MANAGERIAL AND DECISION ECONOMICS

Manage. Decis. Econ. 26: 411– 412 (2005)

Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/mde.1261

INTRODUCTION

Corporate Governance: An InternationalPerspective

In this special edition of Managerial and DecisionEconomics, I have gathered together papers from anumber of international experts in corporategovernance. The intention is to look at aspects ofcorporate governance from several vantage pointsoutside of America, following the Enron andsimilar debacles. However, the papers are notsimply cases of Europeans and others focusing onEnron and perceived failings in American corporategovernance. Rather, I recognized that the studyof corporate governance, using economic analysis,has been given impetus by the events since 2001.I have therefore encouraged authors to contributeto corporate governance more widely focused.

An underlying belief of this editor is in theimportance of applying economic analysis togovernance issues. There is a danger of unstruc-tured and faulty reasoning in the absence ofeconomic analysis. It is notable that, followingseveral Enron-like corporate scandals, includingEuropean cases such as Parmalat, there has beenwidespread discussion along the usual lines of‘something must be done’, ‘the government mustact’, and similar unstructured responses. Thedifficulty with much of the discussion is that thereis no clear matching of policy analysis withcarefully identified welfare-reducing institutionalfailings. How do we know that the observed levelof fraud is in fact sub-optimal? Can we be sure thatrecommended reforms will operate without unin-tended negative effects? What about the cost?What are the links between governance andperformance, of both companies and countries?Economics answers these questions and is essentialin the study of corporate governance. Our authorshave produced a range of applied economicsstudies in the governance area.

Frank Stephen, David Urbano and Stephan vanHemmen, in The Impact of Institutions on En-trepreneurial Activity, present an empirical analysisof corporate governance factors likely to promoteentrepreneurial activity, based on their empiricalanalysis across a number of transition, developingand developed countries. Their results highlightthe importance of laws and institutions in promot-ing entrepreneurial activity, reflecting the pointmade much earlier by Adam Smith that lawsare important to economic performance justas the economy may influence laws; it is a two-way street. This work is part of an on-goingresearch project on the relationship between thelegal system and factors that influence econo-mic development. Established work shows thatlegal rules protecting creditors and investorsinfluence the size of financial markets which inturn influence economic development. Stephenand van Hemmen extend such ‘law and finance’analysis to demonstrate the influence of institu-tions on entrepreneurship, a major driver ofeconomic development.

In Enron, Corporate Governance and Deterrence,I examine the financial scandals surroundingcompanies like Enron and WorldCom, which havegenerated concerns leading to the legal reform ofcorporate governance in America, and to therevision of voluntary, self-regulatory codes else-where around the world. Using an approach basedon the economic analysis of law, i.e. examiningthe incentive structures set up by the rules, it ispossible to show that the American systemresponded well to the recent scandals. By adjustingthe probability of conviction and penalties, theauthorities showed a rational approach to deter-ring fraud.

Copyright # 2005 John Wiley & Sons, Ltd.

In Disclosure Level and Cost of Equity Capital,Sunil Poshakwale and John Courtis examine theimpact of voluntary disclosure on the cost ofequity capital. An interesting historical observa-tion concerns the extent to which firms’ voluntarydisclosure has often outstripped the legal require-ments imposed on them. Using a sample of 135banks from Europe, North America and Austra-lia, and controlling for a range of financial factors,the authors find a robust relationship betweenhigher disclosure and lower costs for equitycapital. The relationship is particularly notablefor Europe, and particularly influential for dis-closure of risk-management practices.

Sean Liu, in Corporate Governance and Devel-opment: the Case of China, gives a practitioner’sview on developments in corporate governance inChina. There has been a growing Chinese interestin corporate governance in recent years, particu-larly characterized by a series of moves by theChinese authorities aimed at developing corpo-rate-governance laws and institutions. China ex-hibits many problems that are typical of systemsthat fail to protect shareholder interests: inparticular, political influence in the two-tieredboard system. Liu concludes that the new legalframework of company law still leaves much scopefor developing corporate governance at the level ofthe enterprise.

Vitaliy Zheka provides an interesting study ofcorporate governance in Ukraine, in which heexamines the effects of different ownership struc-tures and of the quality of corporate governanceusing a Farrell measure of efficiency. In CorporateGovernance, Ownership Structure and CorporateEfficiency: the Case of Ukraine, Zheka appliesData Envelopment Analysis and Limited

Dependent Variable Estimation to joint-stockcompanies listed on the main Ukrainian stockexchange. Intriguingly, he finds that domesticownership of an organization enhances efficiencythe most, whereas managerial ownership has adetrimental effect on efficiency. These resultssuggest that close local knowledge is needed tocircumnavigate Ukraine’s acknowledged corrupteconomy. Although foreign firms are relativelyinefficient, foreign ownership has a positive effecton the quality of corporate governance. Concen-trated ownership rights (including state owner-ship) improve efficiency, again possibly reflectingcountry-specific factors. The quality of corporategovernance is found to have a positive impact onthe efficiency of the domestically owned firms.Zheka shows how corporate governance factorsaffect efficiency even in the setting of a rathertroubled transition economy.

The papers all show a healthy growth ininterest in corporate governance around the world.It is particularly refreshing to note how thatinterest is very strong in reforming and transi-tional economies, where these issues are, frankly,crucial to development. The issues of corporategovernance are remarkably similar the worldover, dispelling the view that corporate govern-ance is somehow a North American problem. Weshould take heart that economic analysis is ofcentral use in unravelling major issues in corporategovernance.

Antony W. Dnes

Professor of Economics, HUBS,University of Hull, HU6 7RX, UK

E-mail: a.dnes@hull.ac.uk

A. W. DNES412

Copyright # 2005 John Wiley & Sons, Ltd. Manage. Decis. Econ. 26: 411– 412 (2005)