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This thesis consists of three empirical studies on the interplay between regulatory changes and firm behavior from the viewpoint of business ethics. While the first study investigates one of the most stringent anti-bribery laws in the U.K., the next two studies examine a new regulation in Korea affecting the ownership structure of large-sized business groups. The first study uses the U.K. Bribery Act 2010 to examine the impact of anti-bribery regulation on firm risk. I find that U.K. firms with high bribery exposure experience a significant reduction in the cost of equity as a proxy for risk to shareholders, which is estimated by using the residual income valuation model. I further find that the Bribery Act affects the cost of equity by improving the internal control system and increasing the stock liquidity of firms with high bribery exposure. This study highlights the risk reduction benefit of stringent anti-bribery laws. The second study examines the relation between cross-shareholdings and firm value in the context of changing regulatory regimes. Exploiting a new regulation in Korea that prohibits new and existing cross-ownership of business groups over 5 trillion KRW in combined assets, I estimate the market valuation changes of group-affiliated firms. I find the overall positive market response to the affiliates of regulated business groups, but significant costs of removing pre-existent cross-shareholdings. The costs are positively moderated by a greater disparity in cash-flow and voting rights, a distance from controlling shareholders' direct ownership, and a dependency on the internal capital market. The findings suggest that the removal of cross-shareholdings reduces agency costs but simultaneously imposes potential costs. The third study explores how ownership structure affects the financing choices and efficiency of capital allocation of firms in a business group. Using a difference-in-differences design with the same regulatory change on cross-shareholdings of the second study, I provide evidence that a controlling shareholder's direct ownership from the removal of cross-shares substitutes intra-group loans with external debts and external equity with internal equity financing. The substitution is due to the enhancing motive of controlling shareholders to maintain control over group firms from reduced wedges between control and cash-flow rights. I further find that the financing substitution improves the firms' debt-financing sensitivity to growth potential and investment efficiency. The findings on financing and investment efficiency are valid against robustness checks with a placebo test using an artificial event year and parallel-trends test. I also show that capital allocative efficiency comes from exposing the management to financial market discipline rather than being over-leveraged. Overall, these findings suggest that the controlling shareholder's direct equity ownership limiting access to internal capital markets improves the capital allocative efficiency of group-affiliated firms.

In this thesis, I exploit accounting issues in the Chinese context with a particular focus on the role of government. The thesis consists of three empirical essays, examining how the state coordinates among the state-owned enterprises in executive compensation (essay 1), how the government regulates the dividend payouts of listed firms (essay 2) and how the delisting regulation influences the accounting choices of listed firms (essay 3).The first essay examines relative performance evaluation (RPE) in China. Previous studies of RPE for executive compensations in Western developed markets have produced mixed findings. This is partly because the dispersion of share ownership in Western capital markets does not closely correspond with the single-principal/multi-agent theoretical setting assumed by Holmstrom (1982). In this study, I exploit the existence of a large number of state-owned enterprises (SOEs) in China to examine RPE in a setting closer to the theoretical assumption. I find that SOEs are more likely to use RPE for executive compensation than non-SOEs. This is consistent with better cross-firm coordination in executive contracting among SOEs under a common “state” principal than among non-SOEs with dispersed principals similar to Western firms. Furthermore, I find a more pronounced RPE effect among SOEs that are larger or have poorer past performance. This implies that the state principal has greater incentives to monitor strategically important firms or those in distress. The second essay examines the market reaction to and earnings management choices around changes in the regulations requiring a higher minimum dividend payout in China to shed new light on the determinants of dividend payout policy. I find that the market reaction is more positive for firms that paid less than the new required minimum payout than for those that paid more than the new required minimum, consistent with agency cost explanations of dividend payout. In addition, I find that low dividend payers exhibit a greater tendency to manage their earnings downwards to comply with the earnings-based threshold, and investors can “see through” such earnings management behaviors. My findings support the view of DeAngelo, DeAngelo and Skinner (2009) that agency costs of free cash flow retention are an important part of the dividend payout story. The third essay explores the earnings-based delisting rule in China that provides particularly strong motivation to manage earnings above the loss/profit threshold. I identify two groups of firms that successfully avoid being ST-ed, i.e. firms with a one-year loss before returning to profit, and firms with consecutive small profits. I provide a comprehensive examination of earnings management in terms of accruals management, real earnings management and non-operating income, to investigate whether Chinese firms manage earnings either to avoid reporting a loss or to avoid reporting two consecutive losses. Though there are mixed results sensitive to the research design for earnings management pattern in the two groups of firms, this study provides insights into earnings management induced by a government regulation.

The thesis examines the dynamic impact of capital structure on firm performance in Nigeria. The aims of this thesis are; first, to investigate the impact of capital structure of firms on their performance in a dynamic framework. This is unlike previous studies in the capital structure literature that have used static analysis. Second, to examine the dynamic feedback from performance to capital structure using the two-step system generalized method of moment estimator. Third, to explore the determinants or variables that influence capital structure choice of firms in Nigeria and the rate of adjustment to achieve optimal debt position. Fourth, to assess the possibility of non-monotonicity effect of capital structure on firm performance and non-monotonicity effect of performance on capital structure. The second chapter discusses the theoretical framework and review the empirical literatures on capital structure and firm performance. Also, the chapter review empirical literature on firm performance and capital structure as well as on determinants of capital structure. The study find much evidence in support of the theoretical prediction of the agency cost theory of capital structure. The stuudy observed that there are limited empirical studies on the franchise value and efficiency-risk hypotheses of reverse causality from performance to capital structure. The empirical literatures on determinants of capital structure suggests that both firm specific and country factors are important variables that drive capital structure choice of firms. The thrid chapter examines the methodology of the study. The population, sampling and sampling size, estimation methods were discussed in this chapter. The fourth chapter analysis and described the data employed in the study. Specifically, the results of the dynamic relationship between capital structure and firm performance were presented in this chapter. The results indicate that capital structure has non-monotonic effect on firm performance thereby supports the agency cost theory of capital structure. The fifth chapter provides results on the reverse causality between performance and capital structure. The findings indicate that there is reverse causality between performance and capital structure. This is evidence in the statistically significant negative finding between performance and capital structure. This finding support the franchise value hypothesis. The findings of this study also reveal that non-monotonic relationship exist between performance and capital structure. The sixth chapter provides results on the determinants of capital structure of Nigerian firms. The findings indicate that both firm specific variables (return on equity, risk, profitablity, age, size, tangibility, growth opportunities, dividend, ownership) and country variables (inflation, interest rates, credit to private sector as percentage of gross domestic product, institutional quality) jointly influence capital structure choice of firms in Nigeria. The findings equally indicate that firms in Nigeria adjust to their optimal debt target relatively faster with lower cost of adjustment because of better access to private debt that public debt. Conclusions from the empirical chapters indicate that firm specific and country factors are major determinants of capital structure of firms in Nigeria and that capital structure choice of firms influence their performance. Equally, there is evidence that indicate that there is reverse causality from performance to capital structure of firms. The study therefore contend that the agency cost theory of capital structure and franchise value hypothesis are portable in the Nigerian context. Full portability of these theories in emerging market like Nigeria may require modifications to accommodate specific peculiarities of operating and business environment of Nigeria.

The recent financial crisis has raised serious questions about the effectiveness of corporate governance (CG) in monitoring management and protecting investors’ interests. There is concern that ‘poor’ CG was, to a certain extent, a major cause of the current financial crisis. This thesis, therefore, investigates the crucial policy question of whether the quality of CG has any effect on financial performance, information asymmetry and on block shareholders’ investment decisions. This is achieved and presented in the form of three essays on CG practices in UK with a particular focus on the periods before and during the 2007/2008 financial crisis. The first essay aims to investigate the impact of firm-level CG on block shareholders’ investment decisions for a large sample of UK non-financial firms over the period 2005 to 2009. Using a panel data analysis, the results revealed the importance of CG for block shareholders’ investment decisions. Furthermore, the study results indicated that only institutional block shareholders consider CG to be important criteria for their investment decisions. Moreover, when the effect of CG on block shareholdings in both periods before and during crisis was examined, a significant difference in results appeared: an insignificant positive relationship in the pre-crisis period turned out to be significant during crisis. The result thus indicates that block shareholders viewed CG as particularly important during the crisis period. The second essay aims to examine the effect of CG on firm performance before and during the financial crisis. It also investigates the mediating effect of agency costs on the association between CG and firm performance. The results revealed that CG affects firm performance only in the period before the crisis, but no significant effect was found during the crisis period. Moreover, agency cost was proved to fully mediate the relationship between CG and performance in the pre-crisis period. The results point to an important issue, which is the need to re-evaluate CG not only in stable periods but also during turbulent times, and to evaluate its ability to perform effectively in such different conditions. The third essay investigates the effect of both CG and block ownership on information asymmetry. Further, the effects of CG in lessening the positive association between block ownership and information asymmetry is considered. The results revealed that CG affects information asymmetry only in the pre-crisis. In addition, block ownership was shown to have a significant and positive effect on information asymmetry during crisis periods suggesting that block shareholders benefit from their information advantage during crisis period which in turn worsens the information asymmetry problem. This suggests that block shareholders engage more in their private benefits rather than in efficient monitoring. The results also proved that CG is insignificant during turbulent period in lessening the negative effect of block ownership.

In general, this study is about privatisation and corporate governance, examining the association between state ownership and firm performance in privatised firms. In particular, the study attempts to explain this association in two respects: the mediating impact of agency costs, and the moderating effect of debt. The thesis presents two arguably novel theoretical approaches. First, employing agency theory to examine the association between state ownership and firm performance, it distinguishes itself by considering the role of agency costs in the ownership/performance relation. To do this, it relaxes a conventional assumption that state ownership generally has a negative impact on firm performance because it has a positive association with agency problems. Specifically, the thesis hypothesizes an ownership/performance relation without any prior expectation concerning its sign. The association between state ownership and firm performance may be mediated by agency costs, and state ownership may have a negative/positive association with firm performance because it may have a positive/negative association with agency costs. Second, the thesis complements the strategic management literatures on the roles of ownership and capital structures by exploring interaction between state ownership, debt and firm performance. The study proposes that debt, as a source of corporate governance in the nuanced institutional context of transition economies, may moderate the association between state ownership and firm performance. The above theoretical approaches are developed into three pairs of hypotheses that are tested with a sample of Chinese privatised firms, listed on the two stock exchanges of China (Shanghai and Shenzhen). Results show that state ownership has a positive impact on firm performance because it has a negative association with agency costs. In addition, debt is generally found to reinforce the positive association between state ownership and firm performance. On the basis of possible power and/or efficiency influences of the Chinese government in the context of nascent Chinese institutions, findings are discussed and implications for government policy are provided. In addition, given the size and growing global importance of the Chinese economy, the study has practical significance for practitioners such as international managers and investors planning to invest in the country. In general, although the study focuses on China with her institutional features, it has been developed from an extensive strategic management literature and hence, the study may be replicated to in other transition economies.

An extension of the agency model of capital budgeting under private information shows that an owner’s investment in a risk management system (RMS) exacerbates the owner’s agency costs as it increases the expected slack available for managerial expropriation. This study experimentally examines the effects of an RMS on honesty in managerial reporting and the incremental effect of the owner’s willingness to invest in an RMS. Applying insights from a model of social norm activation and behavioral economics, I predict that an RMS will increase managerial honesty in reporting by increasing common expectations for truthful reporting. Furthermore, I predict that the owner’s willingness to invest will activate a trustworthiness social norm for managers that will strengthen the positive effect of an RMS. Consistent with my theory, I find that an RMS has a positive effect on managerial honesty in reporting, and this positive effect is greater when the RMS is the result of the owner’s investment choice. An analysis of exit questionnaire responses confirms that the owner’s investment in an RMS signaled trust and increased the manager’s trustworthiness. The results suggest that an RMS can play a corporate governance role despite the potential increase in agency costs, and the salience of the owner’s investment choice reinforces this role.

Investment in hospitality firms is perceived to be riskier than investments in other types of industries. Based on literature linking good corporate governance to lower default risks and higher credit ratings, this quantitative study is designed to identify the effects of corporate governance on credit ratings in the hospitality industry. After exploring the various factors influencing the characteristics of corporate governance, as well as the specific risks for capital financing in hospitality firms, this research provides empirical evidence to show that hospitality firms with stronger shareholder influence tend to have higher credit ratings. In a related finding, this investigation confirms that hospitality stakeholders are able to evaluate their potential risks by determining a firm's credit ratings and can protect their long-term interest by increasing their power versus management in the corporate governance of the firm.