CORPORATE GOVERNANCE

The reasons why I choose “Corporate Governance in China: an Overview” article:

This paper shows about corporate governance (gongsi zhili) is a concept whose time seems definitely to have come in China.

COMPONENT OF COMPARISONS	ARTICLE 1 COURSE READING PACKAGE (CRP)	ARTICLE 2
TITLE	Identification of Role of Social Audit by Stakeholders as Accountability Tool in Good Governance S.S. Ghonkrokta and Anu Singh Lather	corporate governance in China: an Overview Donald C. Clarke
TOPIC	Corporate Governance Social audit is being viewed as a promising approach to improve the performance and social accountability in private as well as in public sector.	Corporate Governance The major theme of this article is that the state wants to make SOEs operate more efficiently by subjecting them to a new and different set of rules, the rules of organization under the “Modern enterprise system”.
THEORY USED BY ARTICLE RESEARCH	Social audit Good governance Accountability (Asian Development Bank-2000 and scientific)	Corporate governance Chinese CGLI reform Company Law Corporatization
HYPOTHESIS OF RESEARCH	Social audit creates confidence in society regarding government initiatives, promotes transparency and efficiency, improves social, ethical and environmental performance, enhance inclusion, facilitates monitoring and ensures accountability.	Chinese corporate governance in this narrow sense, and attempts to explain some perplexing features of its discourse, laws, and institutions.
VARIABLE USED	This research uses questionnaire that list about 30 positive statements identifying the likely role of social audit is prepared and placed in a 5 point Likert scale. To check the face and construct validity, questionnaire is given for examination and examined by 6 experts. To check the test and retest reliability, questionnaire was given to a set of 30 stakeholders taken from 5 categories of stakeholders	State-owned enterprises (SOEs), particularly after their transformation into one of the corporate forms provided for under the Company Law, and listed companies, which must be companies limited by shares (CLS) under the Company Law.
METHOD OF ANALYSIS	This research uses questionnaire that list about 30 positive statements identifying the likely role of social audit is prepared and placed in a 5 point Likert scale. The most positive answer is rated at 5 point and the most negative at 1 point. To check the face and construct validity, questionnaire is given for examination and examined by 6 experts. These experts were selected from different stakeholders, 1 citizen, 1 legal, 1 politician, 2 officials, and 1 educationist so as to include specialists from different categories, professions, and fields. To check the test and retest reliability, questionnaire was given to a set of 30 stakeholders taken from 5 categories of stakeholders (citizen, legal professionals, political persons, bureaucracy/officials and media). Retest was done after 15 days interval. Results were compiled and Pearson’s correlation coefficient calculated along with other statistical analysis done by using SPSS software.	Chinese corporate governance discourse in practice focuses almost exclusively on agency problems, and within only two types of firms: state-owned enterprises (SOEs), particularly after their transformation into one of the corporate forms provided for under the Company Law, and listed companies, which must be companies limited by shares (CLS) under the Company Law.
RESULT OF THE ANALYSIS RESEACRH	High reliability and validity of the instrument developed on positive statement establishes the appropriateness of the tool designed for assessing the role of social audit and its likely benefits and utility to stakeholders. Reliability and validity go side by side. The benefits of role areas: Stakeholder accepted that social audit helps the government in monitoring, accounting for and reporting the activities/actions. The exercise of social audit improves social, ethical, and environmental performance. Public is convinced and confident that social audit contributes towards achievement of efficacy and effectiveness of the administration. The important finding was that it creates confidence on governmental actions in the community. It makes administration more transparent and accountable. It provides verifiable data to substantiate claims on social performance. It enhances inclusions, partnership, and participation. Collectively, social audit is a tool for social accountability in good governance.	Any discussion of corporate governance in China must take seriously the implications of the state’s policy of continuing and significant involvement in enterprise ownership. Many of the problems the drafters of the Company Law sought to address are not necessarily best addressed by a statute like the Company Law, or even by an institution such as legislation and government enforcement.

INTERNATIONAL INVESTMENT

ARTICLE 1
COURSE READING PACKAGE (CRP)
FOREIGN OWNERSHIP AND INVESTMENT: EVIDENCE FROM KOREA
International Investment
This study examines whether an increase in foreign ownership affects investment in Korea.

THEORY USED BY ARTICLE RESEARCH – Modigliani and Miller

HYPOTHESIS OF RESEARCH – Cash flow sensitivity of investment is lower in firms with high foreign ownership than in firm with low foreign ownership.

VARIABLE USED
fi is firm specific effect
dt is time specific effect
εit is white noise
I represent investment
K capital stock
Q Tobin’s q
CF the firm’s internal financial position

High is the Dummy variable for firms with high foreign ownership
Low is the dummy variable for firms with low foreign ownership

Before and after represent the time period before and after 1998

METHOD OF ANALYSIS
Financial Variable Augmented Q model
(I/K)it=c+β1(I/K)it-1+β2Qit+β3(CF/K)it+fi+dt+εit
To test whether cash flow sensitivity of investment differs across foreign ownership structure:
(I/K)it=c+β1(I/K)it-1+β2Highi*Qit+β3 Highi* (CF/K)it+ β4Lowi*Qit+β5 Lowi* (CF/K)it +fi+dt+εit
(I/K)it=c+β1(I/K)it-1+β2Beforet *Qit+β3Beforet * (CF/K)it+ β2Aftert *Qit+β3Aftert * (CF/K)it +fi+dt+εit

RESULT OF THE ANALYSIS RESEACRH
For both the q model and the Euler model, it is found that firms are financially constrained since the coefficient in CF/K is statistically significant at the conventional level.
Both a q model and an Euler equation are estimated, adopting two classification methods to distinguish high foreign ownership from low foreign ownership. In both models, the cash flow sensitivity for firms with high foreign ownership is statistically insignificant. Cash flow has a significant impact on the investment of firms with low foreign ownership.
Liquidity constraints are reduced mainly in firms with low foreign ownership. Cash flow sensitivity in firms with high foreign ownership is statistically insignificant regardless of time periods.
If the value of the firm is directly related to financial constraints that the firm faces, the effect of cash flow on investment may also have a non linear relationship with the level of foreign ownership.
Cash flow sensitivity of investment decreases as foreign ownership increases. This implies that foreign ownership improves a firm’s accessibility to external finance.
The findings simply suggest that foreign ownership plays a role in reducing financial constraints on firms, and thus improves accessibility of external financing for investment. In addition to capital inflows, the relaxation of the information asymmetry can also be potential benefit of open financial markets.

ARTICLE 2
INVESTMENT FOLLOWING A FINANCIAL CRISIS: DOES
FOREIGN OWNERSHIP MATTER?
International Investment
This study investigates whether foreign ownership shields firms from liquidity constraints following a financial crisis.

THEORY USED BY ARTICLE RESEARCH
Trade theory assumes that relative prices are important, and no price is more important than the relative price of currency the real exchange rate.
When a currency undergoes a real devaluation, exports become more competitive.
In addition, firms that compete against imported goods become more competitive.
Firms that import most of their raw and intermediate goods, in contrast, become less competitive.

HYPOTHESIS OF RESEARCH
The rupiah devaluation should have affected foreign and domestic exporters in the same manner, all else being equal.

VARIABLE USED
Outcomeit is the log of value added, the log of labor, and the log of capital in the respective specifications,
(Exporter * Post)it is the interaction of indicators for a pre-crisis (anytime during 1994-1996) exporting establishment i and postcrisis years (1999-20000)
(Foreign Leverage*Post)it and (Domestic Leverage_ Post)it are the interactions of foreign and domestic leverage, respectively, and post-crisis years,
αi is a fixed effect for factory i, γt is a dummy variable
for year t.
Foreign is an indicator for firms with foreign equity.

METHOD OF ANALYSIS
First, we compare the effect of the crisis on wholly
Indonesian-owned firms, both exporters and non-exporters. Our aim to establish exporters as beneficiaries of the rupiah devaluation.
Second, we compare the post-crisis outcomes of Indonesian-owned exporters with those of foreign-owned exporters.
Equation estimates the effect of the crisis on firm outcomes.
Ln Outcomeit =β0(Exporter * Post)it + β1(Foreign Leverage * Post)it+ β2(Domestic Leverage * Post)it + αi + γt + εit
Ln Outcomeit =β0(Foreign * Post)it + β1(Foreign Leverage * Post)it+ β2(Domestic Leverage * Post)it + αi + γt + εit

RESULT OF THE ANALYSIS RESEACRH
Because of the rapid devaluation and inflation during 1997 and 1998, it difficult to interpret values during those years. Focusing on 1999 and 2000 hints at the trend that the regression analysis will show: only foreign exporters are investing post-crisis.
Because of the rapid rupiah devaluation during 1997 and 1998, a difference of just a few weeks in the reporting date could dramatically affect values.
Trade theory suggests that exporting firms should increase profits, expand employment, and invest in new capital following a real devaluation. For domestic exporters, we observe the first two effects, but do not see evidence of increased investment even though conditions warrant it. Liquidity constraints are a likely explanation. Whereas increases in employment could be financed through cash flow, capital investment required obtaining credit from a struggling financial sector.
In contrast, exporters with foreign ownership did expand investment. A priori, we see no reason why investment would depend on ownership other than financing availability. While domestic exporters may have faced a credit crunch, exporters with foreign ownership could access credit through their parent company and thus insure themselves against liquidity constraints.