Corporate Governance

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Corporate Governance Accounting Research in
Asia and China

• T.J. Wong
• CUHK

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Outline

• Research approach
• Top-down not bottom-up
• Unique institutional settings in Asia
• Key institutional factors of China
• Sample projects
• Center for Institutions and Governance

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Bottom-up Approach

• Two common problems
• Replicate a US topic - not taking into
  consideration the difference institutions
• Document a unique phenomenon but not being able
  to explain it with good theories

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Top-down Approach

• Identify key institutional factors that shape
  organization and incentives
• These factors include property rules,
  governments role in economy, market and legal
  development
• These factors also shape the corporate
  governance, accounting and corporate policies
• Apply common theories or analytical frameworks --
  only institutions are different

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Institutions of East Asia

• Political economy
• Close ties between government and business
• Rent seeking society
• Legal systems
• Poor protection of property rights
• Private enforcement of contracts
• Weak protection of outside shareholders
• Culture and social norm
• Low trust society
• Relationship-based transactions
• Family firms

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Sample studies

• Fan and Wong (2002, JAE)
• Institutions concentrated ownership ? stock
  pyramids ? divergence of cash flow and voting
  rights through pyramiding ? expropriation
  incentives / rent seeking ? less transparent
• Fan and Wong (2005, JAR)
• Divergence of cash flow and voting rights ? hire
  B4 auditors
• More prevalent among issuing firms reduce cost
  of capital

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Chinas Institutional Setting

• Economic in transition ? Govt vs. Market
• Capital markets (state vs. market)
• IPO, rights offerings and delisting controlled by
  govt (quota system ROE targets)
• State banks related lending
• Government not market plays a big role
• Majority ownership by the state
• partial privatization (minority shares) of SOEs
• direct (SAMB) and indirect (parent SOE)
  government majority ownership
• Government shares cannot to be sold easily
• Incentive issues soft budget constraints SOE
  pursuing non-economic goals

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Institutional setting (contd)

• Control (mgmt vs. state)
• 1992, central govt granted SOEs 14 rights, mainly
  operating rights
• Rights not given MA, disposal of assets,
  appointment of chairman and CEO
• Boards and management filled with govt
  bureaucrats not professional
• Incentives issue government interventions
  double agency of management
• Economy is decentralized
• Local governments own SOEs and have production
  and fiscal autonomy
• Listed SOE can bring resources and political
  capital to local govt
• Weak legal systems and undeveloped markets
• Poorly developed legal system and markets, more
  government interventions
• Institutions vary across provinces in China,
  which allows x-sectional comparisons across
  regions

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Different Organization Structures
SAMB
SAMB
Private
SAM Co.
Listed Firm
Parent SOE
Listed Firm
Listed Firm
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Market Institutions Protection for property
rights
High
Middle
Low
Missing
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Market Institutions of Different Regions
Source Fan and Wong, 2003 (Economic Science
Press)
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Rough Sketch of the Framework
Institutions
Firm organization
Government
Corporate governance
Role of accounting and corporate policies
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Some Studies

• Political influence and accounting quality
• Board structures pyramids corruption as
  measures of political influence
• How institutional factors determine auditor
  choice in China
• Chinese firms do not hire quality auditors. Why?
• Corporate governance role of accounting? Used by
  controlling owner to monitor management? When?
  How?

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State Ownership, Institutional Environment and
Auditor Choice Evidence from China

• Wang Qian, TJ Wong
• CUHK
• Xia Lijun
• SUFE

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Chinese Firms Choose Poor Quality Auditors

• Market share of Top 10 auditors (based on market
  shares) declined from 47 in 93 to 24 in 03
• But Top 10 auditors are found to have better
  quality
• Compared to non-state firms, SOEs tend to choose
  local auditors (from same region) that are small
• What causes Chinese SOEs not to choose good
  quality auditors?
• Fundamental questions what determine Chinese
  firms choice of auditors?

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Institutional Constraints

• Government ownership
• Easier access to capital (equity and debt) - less
  need to reduce information asymmetry
• Soft budget constraint - less need for insurance
  
• Government influence over auditors
• Small local auditors lose independence - help
  clients to meet government targets
• Mainly related to local government SOEs
• Poor market and legal systems
• Weak monitoring against lack of independence

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Results

• SOEs vs. non-state firms
• Local SOEs more likely to hire small local
  auditors
• Regions with less market development and more
  government intervention
• Local SOEs hire even more small local auditors
• Are small local firms compromising independence?
• They issue fewer qualified opinions
• They are more lenient towards SOEs from same
  region

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Future Directions

• Ask more fundamental questions with good data
• Role of accounting and corporate policies in
  Asian / Chinese listed firms
• Organization economics firm governance, agency
  issues and contracts ? role of accounting
  corporate policies
• Transition economics state ownership or
  intervention that creates distortion ? role of
  accounting and corporate policies
• Identify other key constraints that shape CG and
  accounting

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Website address

• http//www.baf.cuhk.edu.hk/research/cig/