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WHY BETTER CORPORATE GOVERNANCE DOESN’T NECESSARILY MEAN MORE TRANSPARENCY FOR MARKETS

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corporate strategy

Good corporate governance, in principle, has an important role to play in influencing management decision-making, aligning their objectives and activities with what’s best for shareholders. In particular that’s been reported as meaning less earnings management and quicker, more frequent disclosures to the stock market.

But is it really as simple as that? Past research has shown practices to vary by country. There’s evidence of less disclosure with increased involvement by outside board members in Singapore; in Japan, ‘better’ corporate governance is not accompanied by more timely price discovery. Perhaps even, sometimes, corporate governance is a substitute for disclosure and transparency?

In our research, we used cross-country data from 23 OECD countries. This meant we could access a far greater range and variety of examples, and make comparisons between countries. Our main sample was made up of firms with financial years ending between 1 January 2003 and 31 December 2008. We looked at company announcement information from more than 2,000 different firms, and share prices relating to 5,800 different firms. Data for company announcements were sourced directly from the stock exchanges wherever possible but for some countries alternative sources were used as the data were unavailable from the stock exchange directly, such as Perfect Information for the UK. This data includes all firm announcements and provides a comprehensive measure of firm documents released to the market.

To determine the levels of corporate governance (CG) in each company we used Institutional Shareholder Services (ISS) CG data to create an index of ‘good’ CG practice.  This includes an assessment of the function of the board and its committees, stock ownership and compensation of directors, and provisions in the firm’s charter, taking in to account the level of independence of the main board committees (audit, nomination and remuneration) which perform important roles in assisting the main board. In particular the audit committee will have oversight of financial reporting and disclosures made by the firm; as well as responsibility for monitoring the internal audit and independent external audit process. The existence of these kinds of structures should improve overall disclosure and transparency.

The research asked questions about the association between ‘better’ CG and disclosure (in terms of

the number of documents released to the stock exchange), as well as the timeliness of disclosures, and the speed with which value relevant information is incorporated into share prices – important aspects of a firm’s transparency. To assess the timeliness of prices we focused on the flow of information to the market up to the time of the company’s annual earnings release and we assess the speed with which that information is integrated into share prices. We also then investigated differences across countries with different levels of investor protection and litigation pressure.

Our results suggest better CG is associated with a greater number of disclosures to the stock market (i.e. a complementary relationship between CG and firm disclosure). This is consistent with research carried out for Australia, Canada and Japan. Our analysis of the timeliness of disclosures suggests better-governed firms are more timely on the whole at releasing documents to the stock market. Also in common law countries, better governed firms increase the timeliness of documents relating to bad news items, demonstrating a conservative bias.

But when it comes to transparency, we find better CG is not associated with more timely price discovery. This would suggest firms with better CG substitute governance processes for greater transparency, proxied by more timely release of information to the share market, or alternatively that market participants take longer to digest the greater amount of information disclosed by better-governed firms. Additional analysis suggests CG is effective at increasing the timeliness of prices for firms in common law countries where there is a low level of firm disclosure (relative to their industry and country).

Our analysis also considers the impact of share ownership. Firms with greater proportions of closely held shares are associated with fewer disclosures, which is consistent with the view that firms controlled by insiders are less willing to release information to outside parties. We also find evidence that closely held shares are associated with more timely good news (in documents and in prices).

Future work we have in progress examines the effect of CG and ownership on analyst following and the properties of analyst forecasts. As the results of this study show, better-governed firms release more information. So the question remains: is this information processed effectively by analysts, and if so, how is it reflected in attributes of their forecasts? The answer may shed further light on our results for the timeliness of price discovery and help explain some unexpected findings.

Dr Wendy Beekes and DrQiyu Zhang are Lecturers in the Accounting and Finance department at Lancaster University Management School, www.lancaster.ac.uk/lums. Professor Philip Brown is an Emeritus Professor at University of Western Australia and Visiting Professor at Lancaster University Management School.  DrWenwen Zhan is a Portfolio Manager at China Merchants Securities.

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Sunak to raise business tax to pay for COVID-19 support – The Sunday Times

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Sunak to raise business tax to pay for COVID-19 support - The Sunday Times 1

(Reuters) – British finance minister Rishi Sunak is set to increase a tax on business to pay for an extension to COVID-19 support schemes in the budget next month, The Sunday Times reported https://bit.ly/3ujaBcU.

Sunak, in his speech on March 3, will announce he is increasing corporation tax from 19 pence in the pound and will outline a pathway where it rises to 23 pence in the pound by the time of the next general election, the report said. The move will raise an expected 12 billion pounds ($16.8 billion) a year, the report added.

According to the report, at least 1 pence is set to be added to the bill for business from this autumn, at a cost to business of 3 billion pounds, with further rises in subsequent years.

Allies of Sunak clarified he would not increase corporation tax higher than 23%.

These measures will be helpful in paying for an extension to the furlough scheme, VAT cuts and business support loans until at least August.

Unlike the 2010 Conservative-led government, which pursued spending cuts to rebalance the economy after the global financial crisis, Sunak is expected to defer most of the toughest decisions about how to pay for that support in his budget speech.

“The corporation tax hike will be higher than expected and the extension of the support schemes will be longer than most people expect,” the newspaper quoted a source as saying.

Insiders indicated the stamp duty holiday on property purchases would also be extended in line with the other coronavirus support measures, the report said.

Britain’s economy had its biggest slump in 300 years in 2020, when it contracted by 10%, and will shrink by 4% in the first three months of 2021, the Bank of England predicts.

($1 = 0.7136 pounds)

 

(Reporting by Vishal Vivek in Bengaluru; Editing by Lincoln Feast.)

 

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Foxconn chairman says expects “limited impact” from chip shortage on clients

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Foxconn chairman says expects "limited impact" from chip shortage on clients 2

TAIPEI (Reuters) – The chairman of Apple Inc supplier Foxconn said on Saturday he expects his company and its clients will face only “limited impact” from a chip shortage that has rattled the global automotive and semiconductor industries.

“Since most of the customers we serve are large customers, they all have proper precautionary planning,” said Liu Young-way, chairman of the manufacturing conglomerate formally known as Hon Hai Precision Industry Co Ltd

“Therefore, the impact on these large customers is there, but limited,” he told reporters.

Liu said he expected the company to do well in the first half of 2021, “especially as the pandemic is easing and demand is still being sustained.”

The global spread of COVID-19 has increased demand for laptops, gaming consoles, and other electronics. This caused chip manufacturers to reallocate capacity away from the automotive sector, which was expecting a steep downturn.

Now, car manufacturers such as Volkswagen AG, General Motors Co and Ford Motor Co have cut output as chip capacity has shrunk.

Counterpoint Research says the shortage has extended to the smartphone sector, with application processors, display driver chips, and power management chips all facing a crunch.

However, the research firm predicts Apple will face a minimal impact, due to its large size and its suppliers’ tendency to prioritise it. Apple is Foxconn’s largest customer.

Foxconn is looking at other areas for growth, including in electric vehicles (EVs), and Liu said their EV development platform MIH now had 736 partner companies participating.

He expected it would have two or three models to show by the fourth quarter, though did not expect EVs to make an obvious contribution to company earnings until 2023.

Liu also said the company was still looking for semiconductor fab purchase opportunities in Southeast Asia after not winning a bid to take over a stake in Malaysia-based 8-inch foundry house Silterra.

(Reporting by Ben Blanchard and Jeanny Kao; Writing by Josh Horwitz; Editing by William Mallard and Ana Nicolaci da Costa)

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EU seeks alliance with U.S. on climate change, tech rules

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EU seeks alliance with U.S. on climate change, tech rules 3

By Sabine Siebold and Kate Abnett

BERLIN (Reuters) – Europe and the United States should join forces in the fight against climate change and agree on a new framework for the digital market, limiting the power of big tech companies, European Union chief executive Ursula von der Leyen said.

“I am sure: A shared transatlantic commitment to a net-zero emissions pathway by 2050 would make climate neutrality a new global benchmark,” the president of the European Commission said in a speech at the virtual Munich Security Conference on Friday.

“Together, we could create a digital economy rulebook that is valid worldwide: a set of rules based on our values, human rights and pluralism, inclusion and the protection of privacy.”

The EU has pledged to cut its net greenhouse gas emissions to zero by 2050, while President Joe Biden has committed the United States to become a “net zero economy” by 2050.

Scientists say the world must reach net zero emissions by 2050 to limit global temperature increases to 1.5 degrees above pre-industrial times and avert the most catastrophic impacts of climate change.

The hope is that a transatlantic alliance could help persuade large emitters who have yet to commit to this timeline – including China, which is aiming for carbon neutrality by 2060, and India.

“The United States is our natural partner for global leadership on climate change,” von der Leyen said.

She called the Jan. 6 storming of the U.S. Capitol a turning point for the discussion on the impact social media has on democracies.

“Of course, imposing democratic limits on the uncontrolled power of big tech companies alone will not stop political violence,” von der Leyen said. “But it is an important step.”

She was referring to a draft set of rules unveiled in December which aims to rein in tech companies that control troves of data and online platforms relied on by thousands of companies and millions of Europeans for work and social interactions.

They show the European Commission’s frustration with its antitrust cases against the tech giants, notably Alphabet Inc’s Google, which critics say have not addressed the problem.

But they also risk inflaming tensions with Washington, already irked by Brussels’ attempts to tax U.S. tech firms more.

Von der Leyen said Facebook’s decision on a news blackout on Thursday in response to a forthcoming Australian law requiring it and Google to share revenue from news underscored the importance of a global approach to dealing with tech giants.

(Additional reporting by Foo Yun Chee; editing by Robin Emmott and Nick Macfie; editing by Jonathan Oatis)

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