Three essays on international capital markets
Date of Issue2009
College of Business (Nanyang Business School)
The purpose of this thesis is to document and understand the cross-country differences in institutional characteristics and firm attributes in the context of international capital markets. The thesis consists of three essays. I start by performing a cross-country analysis of the relationship between corporate governance and the amount of private information in stock price. Existing evidence suggests that investor protection and transparency associated with strong corporate governance encourage informed trading, thereby facilitating financial market efficiency. Using firm-level data from 22 developed countries, I find that firm-specific stock return variation, a measure of stock price informativeness, increases with the quality of a firm's corporate governance. This finding is more pronounced among companies with low firm-level governance. The results show that anti-takeover and audit ratings, while not board quality, are positively related to stock price informativeness. In countries with poor legal environment, company corporate governance plays a more significant role in increasing stock price informativeness. The market views a firm's commitment to better corporate governance favorably in countries with poor legal environment. The second essay performs an event study to examine whether and how corporate governance affects market behavior around annual earnings announcements in 23 developed countries worldwide. Using detailed corporate governance data for the period 2002-2005, I find that companies that adopt better corporate governance practices experience stronger market price reactions. Evidence therefore suggests that effective corporate governance gives credibility to accounting earnings, thereby conveying more informative earnings announcements to the public. Furthermore, the results show that firm governance practices are at least as important as legal regulations in explaining market reactions around the announcements. Particularly, regulations mandating financial disclosures are conducive to the informativeness of earnings announcements as perceived by investors.