,

andRegional

Characteristicsfor

Developmentand

Agglomeration

Resultsshow

equityjointventuresin

highly-

pollu

tingindustriesfundedthroughHongKong,

Macao,andTaiw

anare

attractedbyweak

environmentalstandards.In

contrast,EJVsfunded

from

non-ethnically

Chinese

sourcesare

not

significantlyattractedbyweakstandards,

regardless

ofthepollu

tionintensity

ofthe

industry.These

findingsare

consistentwith

pollu

tionhavenbehavior,butnotbyinvestors

from

highinco

meco

untriesandonly

inindustries

thatare

highly

pollu

ting

Douma

etal.

(2006)

1999–2000,India

Capitalin

e2000

ROAandTobin’s

QFo

reignownership,firm

-

specificco

ntrolvariables

Thepositive

effect

offoreignownership

onfirm

perform

ance

issubstantially

attributable

to

foreignco

rporationsthathave,onaverage,larger

shareholding,higherco

mmitment,andlonger-

term

invo

lvement

Ruigrok

etal.

(2007)

269Companiesonthe

SwissStock

Exch

angein

2003

SwissStock

Exch

ange

DirectorNationalityand

Gender

Education,Age,Family

Affiliation,Interlocking

Director,Tenure,Other

Affiliations

Whereasforeigndirectors

tendto

bemore

independent,womendirectors

are

more

likely

to

beaffiliatedto

firm

managementthroughfamily

tiesandthatforeigndirectors

hold

significantly

lowernumbers

ofdirectorshipsatotherSwiss

boards.Female

andforeigndirectors

alsodifferin

term

sofeducationalbackground,educational

level,ageandboard

tenure.Weco

ncludethatin

orderto

managediversityonco

rporate

boardsit

isim

perative

tounderstandthech

aracteristics,

qualifi

cationsandaffiliationsthatthese

directors

bringto

theboardroom

andthatitisim

portantto

take

nationalcircumstancesinto

accountrather

thanrelyingonresearchresultsfrom

other

countries

Choietal.

(2007)

457KoreanFirm

sand

1834firm

-years

from

1999–2002

ListedCompany

Database

ofthe

KoreanListed

Companies

Association,Financial

Supervisory

Service

andtheFairTrade

Commissionofthe

Koreangovernment,

andtheKoreanStock

Exch

ange

Tobin’s

QFo

reignInstitutional

Ownership,Fo

reign

Directors,Market

Conditions,

Firm

Level

ControlVariables

AftertheAsianfinancialcrisis,regulations

requiringoutsideindependentdirectors

were

implemented.Theeffect

offoreignindependent

directors

andforeigninstitutionalownership

on

firm

perform

ance

issignificantandpositive,

exceptonthesubsetoffirm

swithfamily

control

andch

aebolco

ntrolwhere

theeffect

is

insignificantornegative


136


Table

2(Continued

)

Author(s)

Sample

Data

source

Dependentvariables


Main

findings

Rhee&

Lee(2008)

Korea,2000–2003

KoreaStock

Exch

ange

ForeignOwnership

DirectorEducation,Firm

SpecificControlVariables

Thegrowth

offoreignownership

ispositively

affectedifahigherproportionofoutsidedirectors

hold

advancedforeigndegrees,

ifahigher

proportionofoutsidedirectors

have

form

eror

currentaffiliationswithgovernmental

organizations,orifahigherproportionofoutside

directors

have

jobexperience

inthesame

industry

Masulis

etal.

(2012)

1988–2006,Fo

reign

Directors

inUS

Corporations

IRRC

(now

RiskM

etrics)

Directors

Database;Compustat

annualfilesand

geographic

segment

files

Acq

uirerReturnsin

Cross-

borderAcq

uisitions;

DirectorMeeting

Attendance;Earnings

Restatements;CEO

Compensation;ROA;

Tobin’s

Q;CARsaround

ForeignIndependent

DirectorAnnouncements

ForeignIndependent

Director(FID),FIR*

PercentageofSalesfrom

FID

HomeRegion,FID

on

AuditCommittee;Firm

-

SpecificControlVariables,

CountryLevelControl

Variables,

Market

Conditions

Inrecentyears,about13%

oflargeUSpublic

corporationshave

foreignindependentdirectors

(FIDs)

servingontheirboards.

FIDsbringboth

benefits

andco

ststo

firm

s.Consistentwithvalue

addedbyFIDsthroughtheirinternational

expertise,firm

swithFIDsmake

bettercross-

borderacq

uisitionswhenthetargets

are

from

the

homeregionsofFIDs.

However,indicative

of

FIDs’monitoringdeficienciesandadverseeffect

onco

rporate

governance,FIDsdisplaypoor

board

meetingattendance

reco

rds,

andfirm

s

withFIDsontheirboardstendto

paytheirCEOs

excessively

highco

mpensationandare

more

proneto

commitfinancialmisreportingthat

requiresfuture

restatements.Firm

swithFIDsare

associatedwithsignificantlypoorerperform

ance,

especially

whentheydonothave

much

business

presence

intheirFID’s

homeregion,butFIDs

make

increasingly

largerco

ntributionto

firm

perform

ance

asafirm

’soperationin

theFID’s

homeregionbeco

mesmore

important


137


Table

2(Continued

)

Author(s)

Sample

Data

source

Dependentvariables


Main

findings

Knill

etal.

(2012)

900acq

uisitionsby

SWFs

overtheperiod

1984–2009

LexisNexis,SDC

Platinum

SWFInvestment/Amount

ofInvestment

Differencesin

Macroeco

nomic

Variables

(marketreturn,exch

ange

rate

return,GDPpcand

GDPgrowth),Correlation,

Geographic

Proxim

ity,

Anti-self-D

ealin

gIndices,

AccountingDisclosure

Indices,

TradeBlock

Membership

and

Democracy

Levels

Weexaminetherole

ofbilateralpoliticalrelations

insovereignwealthfund(SWF)

investment

decisions.

Ourempiricalresultssuggest

that

politicalrelationsplayarole

inSWFdecision-

making.Contrary

topredictionsbasedontheFD

I

andpoliticalrelationsliterature,wefindthat

relative

tonationsin

whichtheydonotinvest,

SWFs

preferto

invest

innationswithwhichthey

have

weakerpoliticalrelations.Usingatw

o-stage

Craggmodel,wefindthatpoliticalrelationsare

anim

portantfactorin

where

SWFs

invest

but

matterless

indeterm

ininghow

much

toinvest.

Inco

nsistentwiththeFD

Iandpoliticalrelations

literature,these

resultssuggest

thatSWFs

behave

differentlythanrationalinvestors

whomaxim

ize

return

while

minim

izingrisk.Consistentwiththe

tradeandpoliticalrelationsliterature,wefindthat

SWFinvestmenthasapositive

(negative)im

pact

forrelatively

closed(open)co

untries.

Ourresults

suggest

thatSWFs

use

–atleast

partially

–non-

financialmotivesin

investmentdecisions

Johan

etal.

(2013)

SWFinvestmentdata

from

50co

untries,

1984–2009

LexisNexis,SDC

Platinum

Investmentin

Private

versusPublic

Firm

s

LegalConditions,

Market

Conditions

SWFs

investments

are

more

oftenin

private

firm

s

whenthemarketreturnsoftargetnationsare

negatively

correlatedto

themarketreturnsofthe

SWFnations.

SWFs

are

more

likely

toinvest

in

private

firm

softargetnationswithweakerlegal

conditions,

andwhenthelegaldifferences

betw

eentheSWFco

untryandthetargetco

untry

are

more

pronounced.Thisevidence

isco

nsistent

withstrategic

rationalesforinvestmentand

potentialco

rporate

governance

conflicts

Giannetti,

etal.

(2015)

China,1999–2009

ChinaStock

Market&

AccountingResearch

Database

(CSMAR)

Tobin’s

Q,TotalFactor

Productivity,Return

on

Assets

ForeignOwnership,

ForeignExperience,Firm

ControlVariables,

Market

Conditions

Valuation,productivity,andprofitability

increase

afterfirm

shiredirectors

withforeignexperience.

Furtherm

ore,co

rporate

governance

improves

andfirm

sare

more

likely

tomake

international

acq

uisitions,

toexport,andto

raisefunds

internationally


138


Table

2(Continued

)

Author(s)

Sample

Data

source

Dependentvariables


Main

findings

Cumming

etal.

(2016)

81Countries,

1995–2010

SDC

Platinum’s

VentureXpert,

Mergers

&

Acq

uisitions,

and

GlobalNew

Issues

databases

Probability

ofIPO,

Proceedsin

IPO,

Probability

ofAcq

uisition,

Acq

uisitionDealValue

ForeignInvestor,Legal

Conditions,

Market

Conditions,

Firm

-Specific

Governance

Variables

Relative

todealsin

whichtheinvestorbase

is

purely

domestic,private

firm

sthathave

an

internationalinvestorbase

have

ahigher

probability

ofexitingviaaninitialpublic

offering

(IPO)andhigherIPO

proceeds.

Theevidence

is

consistentwiththeview

thatwhile

thebenefitsof

internationalizationmaybedifficu

ltandco

stly

to

manage,forthose

firm

sthatsucceedin

managingcross-borderco

ordinationco

sts,

there

ispotentialvalueforanIPO

firm

.Thebenefits

relative

totheco

stsofinternationalizingthe

investorbase

forprivate

firm

ssold

inacq

uisitions,

byco

ntrast,are

much

less

pronounced.Themost

importantsourceofthisbenefitappears

tobe

access

tocapital

Miletkov

etal.

(2017)

80Countries,

2001–2011

OSIRIS

(Bureauvan

Dijk

Electronic

Publishing),

InternationalCountry

RiskGuide,Global

Competitiveness

Report,andtheWorld

Bank’sDoingBusiness

project

ForeignIndependent

Directors,Return

on

Assets

ForeignIndependent

Directors,QualityofLegal

Regim

e,Firm

Specific

FinancialandGovernance

Variables

Foreigndirectors

are

more

likely

tobeassociated

withfirm

sthathave

more

foreignoperationsand

aninternationalshareholderbase,andfirm

sthat

are

locatedin

countrieswithalim

itedsupply

of

potentially

qualifi

eddomestic

directors

–

countrieswithasm

aller,less

well-educated

populace

andlowerlevelsofcapitalmarket

development.Theassociationbetw

eenforeign

directorsandfirm

perform

ance

ismore

positive

in

countrieswithlowerqualitylegalinstitutions,and

whenthedirectorco

mesfrom

aco

untrywith

higherqualitylegalinstitutionsthanthefirm

’s

host

country

Callu

zzo

etal.

(2017)

SWFinvestmentdata

from

8co

untriesand

into

USfirm

s,

2005–2013

SovereignWealth

FundTransaction

Database

(SWFT

D)

providedbythe

SovereignWealth

FundInstitute

(SWFI),

FEC

MasterFiles

SovereignWealthFu

nd

Investment,Pre/Post

PoliticalContributions

InstitutionalOwnership,

Firm

-Specific

Characteristics

(market/book,

analysts,

financialstatistics,liq

uidity,

momentum),Pollu

tion,

PoliticalContributions

SWFs

are

attractedto

firm

sengagedin

US

campaignfinance.Firm

campaignfinance

contributionsincrease

afterSWFinvestment.SWF

attractionto

campaignfinance

firm

sincreases(1)

afteranexogenouslegalshock

thatlib

eralized

corporate

campaignfinance

activitiesand(2)in

a

subsetofindustriesvu

lnerable

torecent

legislationcapable

ofinhibitingorexpunging

foreigninvestment


139


Table

2(Continued

)

Author(s)

Sample

Data

source

Dependentvariables


Main

findings

Aguilera

etal.

(2014)

ForeignInvestors

into

Japanese

Companies,

2006–2013

Japanese

Company

Handbook,

Nikkei

FinancialQuest,

TokyoStock

Exch

ange,Thomson

Eikon,Thompson

Worldscope,

Companyfinancial

statements,

Bloomberg

EarningsFo

recasts,

SurprisesErrors,Revisions

ForeignOwnership,

Domestic

Ownership,Past

Perform

ance,Prior

Optimism,Corporate

Governance

Proxies

Afteraddressingendogeneityco

ncerns,

inthe

presence

offoreignowners,managers

are

more

optimisticin

theirinitialearningsforecasts,butin

subsequentrevisionstheyare

more

likely

to

providetimely

adjustments

oftheirearnings

forecast

andavo

idmakinglast-m

inute

adjustment

Sojli

&

Tham

(2017)

China,Singapore,US,

1998–2013

SEC

13D

Filin

gs,

Web

Searches,

SWFRadar,

SWFInstitute,

AmadanInternational,

CompustatSegments

Cumulative

Abnorm

al

Return,Tobin’s

Q,

ForeignMarketAccess,

ForeignGovernment

Contracts

ForeignPolitical

Connections,

Government

RelatedContracts,

Firm

SpecificFinancialand

Governance

Variables

Foreignpoliticalco

nnectionscreate

largefirm

valueandim

prove

access

toforeignmarkets.One

ofthemain

channelsofvaluecreationis

governmentco

ntractsawardedto

firm

swith

direct

foreignpoliticalco

nnections

Boulton

etal.

(2017)

36Countries,

1998–2014

ThomsonFinancial

SDC

Platinum

New

Issues,

Thomson

FinancialSDC

Platinum

New

Issues

Database,Datastream

IPO

Underpricing

Country-level

Conservativism

,Firm

-

SpecificFinancialand

Governance

Measures,Law

andFinance

CountryLevel

Measures,

Eco

nomic

Conditions

IPOsaroundtheworldare

underpricedless

in

countrieswhere

existingpublic

firm

spractice

more

accountingco

nservatism

.Thelin

kbetw

een

conservatism

andunderpricingisrobust

to

alternative

measuresofco

nservatism

,co

untry

meanregressions,sampleco

untryexclusions,and

endogenoustreatm

entmodels.Consistentwith

thehypothesisthatco

nservatism

reduces

underpricingbymitigatingtheim

pact

of

inform

ationasymmetries,

higherco

untry-level

conservatism

isassociatedwithlowerco

untry-

levelprobability

ofuninform

ed-basedtrading

valuesandthatthenegative

relationbetw

een

conservatism

andunderpricingisstrongest

for

IPOsinvo

lvingsm

allfirm

swhere

inform

ation

asymmetriesare

likely

tobehigh.Litigationrisk

andlegalorigin,tw

ofactorslin

kedto

thepractice

ofco

nservatism

,influence

therelationbetw

een

underpricingandco

nservatism


140


connections (Rhee & Lee, 2008). There is somecontrasting evidence, however, that while foreigndirectors make better M&A decisions, they are lessoften engaged in firm activities thereby worseningperformance and requiring more earnings restate-ments, among other problems (Masulis et al., 2012).Four important papers in this Special Issue con-

tribute to the literature on foreign investors, foreigndirectors, and political connections. Aguilera et al.(2017) show that, in the presence of foreign investors,managers tend to be more optimistic in their earlyearnings forecasts, but have more long-term andtimely adjustments relatively and avoid making lastminute decisions. Calluzzo et al. (2017) show thatsovereign wealth funds are attracted to firms that aremore engaged in campaign finance, and hence canhave a political influence in the target firm’s country.Sojli & Tham (2017) show that foreign politicalconnections create large increases in firm value,improve access to foreign markets, and improveaccess to government contracts. Foreign boardmem-bers coming from countries with more advancedinstitutions may export good governance to a localfirm operating in a relatively less advanced institu-tional environment, and this improvement may bestronger when institutional differences between ‘‘ex-porting’’ and ‘‘importing’’ countries are high (Mile-tkov et al., 2017). These papers show that the identityof foreign owners is significant and may have inter-play with foreign directors and political connections,and can substantially influence the governance andperformance of firms in different institutional envi-ronments. All of these papers show that governance ismobile and a key competitive advantage.Last but certainly not least, it is important to note

that bad governance is also internationally mobile.Allred, Findley, Nielsen, & Sharman (2017) show thatmany firms flaunt international standards by settingup internationally shell corporations. Even amongOECD countries, there are substantial numbers ofshell companies that are not compliant with interna-tional standards. Tax haven based firms, by contrast,aremore compliantwith international standards. Thepopularity of research on shell companies is growingsignificantly (Fig. 1). Future research could continueto seek a better understanding of the causes andconsequences of these shell companies.

DISCUSSION AND CONCLUSIONSOur review of the literature suggests that mobilityof corporate governance is very context specific inrespect of the country level institutional conditionsT

able

2(Continued

)

Author(s)

Sample

Data

source

Dependentvariables


Main

findings

Allred

etal.

(2017)

176Countries

Surveys,

Field

Experiment

Anonymous

Inco

rporation,

Compliance

withRules

InternationalLaw,

EnforcementandThreatof

Penalties,

Norm

sof

Appropriate

Behavior,Tax

Havens

Asubstantialnumberoffirm

sare

willingto

flout

internationalstandardswithanonymous

inco

rporationofshellco

mpanies.Those

inOECD

countriesprovedsignificantlyless

compliantwith

rulesthanin

developingco

untriesortaxhavens.

Firm

sin

taxhavensdisplayedsignificantlygreater

compliance

andwere

sensitive

toexperimental

interventionsinvo

kinginternationallaw

Thistable

summarizestheliterature

onco

untry-levellegal,politicalandcu

lturalco

nditions,

cross-borderownership,andinternationaldirectors.Main

findingsare

quotedorparaphrased.


141


as well as the mode of international governancetransfer. Insights into the causes and consequencesof firm-specific international governance transfercan be gleaned from interdisciplinary analysesinvolving law, finance, management and relatedfields. There is a massive scope for further work ontopic that makes use of these interdisciplinaryperspectives that we have highlighted here.

In this introduction, we specifically emphasizedfour main ways in which governance is interna-tionally mobile: international M&As, foreign inves-tors, foreign directors, and foreign politicalconnections. These related topics are the focus ofthe important papers in this Special Issue. As alimitation we note that these four channels are notthe only ways in which governance practices maybe transferred across countries. For example, priorstudies identify other channels of the transfer ofcorporate governance, such as the proliferation ofgovernance codes around the globe and the har-monization of accounting standards, which havebeen discussed in the related literature. Future IB

studies should develop a more holistic picture ofthe mobility of corporate governance by looking atthese diverse channels.Examining multi-stakeholder perspective may

reveal new important dimensions of the mobilityof corporate governance, bearing in mind that thetraditional view of corporate governance is heavilyanchored on mechanisms for solving agency prob-lems arising from conflicting interests between topmanagement and outside shareholders. Debatesabout US-based board governance, including itsoptimal size, composition, and independence, arelargely influenced by this convention. However,agency conflicts arising from other stakeholdershave implications for the design of corporate gover-nance intended to solve managerial agency prob-lems. For instance, in an environment where we alsohave debt agencyproblems (Djankov et al., 2008), anoptimally designed corporate board should repre-sent a balance between the interests of outsideshareholders and outside debtholders. Debtholderrepresentation on the board is observed frequently

Figure 2 Google Scholar hits on foreign directors, foreign shareholders, and related topics. This figure displays the number of Google

Scholar hits as a percentage of the hits in 2008 for different search terms: Directors (84,300 hits in 2008), Foreign Directors (84 in

2008), Shareholders (32,400 in 2008), Foreign Shareholders (438 in 2008), Political Connections (2370 in 2008), and Sovereign

Wealth Funds (1510 in 2008).


142


outside the U.S. and U.K. corporate sectors, andfuture research may explore how some elements ofthe multi-stakeholder governance model can betransmitted from one country to another withinthe context of MNE global operations.

The papers in this Special Issue highlight impor-tant managerial and policy implications associatedwith the mobility of governance. Internationalacquisitions benefit both acquirer and target firms,and particularly those firms with a greater institu-tional distance between them (Ellis et al., 2017;Renneboog et al., 2017). Foreign investors affectmanagerial behavior (Aguilera et al., 2017), and canhave a political influence (Calluzzo et al., 2017).Foreign political connections positively affect firmvalue (Sojli & Tham, 2017). Foreign directors canpositively affect firm value, particularly in countrieswith weak legal standards (Miletkov et al., 2017).The only negative aspect of mobility of governanceis seen with the establishment of shell companiesthat are common and not compliant with interna-tional standards (Allred et al., 2017). Policymakersshould work to encourage mobility of governance.At the same time, regulators could further cooper-ate to enforce international standards to preventimproper governance standards from being trans-ferred across countries. Given recent events such asthe Global Financial Crisis and all of its implica-tions, this balance in policy could prove particu-larly challenging.

The impact of financial regulation on governanceis particularly important in the contest of financialfirms. To the extent that countries and regions varyin terms of regulatory schemes, the governancestructure varies accordingly. Again, this is oneexample where the interaction between multipleagents and stakeholders matters in the design andmobility of governance. In fact, the design of bankmanagement compensation and its incentive fea-tures play a vital role in the design of optimalbanking regulation (John, Saunders, Senbet, 2000).Traditional banking regulation focuses on a two-party game with conflicting interests between thebank and the regulator.However, bankmanagementis the key decision maker, and the bank risk

incentives depend on the incentive structure ofbankmanagement compensation. John et al. (2000)show that, if these incentive features (e.g., bonus,salary, equity participation) are an input to thepricing of deposit insurance, an optimal bankingregulation can be designed. Thus, the transmissionmechanisms for governance mobility are broaderwhen financial firms are considered. They arisefrom cross-border regulation and regulatorycoordination.In addition, development partners, as well as

international financial institutions, such as the IMFand World Bank, can be transmission sources ofgovernance for developing economies. This arisespartly through technical assistance in financialsector development programs, but extends intonon-financial firms as well. The quality of corporategovernance is among the design features in thereform of financial systems in developing countries.This suggests an interesting research question intothe relationship between governance and financialdevelopmentwith a focus on low income countries.To conclude, this Special Issue poses important

questions for corporate governance researchers inall of the respective fields, including IB, finance,economics, accounting and law. With the growingscale and scope of internationalization of businessactivities, the challenges facing executives in theglobal arena are considerably more demandingthan those encountered in a domestic environ-ment. The global context increases the diversity ofstakeholders whose interests must be considered aswell as the complexity of the governance problemsfacing MNCs and their leaders. Furthermore, com-panies competing in the global marketplace face afundamental dilemma – how to balance the needfor global consistency in corporate governancepractices with the need to be sensitive to thedemands and expectations of local stakeholders(Filatotchev & Stahl, 2015). Finding the appropriatebalance between these competing demands is notalways easy, and papers in this Special Issue help tomap out future research directions in this increas-ingly important field.

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ABOUT THE AUTHORSDouglas Cumming JD., Ph.D., CFA, is a Professorof Finance and Entrepreneurship and the OntarioResearch Chair at the Schulich School of Business,York University. Douglas has published over 140articles in leading refereed academic journals infinance, management, and law and economics,such as the Academy of Management Journal, Journalof Financial Economics, Review of Financial Studies,Journal of Financial and Quantitative Analysis, andthe Journal of Empirical Legal Studies, and authoredand edited over a dozen books with Oxford andWiley, among others. He is the Founding Editor ofAnnals of Corporate Governance, and Co-Editor ofFinance Research Letters, and Entrepreneurship Theoryand Practice, and has been a guest editor fornumerous Special Issues of top journals. Douglas isthe incoming Editor-in-Chief of the Journal ofCorporate Finance, effective 2018. Douglas’ workhas been reviewed in numerous media outlets,including the Wall Street Journal, The Economist, TheNew York Times, Canadian Business, the Globe andMail, the National Post, and The New Yorker.

Igor Filatotchev is Professor of Corporate Gover-nance and Strategy at City, University of London,and Visiting Professor at Vienna University of Eco-nomics and Business. His research interests arefocused on institutional aspects of corporate gov-ernance and sociology of capital markets, and hehas published more than 130 refereed papers inthese fields, including in leading journals such asAcademy of Management Journal, Strategic Manage-ment Journal, Organization Science, Journal of Inter-national Business Studies, Journal of Corporate Finance,and Journal of Management. He is a General Editor ofJournal of Management Studies. He earned a Ph.D. inEconomics from the Institute of World Economyand International Relations, Moscow, the RussianFederation.

April Knill is the Gene Taylor/Bank of AmericaProfessor of Finance and the Associate Director ofthe BB&T Center for Perspectives on Free Enterpriseat The Florida State University. She received herPh.D. from the University of Maryland at CollegePark in August of 2005. While pursuing her doc-toral degree she worked at The World Bank as aconsultant. Upon graduation, she went to work atFlorida State University. Her research interests areinternational finance, venture capital/privateequity, and the intersection between law, financeand politics. She has published in academic jour-nals including (but not limited to) Journal of Busi-ness, Journal of Financial and Quantitative Analysis,Journal of International Business Studies, FinancialManagement, European Financial Management, Jour-nal of Corporate Finance, Journal of Comparative Eco-nomics and Journal of Financial Intermediation.

David Mitchell Reeb is Mr. and Mrs. Lin Jo YanProfessor of Banking and Finance and a Professor inthe Department of Finance at National Universityof Singapore (NUS) Business School. Dr Reeb‘sresearch focuses on family-controlled, publicly-tra-ded firms and encompasses financial markets andfinancial disclosure choices. His work has appearedin the Journal of Finance, Journal of Financial Eco-nomics, Journal of Accounting and Economics, Ac-counting Review, Administrative Science Quarterly,Journal of Law and Economics, and the Journal ofInternational Business Studies. Professor Reeb hasserved as a department editor at the Journal ofInternational Business Studies. He was a finalist forthe Battle Price Best Paper in Corporate Finance(2003), by American Finance Association.


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Lemma Senbet is the Executive Director of AfricanEconomic Research Consortium and on leave fromthe University of Maryland as the William E. MayerChair Professor of Finance. He has achieved globalrecognition for his extensive and widely citedcontributions to corporate and internationalfinance, which have appeared in such premierjournals as Journal of Finance, Review of FinancialStudies, and Journal of Business. He has been electedtwice as director of the American Finance Associa-tion and is a past president of the Western FinanceAssociation. He has been appointed to over a dozen

journal editorial boards, including extendedtenures with the Journal of Finance (12 years), Jour-nal of Financial and Quantitative Analysis (6 years),and Financial Management (18 years). In 2006 hewas named Editor (Finance), JIBS, and he served fiveyears. He has advised the World Bank, the IMF, theUN, African Development Bank, and various gov-ernmental and private agencies in USA, Canada,and Africa on issues relating to financial sectorreforms and capital market development.

Accepted by John Cantwell, Editor-in-Chief, 12 December 2016. This article was single-blind reviewed.


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