Corporate Governance, Information, and Investor Confidence

• DOI: http://doi.org/10.1111/corg.12094
• Author: Alessandro Zattoni,Praveen Kumar
• Published date: 01 November 2014
• Date: 01 November 2014

Editorial

Corporate Governance, Information, and

Investor Conf‌idence

Praveen Kumar and Alessandro Zattoni

Corporate governance has a major impact on investors’

conf‌idence that self-interested managers and control-

ling shareholders will not divert their investment to non-

productive ends (Claessens, Djankov, Fan, & Lang, 2002;

Shleifer & Vishny, 1997). Maintaining this conf‌idence is criti-

cal for public f‌irms because the resources and capital pro-

vided by outside investors is the life-blood of their growth

and even survival. In their seminal work on the modern

corporation, Berle and Means (1932) pointed out the disad-

vantaged situation of outside investors. In particular, share-

holders in corporations do not havethe expertise and/or the

resources to monitor individually insiders’ actions or access

insiders’ information on the future prospects of the f‌irms.

Building on this, the vastand inf‌luential literature on agency

costs (Jensen & Meckling, 1976) highlights the consequences

of asymmetric information between insiders and investors.

More broadly, there are large literatures on ameliorating

agency conf‌licts through incentive contracts (Hart,1995) and

the transmission of information by insiders to outside inves-

tors through signaling with dividends and share repur-

chases (Bhattacharya, 1979; Vermaelen, 1981) and disclosure

through f‌inancial statements (Dye, 2001). However, the role

of corporate governance is considered only implicitly in

these papers.

Research on the explicit effects of corporate governance on

insiders’ moral hazard and information transmission is only

now emerging. In particular, we have looked for research

that examines the interaction of the qualityof corporate gov-

ernance with empirically important aspects of insiders’

behavior and information transmission choices. Moreover,

there has been a need to study this role of corporate gover-

nance in diverse international contexts. The studies pub-

lished in this issue of CGIR move the literature signif‌icantly

forward in these areas.

As we mentioned above, a major concern for outside

investors is that resources can be diverted by managers for

perquisite consumption (Grossman & Hart, 1988), or tun-

neled by controlling shareholders for their pecuniary benef‌it

(Cheung, Rau, & Stouratis, 2006; Johnson, Boone, Breach, &

Friedman, 2000). In particular, the risk of tunneling has

received substantial attention in the recent literature (Aslan

& Kumar, 2012, 2014; Huyghebaert & Wang, 2012; Shan,

2013). The fastgrowing literature on tunneling has examined

both theoretically and empirically the consequences of tun-

neling for both minority shareholders and creditors.

However, the role of management in tunneling by control-

ling shareholders has received little attention. This is a sig-

nif‌icant gap in the literature. After all, the agencyliterature is

largely devoted to understanding the implications of the

managerial power and prerogatives.

In the f‌irst paper of this issue, Zhang, Gao, Guan, and

Jiang study controlling shareholder–manager collusion in

tunneling, using data fromChinese listed companies. Zhang

et al. f‌ind support for the hypothesis that there is collusion

between controlling shareholders and managers. While the

earlier literature shows that the deviation between control

and cash f‌low rights of dominant shareholders facilitates

tunneling, this study shows that this deviation is negatively

related to the pay and turnover performance sensitivity of

managers. This is one of the f‌irst empirical analyses of the

relation of controlling shareholder moral hazard (as mea-

sured by the deviation between control and cash f‌low

rights) and managerial incentives. The authors also f‌ind evi-

dence of rent sharing between controlling shareholders and

management, suggesting that the collusion between them

has negative consequences for investors beyond the weak-

ening of managerial performance incentives. Furthermore,

Zhang et al. use their data to examine the variations in the

controlling shareholder–manager nexus. They f‌ind that this

nexus, resulting in weak performance incentives, is more

pronounced in f‌irms with lower prof‌its and poorer eco-

nomic prospects. This is an especially interesting result

because it suggests a form of “vicious cycle,” whereby col-

lusion between controlling shareholders and management

leads to poor economic performance that further exacer-

bates the incentives for rent sharing (through tunneling and

437

Corporate Governance: An International Review, 2014, 22(6): 437–439

© 2014 John Wiley & Sons Ltd

doi:10.1111/corg.12094