Abstract
To what extent do corporate governance practices in one jurisdiction affect another? In this paper, we look at the way that Hong Kong’s and the Mainland’s corporate governance practices have co-evolved, along with offshore incorporations from both places. Drawing on empirical illustrations of the data using analytical techniques like differential equations and Fourier Spectral Analysis, we find a strong relationship across time between changes in corporate governance practices in both jurisdictions as well as offshore incorporations. Our data also support the idea of a theory-free equilibrium level of corporate governance (determined by market participants’ own behaviour rather than by a theory-laden econometric model). We show that lethargy likely explains the persistence of corporate governance practices in both places, with innovations in one place correlating with innovations in the other. Such work clearly implies that corporate governance improvements in one place can help encourage such improvements in other markets which have not adopted laws aimed at improving corporate governance.
1 Introduction
Are corporate governance practices “contagious”? Previous academic attention has turned to factors such as the influence of foreign directors serving on corporate boards in other countries.1 Or large foreign investors buying shares across borders.2 Foreign listing rules also have a role to play.3 Yet, few academics—with the exception of legal authors like Gilson (2001)4 and Branson (2001)5—have looked at the dynamics of such influence. Some authors like Gourevitch and Shinn (2005)6 might see corporate governance as the result of a transnational political contest, where the rich and powerful take over and write (rewrite) corporate governance codes to suit their own selfish purposes. Yet, beyond the case studies populating this literature, we hardly know what effect corporate governance reforms (on paper and in practice) have across borders. Most descriptions of corporate governance influence across borders (except in the very narrow context analysed by economists) have yet to be rigorously, econometrically tested.
In this paper, we quantify the mutual influence of corporate governance rules and practices between Hong Kong and the Mainland (the People’s Republic of China).7 We use the rare glimpse at corporate governance practices afforded by the Panama Papers to find correlations between the way each/both jurisdictions use offshore incorporations and their differing corporate governance rules.8 Hong Kong contributes to some of the poor corporate governance on the Mainland—given Mainland companies’ use of Hong Kong and offshore incorporation centres to mislead investors at home and abroad. Hong Kong has also contributed to some improvements in corporate governance, through Chinese companies copying/complying with Hong Kong corporate governance standards. Indeed, such an interaction has reflected the popular view of corporate governance reform as following a golden mean (balancing inside owners’ interests with others, while not reforming too quickly or slowly). Corporate governance practices in one jurisdiction thus do affect another jurisdiction (at least in our limited context)—and we leave to others to figure out the exact mechanisms of such an affect.
The limited space afforded by journal publication forces us to restrict our discussion in several ways. First, and most importantly, we do not structure our paper in the usual scholarly way. We engage with the literature during our analysis (rather than before in a literature review). We also write the paper like an essay, rather than a scientific paper, to make an argument larger than simply testing a narrow hypothesis, while still grappling with the literature. As such, we don’t write out formulas for our econometrics techniques nor report confidence intervals (which are done by software anyway). Our argument supersedes our desire to find exact parameter estimates and so forth. Second, we only describe the links between offshore incorporations and corporate governance (as measured by crude aggregate measures). In a larger working paper version of this paper, we go into the corporate governance details that we have no space here to discuss. Third (and relatedly), we treat offshore incorporation as a corporate governance issue—a reflection of poor corporate governance in companies electing to set up offshore entities as well as a vector for allowing poor corporate governance practices to continue.9 To readers and reviewers anxious to critique us for omitting such a discussion, we would refer them to the larger online working paper. Fourth, we do not develop and test a model of such corporate governance propagation. Following post-classical (critical school) critiques of the corporate governance literature, we do not impose a model or world-view on the data—letting the data tell their own story.10 We appreciate the conventional approach to empirically describing and testing corporate governance hypotheses. Yet, our project consists only in showing a link between changes offshore incorporations, the quality of corporate governance (writ large however imperfectly measured) across borders—while commenting on what these changes imply for the corporate governance literature. Fifth, and again related to the previous point, Hong Kong hardly represents a foreign jurisdiction from China. Yet, we would argue that differences in legal tradition, political institutions (which drive poor corporate governance on the Mainland) and even language make Hong Kong a sufficiently foreign enough jurisdiction for our purposes.11
2 Background: Chinese Firms’ Corporate Governance and Offshore Incorporation Centres
Bad corporate governance represents a key factor in Chinese companies’ using the services of offshore secrecy jurisdictions’ intermediaries and the services of organisations like Mossack Fonseca.12 Media accounts paint a picture of Chinese companies’ ways and needs to use Mossack Fonseca (specifically) and offshore incorporation agents (in general). Figure 1a shows some of the facts linked with Chinese and Hong Kong incorporations (and corporate governance) cited in the Mossack Fonseca case for the reader unfamiliar with the details. Clearly, Hong Kong’ corporate governance laws and practices facilitated the use of offshore vehicles as a method for enabling and prolonging poor corporate governance at home and in China (among other foreign jurisdictions).13
Chinese corporations’ participation in Mossack Fonseca’s shell game
Citation: The Chinese Journal of Global Governance 5, 2 (2019) ; 10.1163/23525207-12340043
Source: See footnotes for sourcesTo what extent have Hong Kong-based intermediaries participated in the creation of offshore corporate vehicles for Mainland companies (and those at home)? Figure 1b shows, using data from the International Consortium of Investigative Journalists (ICIJ, 2016),14 the time line highlighting the height of the popularity of different locations for the intermediaries who create offshore companies. Panamanian intermediaries saw their heyday in the early 1990s for Hong Kong and Mainland clients. The Bahamas opened more offshore companies a few years later than subsequently in the 2000s and 2010s. The unheard-of Niue (a microscopic island in the South Pacific) also saw a brief rise in these incorporations.15 The British Virgin Islands (or BVIs) saw their heyday as a key incorporator of offshore companies around 2003. While BVI continues to handle most of Hong Kong and the Mainland’s offshore incorporations, other jurisdictions (notably Samoa, Seychelles and British Anguilla in recent years) have succeeded in gaining more market share than in the past. The practices of opening and using offshore vehicles, which served Hong Kong’s corporations well, also helped serve their Chinese counterparts.
Offshore of choice went in waves for Hong Kong and Mainland offshore companies
Citation: The Chinese Journal of Global Governance 5, 2 (2019) ; 10.1163/23525207-12340043
Source: ICIJ (2016).Such offshore incorporations have benefitted corporates in a wide range of China’s cities (and the businesses/businesspersons in them). Figure 2 shows the location of offshore intermediaries’ Mainland clients. Unsurprisingly, most demanders of offshore companies hailed from Beijing and Shanghai. Yet, even companies and individuals in Foshan and Nanchang participated in the offshore incorporation market. As this geography shows, demand for offshore companies spread around China as a way of evading taxes, bypassing capital controls, and safeguarding personal/company assets from seizure by law enforcement.16 Other sources provide data about China’s high net worth individuals, supporting the conclusion of increasing geographical dispersion in the use of offshore companies and wealth.17 Figure 3 provides a simple illustration of the link between offshore incorporations and wealth on the Mainland. Random chance can not explain the very tight fit between the number of offshore incorporations in selected Chinese cities and the number of millionaires in those cities.18 We can not know for sure which factor represents the chicken … and which the egg (the independent versus dependent variable). Yet, we do know that wealth in China correlates with the use of offshore entities often incorporated in Hong Kong (whose use represents a corporate governance defect under Communist Party rules, abets the laundering of monies resulting from such corporate governance defects, and reduces incentives for improving such governance).19
Mainland offshore clients by location
Citation: The Chinese Journal of Global Governance 5, 2 (2019) ; 10.1163/23525207-12340043
Source: ICIJ (2016).Offshore incorporations as cause and effect of the rise in Chinese millionaires around the country
Citation: The Chinese Journal of Global Governance 5, 2 (2019) ; 10.1163/23525207-12340043
Source: ICIJ (2016) and Hurun Research (2016).How do we know that Chinese companies’ poor corporate governance results in malfeasance like tax evasion? As early as 2004, authors like Liu and Xiao (2004) found significant tax avoidance among Chinese companies of up to 16% of profits. Private firms report profits rates of around 8%. Other types of firms reporting profits of only 4% probably mis-represent their profits.20 If only ownership types differ between these companies, we can deduce that, on average, these other (non-private) firms must be hiding 4% of their profits (Ibid., Figure 1). Such under-payment defies the received wisdom about SOEs’ tax payments—as they may indeed, seek to pay taxes, given these taxes’ effect on SOE managers’ promotion potential.21 Namely, the Communist Party taps high tax-paying SOE-managers for promotion and other benefits more frequently. In their summary of the literature, Jansky and Prats (2013) find that ties to a tax haven often provide enough of a predictor of tax avoidance/evasion.22 They do not have data for China. But if countries like India serve as a possible comparator, firms with linkages to tax havens pay 30% less tax than companies without these links. Fisman et al. (2008) specifically for their part of this story, find that traders use “offshore” Hong Kong as a way to avoid paying Chinese taxes and tariffs.23 Hong Kong serves as a key channel for spiriting away evaded tax proceeds.
What effect would better corporate governance thus have on reducing practices like tax evasion? Figure 4 shows the effects of putting more financial experts and independent directors on corporate boards in general. If these results apply to China in the same way as the US, corporate governance reforms like these probably encourage tax paying behaviour for companies not already heavily engaged in tax evasion. Yet, for those companies which evade large shares of tax, more comprehensive corporate governance reform seems to correspond to more tax cheating. Desai and Dharmapala (2005) find that increases in tax avoidance leads to increases in Tobin’s q of around 2.5% only with better governed firms.24 Kim and co-authors (2010) find that stock prices become more resilient against crashes by around 0.2 as tax avoidance decreases (as companies pay more taxes).25 Figure 5 shows the counter-intuitive relationship between corporate governance and tax evasion found in much of the literature. Better corporate governance of course leads to less tax evasion. Yet, these data also show that corporate governance can—for badly governed companies—contribute to tax evasion and other criminal behaviour. More generally, an expected or middle-level value of corporate governance reform best serves corporate interests … resulting in middling levels of malfeasance (John and Kedia, 2002).26
Corporate governance helps big Chinese tax-cheats cheat more and small ones to pay more tax
Citation: The Chinese Journal of Global Governance 5, 2 (2019) ; 10.1163/23525207-12340043
Source: Armstrong et al. (2015).Corporate governance determines the level of tax benefits and the distribution between selfish versus business ends
Citation: The Chinese Journal of Global Governance 5, 2 (2019) ; 10.1163/23525207-12340043
Sources: See text for sources cited.3 What Do the Panama Papers Data Show about China’s Corporate Governance?
The Mossack Fonseca and Open Leaks data provide some indication about the relationship between corporate governance and the use of offshore structures in Hong Kong and the Mainland. Figure 6 shows the percent change in offshore account openings as corporate governance scores for the jurisdiction improve—with corporate governance data taken from the World Economic Forum (2016).27 Of course, they data reflect a very crude measure of corporate governance. Yet, if true, Mainland account openings increased at a time when corporate governance had improved—suggesting that perhaps other factors (besides corporate governance) contributed to these account openings. Hong Kong based intermediaries opened fewer offshore accounts during the same time period. Figure 7 indeed shows that Hong Kong offshore account openings decreased during the time when the number of Chinese accounts rose. Figure 8 shows that other jurisdictions had reduced their offshore incorporations during a time of relatively stable corporate governance. Thus, Mainland offshore incorporations thus might have made up for the decreases in other jurisdictions.
Better corporate governance in Hong Kong and China coincided with more Mossack Fonseca registered offshore accounts
Citation: The Chinese Journal of Global Governance 5, 2 (2019) ; 10.1163/23525207-12340043
Source: ICIJ (2016) and WEF (2016).Have changes to Hong Kong’s corporate governance and money laundering regulations caused offshore companies registrations to move over the border?
Citation: The Chinese Journal of Global Governance 5, 2 (2019) ; 10.1163/23525207-12340043
Source: ICIJ (2016).Singapore and UK had small and steady improvement in corporate governance with large declines with Mossack Fonseca openings
Citation: The Chinese Journal of Global Governance 5, 2 (2019) ; 10.1163/23525207-12340043
Source: ICIJ (2016) and WEF (2016).A bit more analysis shows other trends and patterns in the interactions between corporate governance and offshore incorporations in Hong Kong and the Mainland. Figure 9 shows the relationship between the rate of change of improvements in the Mainland’s corporate governance and its levels of offshore incorporations. Once Chinese companies go down the road of improving their corporate governance, they will likely continue to do so. Such improvements furthermore correlate with less demand for offshore incorporations. The only “viable” corporate governance programmes rate a 34.5 or higher. At such a take-off level (as we label in the figure), corporate governance leads to sustainable decreases in offshore incorporations and self-improving corporate governance. Figure 10 shows similar data for Hong Kong—with different results. Hong Kong’s stable corporate governance rates hover at around 48.2 (or 14 points higher than their Mainland counterparts). Interesting, better corporate governance in Hong Kong seems to correlate with more demand for offshore incorporations. Yet, Hong Kong companies’ demand for offshore incorporations increases most with the relatively rapid deterioration of their corporate governance ratings from high levels of corporate governance to lower levels.
China’s corporate governance growth depends on already existing levels and offshore incorporations fall in China as corporate governance levels rise
Citation: The Chinese Journal of Global Governance 5, 2 (2019) ; 10.1163/23525207-12340043
Source: data from ICIJ (2016).Hong Kong’s changes in corporate governance and offshore incorporations stable for bad as well as good levels of corporate governance (in other words, exhibit double equilibria)
Citation: The Chinese Journal of Global Governance 5, 2 (2019) ; 10.1163/23525207-12340043
Source: ICIJ (2016).What about the relationship between Hong Kong and the Mainland? What proof exists that Hong Kong somehow contributes (or not) to the Mainland’s corporate governance and offshore incorporation practices? Figure 11 shows some initial evidence for such a relationship. Unsurprisingly, bad corporate governance in Hong Kong correlates with bad governance on the Mainland—and visa-versa. Yet, a range of Hong Kong “bad boys” exists for companies scoring between 47.5 to 48.75. When Hong Kong companies have corporate governance in this range, corporate governance on the Mainland falls the fastest. Moreover, Mainland companies can expect a deterioration in their corporate governance to the low value of the range (namely 47.5), as they deal with relatively unreliable partners? Differences-in-differences analysis (between China and Hong Kong and before versus after corporate governance reform) shows a 3 point improvement in the Hong Kong’s corporate governance during the time of Corporate Governance Listing Rules—showing that such changes do affect corporate governance.28
China’s corporate governance reform (change) depends on the quality of corporate governance in Hong Kong
Citation: The Chinese Journal of Global Governance 5, 2 (2019) ; 10.1163/23525207-12340043
Source: data from ICIJ (2016).Network analysis of the Panama Papers database points most strongly to the way that Hong Kong contributes to China’s corporate governance travails. Figure 12 shows the way that offshore entities incorporated by Mossack Fonseca (or other agents in the ICIJ database) link to the jurisdictions shown in the figure. If Chinese companies simply used Hong Kong based incorporation agents to spirit funds offshore, we would expect strong links mainly between these two jurisdictions. We see though, that both jurisdictions have many jurisdictions in common—with many BVI entities starting in Hong Kong and ending on the Mainland (for example). Some jurisdictions relate primarily to one jurisdiction or the other (like the Cook Islands and Hong Kong. Yet, Hong Kong and the Mainland have more links with these other jurisdictions than either random luck or other jurisdictions’ experiences would suggest.29 Overlapping decisions to use particular jurisdictions at particular times suggest that Hong Kong and China form poles in a broader network of offshore corporate relations, which likely “layer” across numerous jurisdictions.30
Hong Kong and China share far more business with the same jurisdictions than coincidence can explain
Citation: The Chinese Journal of Global Governance 5, 2 (2019) ; 10.1163/23525207-12340043
Source: based on data from the ICIJ (2016). ICIJ, Offshore Leaks Database, 2016, at search jurisdictions for China and Hong Kong, available online.Other evidence supports the hypothesis that Hong Kong’s corporate governance influences corporate governance on the Mainland. Figure 13 shows the extent to which changes in corporate governance pass through to offshore incorporations—both at home and in the other jurisdiction. Changes in corporate governance (as measured by the World Economic Forum’s corporate governance indicators) had a much higher correlation (impact?) on offshore incorporations in China—about 5 times higher than in Hong Kong. Yet, Chinese firms seem to adjust their corporate governance more than proportionately for changes in (at the same time as?) Hong Kong’s corporate governance. A 1% change in Hong Kong’s corporate governance (or offshore incorporations) results in a 1.3% change in Mainland corporate governance and/or offshore incorporations. Thus, Hong Kong’s corporate governance might have a disproportionately larger impact on the Mainland’s corporate governance.
Comprehensive analysis of corporate governance, offshore incorporations and the interaction between Hong Kong and the Mainland
Citation: The Chinese Journal of Global Governance 5, 2 (2019) ; 10.1163/23525207-12340043
In theory, share price changes should confirm whether low corporate governance scores and higher numbers of offshore incorporations lead to harmful practices like tax evasion. At least we should check. Figure 14 informally looks at the way that share prices reacted when the Panama Papers publicly identified Chinese managers/ investors linked to these companies. The figure does not control for general market factors, industry or firm specific effects. These factors would likely have a much smaller impact on a two month study (such as ours), rather than many of the usual multi-year studies. Yet, these results fail to show any clear pattern. Some companies’ share prices rose before and after the disclosures which might have affected them. Others share prices fell before and/or after the disclosures. Maybe investors did not see evidence of offshore incorporation as very strong evidence of self-dealing and other problems at these companies? Or—following numerous studies in the vein of Utrero-Gonzalez and Callado-Munoz (2016)31—maybe share prices do not reflect the informativeness of corporate governance practices as fully neoclassical economists might expect. At first glance then, poor corporate governance and wide-spread offshore incorporation seems to pose less risk to Hong Kong’s and the Mainland’s corporates than one might have thought. More likely—as described in Figure 5 above—corporate governance and offshore incorporation practices in Hong Kong and the Mainland have adjusted to each other and settled down. Revelations of offshore entities’ ownerships do not affect the margins of their “sticky governance.” (Black et al., 2006).32
Bowtie share price response suggests little real Chinese corporate reaction to Panama Papers revelations
Citation: The Chinese Journal of Global Governance 5, 2 (2019) ; 10.1163/23525207-12340043
Source: based on data from Bloomberg (2016) with companies’ identities provided by the ICIJ (2016).Such evidence contracts more rigorous evidence supporting a clearer link between tax evasion on the Mainland and share price movements. Chen and co-authors (2016) find that tax evasion/avoidance leads to declining market values, unless the corporate board is skilled enough to use the extra money to increase growth opportunities.33 A different Chen and those co-authors (2014) find that tax evasion ends up decreasing firm value—despite its positive effects on profits and growth.34 If tax avoidance helps increase market values by 13%, then losses from self-serving and worries about lack of transparency reduce market values by around 20% (Ibid., Table 8). They see the existing regulations as a mechanism for creating rents—which businessmen extract for reasons too complex to discuss here. Increasing firm transparency and revisions to the tax rules which create tax-evasion-related rents, thus can decrease the value lost from tax evasion. Both sets of evidence though do support the idea that corporate governance practices and offshore incorporations adjust—or have already adjusted—to some level desired on both sides of the border. Even the Panama Papers’ disclosure could not significantly move share prices enough to affect either practice.
To what extent do corporate governance practices and offshore incorporations in China and Hong Kong depend on foreign influence, as opposed to simple inertia or internal factors? Figure 15 shows the weight of institutional inertia (or history) versus the effects of external shocks and innovations in leading to changes in corporate governance and/or offshore incorporations. Both corporate governance and offshore incorporations appear very heavily influenced by external factors—much more than past actions on corporate governance/offshore incorporations. The Mainland’s corporate governance and offshore incorporations correlate very strongly with Hong Kong’s. In contrast, comparator countries like Taiwan, Thailand and the UK seems to have corporate governance influenced more by external events and offshore incorporations influenced by lethargy or pre-existing trends and relationships.
What causes changes in corporate governance and offshore incorporations?
Citation: The Chinese Journal of Global Governance 5, 2 (2019) ; 10.1163/23525207-12340043
4 Conclusion
Do corporate governance practices in one jurisdiction affect those in another jurisdiction? In this paper, we looked at the “correlation” between offshore incorporations of Hong Kong and Mainland companies and broader indicators of corporate governance. Such a correlation actually consisted of the way these variables affect each other across the border, the way levels affected rates of change (bringing in differential equations into the analysis) and over time (bringing in auto-regressive and Fourier techniques). We use these data to illustrate our argument—rather than to claim we know something about the exact way these variables affect each other. Corporate governance practices in one jurisdiction like Hong Kong do affect those in another like China. We also reviewed evidence from other scholars, to show such a result does not reflect a particular type of analysis or a statistical artefact. Hong Kong causes (in the statistical time series sense of the word) poor, and eventually better, corporate governance on the Mainland—a strong statement indeed. Corporate governance in both places “settled down” (reached an equilibrium and maintained a steady relationship) in a way that we would expect if corporate governance practices were transmitted over borders. Further research can help find out why these relationships in the data might exist and change over time.
Acknowledgements
The authors would like to thank The University Grants Committee Theme-Based Research Scheme grant ‘Enhancing Hong Kong Future as a Leading International Financial Centre’ for funding.
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We do not refer to official territory names to keep our paper readable. Thus, we do not express any kind of political views when we refer to China as the Mainland (as the Hongkongers do) or simply China in contrast to its special administrative region of Hong Kong. We discuss briefly below why Hong Kong’s Basic Law allow the territory autonomy in running its own legal system and corporate law.
We refer to the Panama Papers data in this paper as data from the International Consortium of Investigative Journalists’ (ICIJ) Offshore Leaks Database. The database includes information from the Panama Papers, the Offshore Leaks and the Bahamas Leaks. Yet, we refer to Panama Papers only as a short-hand for these combined search results to make our paper easier to read.
O’Donovan and his co-authors (2017) have conducted analyses similar to those in the larger working paper version of this paper, econometrically valuing the lapses in corporate governance allowing corporate owners and managers to profit from “offshore secrets.” O’Donovan, James, Hannes Wagner, and Stefan Zeume, The Value of Offshore Secrets—Evidence from the Panama Papers. Asian Bureau of Finance and Economic Research 2050 (2017). Available online.
Yoshikawa, Toru and Abdul Rasheed. (2009). Convergence of Corporate Governance: Critical Review and Future Directions. Lee Kong Chian School of Business Research Collection 5–2009. Available at: http://ink.library.smu.edu.sg/lkcsb_research/2908/
La Porta and his colleagues (1998) still represent the orthodoxy in corporate governance research, defining different corporate governance practices by legal origins and institutions characteristics. By their measure then, Hong Kong’s “distance” from China would suffice to make the jurisdiction’s corporate governance practices interestingly different and autonomous. La Porta, Rafael, Florencio Lopez de Silanes, Andrei Shleifer, and Robert Vishny, Law and Finance. Journal of Political Economy 106(6) (1998): 1113–1155.
The International Consortium of Investigative Journalists (2016) describe in detail the “Panama Papers scandal”—the moniker given by the global media industry to the leak of the Panama-based law firm Mossack Fonseca’s client data, leading to revelations about the use of offshore companies.
Naturally, offshore entities facilitate legal, welfare-increasing transactions as well as illegal, selfish ones. We refer the reader to authors like Bailey and Liu (2013) for the theory and data around the use of offshore entities and its effect on corporate governance—and vice versa. Bailey, Warren and Edith Liu, Incorporation in Offshore Financial Centers: Naughty or Nice? SSRN Working Paper 2357074 (2013). Available online.
International Consortium of Investigative Journalists. (2016). The Panama Papers: Politicians, Criminals and the Rogue Industry that Hides Their Cash. Available online.
Van Fossen (2012) talks about the brief rise and fall of Niue as an offshore financial centre. Clearly, Hong Kong and Mainland clients shared in that rise and fall. Van Fossen, Anthony, Chapter 2. In Anthony Van Fossen. Tax Havens (2012).
Henry, James, The Price of Offshore Revisited: New Estimates For “Missing” Global Private Wealth, Income, Inequality, and Lost Taxes. Tax Justice Network Working Paper, July 2012; Alstadsaeter, Annette, Niels Johannesen, and Gabriel Zucman, Who Owns the Wealth in Tax Havens? Macro Evidence and Implications For Global Inequality. NBER Working Paper 23805 (2017). Available online.
Hurun Research Institute, Hurun Wealth Report 2014 (2014). Available online.
In other words, the probability that no correlation exists between these variables does not significantly differ from zero. We do not show the exact statistics related to testing whether the correlation is zero—as this unnecessarily complicates our paper.
In our larger working paper, we show econometric evidence from authors like Liu and co-authors (2012) showing that better corporate governance increases Chinese companies’ profits in the longer-term. Liu, Chun-yan, Konari Uchid and Yu-feng Yang, Corporate governance and firm value during the global financial crisis: Evidence from China. International Review of Financial Analysis 21 (2012): 70–80.
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Differences-in-differences analysis represents a fancy way to say that we subtracted corporate governance scores before the Governance Listing Rules changes from those scores after the changes and then subtracted these differences for Hong Kong from China. By including China in the calculation, we control for its effect (and thus the effect of broader economic factors).
We test this by looking at the probability distributions that govern Singapore’s, Taiwan’s, Thailand’s and the UK’s links with other offshore jurisdictions (choosing these jurisdictions as the major rivals to Hong Kong). We also look at a random probability distribution. We find that “attraction” between China and Hong Kong explains the increased incidence of linking with these other jurisdictions. Jurisdictions which Hong Kong clients use tend to link to the Mainland more often (and visa versa).
To keep our paper from being too technical, we do not report the correlations between the extent to which Hong Kong and Mainland firms use particular jurisdictions in particular years. As we illustrated informally above, jurisdictions like Niue attracted waves of incorporations which demanders of offshore corporate vehicles might have concurrently sought.
Utrero-Gonzalez, Natalia and Francisco Callado-Munoz, Do Investors React to Corporate Governance News? An Empirical Analysis for the Spanish Market. BRQ Business Research Quarterly 19(1) (2016): 13–25.
In contrast, the same author in another study with another co-author (Black and Khanna, 2007) find a share price reaction, in all likelihood because India did not have the same influence from abroad like China had with Hong Kong. Thus, corporate governance reforms provided new information, which led to new share prices. Without further research though, such an assertion remains conjecture. Black, Bernard, Ha-Sung Jang, and Woo-Chan Kim, Predicting Firms’ Corporate Governance Choices: Evidence from Korea. Journal of Corporate Finance 12 (2006): 660–691; Black, Bernard and Vikramaditya Khanna, Can Corporate Governance Reforms Increase Firm Market Values? Event Study Evidence from India. Journal of Empirical Legal Studies 4 (2007): 749–796.
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