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'Investor Protection and Corporate Governance' analyzes the impact of corporate governance on firm performance and valuation. Using unique datasets gathered at the firm-level—the first such data in the region—and results from a homogeneous corporate governance questionnaire, the book examines corporate governance characteristics, ownership structures, dividend policies, and performance measures. The book's analysis reveals the very high levels of ownership and voting rights concentrations and monolithic governance structures in the largest samples of Latin American companies up to now, and new data emphasize the importance of specific characteristics of the investor protection regimes in several Latin American countries. By and large, those firms with better governance measures across several dimensions are granted higher valuations and thus lower cost of capital. This title will be useful to researchers, policy makers, government officials, and other professionals involved in corporate governance, economic policy, and business finance, law, and management.

Environmental sustainability, social engagement and robust governance gained growing attention from consumers and investors alike, leading to what we call ‘ESG finance’. ESG criteria are now shaping the behaviour and choices of enterprises, investors and consumers. Indeed laudable, the increased importance of ESG finance could raise concerns about the robustness underneath this new set of financial products. Moreover, the reliability of ESG-related data and information shared by companies may also be challenged due to the ability of those indicators to shape the public profile of companies and their attractiveness for investors. A new breed of ESG rankings and ratings is widening the metrics that consumers and investors use to make informed decisions about their consumption and investment. Yet, such rankings and ratings hinge on the individual disclosure approaches of the interested companies. This article wishes to complement available data and information about specific emissions data released by companies with the ESG disclosure levels, in particular relating to the “environment” dimension. Based on these disclosure levels, the authors build a new metric with the purpose of reducing asymmetric information and promoting more responsible investment. Starting from ESG-related data and publicly available information, a new disclosure-adjusted pollution index (namely, the GHG Scope-1 DAdj index) is developed. The second part of the article puts forward an empirical analysis on the basis of this new index, suggesting that the rush to ESG finance could be poised to generate leeway for new types of asymmetries and possible distortions in investment decision-making, also providing grounds for potentially reckless speculative attitudes, especially in the domain of product development of financial instruments that may generate new forms of risk for investors. Using the GHG Scope-1 DAdj index makes a few companies less environmentally friendly and interesting for investors who are seeking responsible and sustainable investment options. The innovative index and the empirical analysis lead the authors to suggest to “split the domains of ESG” to better gauge the relation between impact and compliance costs for companies as the individual components of environment, social engagement and governance are considered separately.

Within the EU investor protection framework, issuers are required to provide different investor groups with relevant information. The introduction of the prospectus summary (which has recently undergone substantial changes) clearly shows that EU legislator include unsophisticated investors among the users of financial information. Nevertheless, the issuers’ accounting regime seems to be inconsistent with this regulatory approach. Due to their ever increasing complexity, IAS/IFRS are not suitable to meet unsophisticated investors’ needs and can lead to information overload. Given that a simplification of IAS/IFRS does not appear to be possible, and would be inefficient, the article looks at the UK Strategic Report model and argues that the narrative component of financial reports can play a key role in rendering EU issuers’ financial reports more informative and more suited to meeting information needs of different groups of users by diversifying information directed at unsophisticated and sophisticated investors. Although Directive 2013/34/EU regulates the contents of management reports, a harmonised practice of narrative reporting at EU level is lacking, due to the high degree of flexibility provided by the Directive 2013/34/EU. The article outlines the framework of a possible EU (more) harmonised approach in the area of narrative reporting, arguing that the ESMA may foster harmonisation by promoting the adoption at the national level of proactive enforcement activities aimed at developing guidance and recommendations on the contents and format of narrative reporting, and possibly providing issuers and national enforcers (on which first rests the responsibility to enforce accounting rules) with guidelines on narrative reporting.

This study investigates the role of foreign institutional investors (FIIs) in restraining earnings management activities of firms under varying levels of investor protection. Firms manage their earnings less when independent FIIs are among their shareholders, especially for firms in which monitoring is more valuable – firms in weak investor protection countries and when firms have greater growth opportunities. These effects are robust to a quasi-exogenous shock to FIIs’ shareholdings, unobserved firm heterogeneity, and alternative earning management measures. FIIs are associated with an increase in foreign director presence on corporate boards and audit committees.

This study investigates the relationship between the corporate governance report (CGR) compliance rate and a company’s accounting conservatism, utilizing the CGR compliance rate as a novel method to evaluate the effectiveness of corporate governance practices. Given the challenges of applying global indices to measure corporate governance in the Korean market, this study focuses on the CGR compliance rate as a key indicator. Utilizing the ordinary least squares (OLS) regression model, specifically the Ball and Shivakumar (2005) model widely employed in previous studies to assess accounting conservatism, this paper conducts empirical analyses based on 784 observations from Korean listed firms between 2018 and 2021. The main analysis reveals a positive association between the CGR compliance rates (coef = –2.416, p-value < 0.01) and accounting conservatism. A fixed-effect model and a propensity score matching (PSM) model also show a positive association between the CGR compliance rates, respectively (coef = –2.507, p-value < 0.01; coef = –3.118, p-value < 0.1) and accounting conservatism. This study proves that firms with high CGR compliance rates tend to promptly recognize financial losses in financial reporting, thereby safeguarding investors. This suggests that investors should consider the CGR compliance rates when evaluating potential investments. Overall, these findings contribute to validating the CGR compliance rates as a valuable proxy for assessing corporate governance practices in Korean firms.

We study a broad sample of firms across 32 countries and find that strong shareholder protections and better access to stock market financing lead to substantially higher long-run rates of R&D investment, particularly in small firms, but are unimportant for fixed capital investment. Credit market development has a modest impact on fixed investment but no impact on R&D. These findings connect law and stock markets with innovative activities key to economic growth, and show that legal rules and financial developments affecting the availability of external equity financing are particularly important for risky, intangible investments not easily financed with debt.

Investor protection is associated with greater investment sensitivity to q and lower investment sensitivity to cash flow. Finance plays a role in causing these effects; in countries with strong investor protection, external finance increases more strongly with q, and declines more strongly with cash flow. We further find that q and cash flow sensitivities are associated with ex post investment efficiency; investment predicts growth and profits more strongly in countries with greater q sensitivities and lower cash flow sensitivities. The paper's findings are broadly consistent with investor protection promoting accurate share prices, reducing financial constraints, and encouraging efficient investment.

An unfavorable investment climate, especially in the sphere of corporate relationships, necessitates the revision of investment and corporate legislation in Ukraine. The purposes of this study are to reveal the particular legislative defects and the practical problems caused by these defects that European investors may face during the realization of their corporate rights in Ukraine and to evaluate how Ukrainian investment law, particularly legal norms aimed at protection of investors’ rights, corresponds to international (European) standards. This research identifies gaps and contradictions in Ukrainian legislation in the sphere of corporate investment that cause difficulties in practical applications and attempts to find ways to solve these problems. This paper argues that most problems caused by legislative contradictions can be solved by using the rule of the correlation of general and special normative legal acts, unlike legislative gaps, which must be eliminated by appropriate legislative amendments.

This paper investigates the effect of investor protection on the value impact of stock liquidity. Using a sample of firms from 40 countries for the period between 1996 and 2010, we show that investor protection is positively associated with the value impact of stock liquidity. This association is robust to the difference-in-differences approach based on a natural experiment. Further evidence shows that the positive effect of home-country investor protection on the liquidity–valuation association attenuates in countries with globally integrated capital markets.

We study determinants of internal control reporting decisions under Section 404 of the Sarbanes-Oxley Act (SOX 404) using a sample of restating firms whose original misstatements are linked to underlying control weaknesses. We find that only a minority of these firms acknowledge their existing control weaknesses during their misstatement periods, and that this proportion has declined over time. Further, the probability of reporting existing weaknesses is negatively associated with external capital needs, firm size, non-audit fees, and the presence of a large audit firm; it is positively associated with financial distress, auditor effort, previously reported control weaknesses and restatements, and recent auditor and management changes. These results provide evidence that detection and disclosure incentives play a role in whether existing material weaknesses are reported, which has implications for the effectiveness of SOX 404 in providing investors with advance warning of potential accounting problems.