HIDEAKI MIYAJIMA, Waseda University - Graduate School of Commerce, Research Institute of Economy, Trade and Industry (RIETI)
Email: miyajima@waseda.jp

The Japanese economy is in the midst of a major mergers and acquisitions wave for the first time in the postwar period. This article puts a spotlight on Japan's M&A activity, which has surged since the end of 1999, and takes a look at the factors that have contributed to the surge, and its various economic dimensions. It will place Japan's M&As in an international context, and identify the causes of the wave, and its structural characteristics (Sections 2 and 3). The article will also examine the economic role of M&A and its pros and cons. We contend that M&As contribute to raising the efficiency of resource allocation and organizations (Section 4 and Section 5). The last section addresses policy implications and includes concluding remarks.

AMY KAM, City University London - Faculty of Finance
Email: klp_hk@hotmail.com
DAVID B. CITRON, City University London - Sir John Cass Business School
Email: d.b.citron@city.ac.uk
YAZ GULNUR MURADOGLU, City University London - Sir John Cass Business School
Email: G.Muradoglu@city.ac.uk

This paper examines two financially distressed companies and their restructuring strategies. The existing distress literature focuses on developed economies such as U.S. and U.K. This paper is a pioneering work in an emerging market context. The main purpose of the case studies is to provide rich in-depth evidence on complex events which large-scale empirical studies of necessity ignore. To achieve this, the paper first analyses the firms' accounting-based performance, both pre- and post-distress, to understand the nature of the firms' difficulties. It then examines the series of complex restructuring procedures each firm initiated and uses an event study approach to evaluate the stock market's reaction to these strategies. We provide an in-depth understanding of the special features of the Chinese situation, such as the role of government and other more commercially driven shareholders; the subsequent importance of social policy issues; the protracted and complex nature of the restructurings; and the frequent use of mergers, share transfers, asset swaps and asset sales. The analysis provides new hypotheses for further empirical study on a large-scale basis.

CINDY R. ALEXANDER, U.S. Securities and Exchange Commission (SEC)
Email: alexanderc@sec.gov
KATHLEEN WEISS HANLEY, U.S. Securities and Exchange Commission (SEC)
Email: hanleyk@sec.gov

This paper examines the economic relevance of the factors set forth under Section 408 of the Sarbanes-Oxley Act to guide the enhanced regulatory scrutiny of public company financial disclosures, as required under the Act. We interpret two of the factors, volatility and firm size, as predictors of a public company's relative risk of non-compliance or the prospective loss to investors, conditional upon non-compliance. We use disclosures of material weaknesses in internal controls under Section 404 as indicators of the potential for non-compliance. Our evidence is that the Section 408 factors that we associate with a relatively high risk of non-compliance - high stock-price volatility, and whether a company is emerging with a disparate PE ratio - are good predictors of reported material weaknesses in internal controls. In addition, while Section 408 calls for enhanced review of large firms - those with high market capitalization and a material affect on the economy - we find that relatively few large firms have disclosed material weaknesses in internal controls. The large firms that have disclosed material weaknesses, however, comprise 92% of the market capitalization of all companies disclosing a material weakness. In contrast with the focus of the public debate on the compliance problems of smaller public companies, our evidence points to high volatility as a stronger predictor of compliance problems under the Act than small firm size. Finally, we discuss alternate explanations for our findings and the potential for unintended consequences for shareholders.

LIN NAN, Carnegie Mellon University - David A. Tepper School of Business
Email: lynn_nan@yahoo.com

The Statement of Financial Accounting Standards No.133 (SFAS 133) allows firms to apply hedge accounting only to qualified hedges that pass effectiveness tests, and requires that firms evaluate the effectiveness of hedges in every quarter. Unqualified hedges and the ineffective portion of the hedges are required to be marked to market, and the unrealized gains/losses are to be recognized in earnings immediately. It appears that FASB tries to use SFAS 133 to restrain speculation while continuing to encourage effective hedges. This paper, however, shows that the early recognition of unqualified hedges may instead be in favor of motivating speculation. Even in the case where the policy favors motivating hedges, the shareholders' wealth is likely to be worse off. In addition, sometimes the new recognition policy prevents the firms from using financial derivatives, even through the firms used to use financial derivatives for hedging purpose only.

MICHAL BARZUZA, University of Virginia - School of Law
Email: mbarzuza@virginia.edu

This paper develops a model of signaling of private benefits of control and applies it to the decision to cross-list. It suggests that cross-listing signals that a manager or a controlling shareholder can not extract large amounts of private benefits.

This signaling effect creates opposite incentives for managers and controlling shareholders. While the opportunity to bond and signal limited extraction encourages managers to cross-list, it discourages controlling shareholders from cross-listing, since such a signal decreases the control premium they receive if they sell their control block.

The paper derives implications for the cross-listing market, the desirability of international regulation and the likelihood of international convergence of corporate law and structures.

Since this paper is the first to develop a signaling model of private benefits, it also has implications for other issues in corporate law and corporate finance such as the desirability of mandatory corporate law and dividend distribution.

ROB BAUER, University of Maastricht - Limburg Institute of Financial Economics (LIFE)
Email: R.BAUER@BERFIN.UNIMAAS.NL
PIET M.A. EICHHOLTZ, University of Maastricht - Limburg Institute of Financial Economics (LIFE)
Email: p.eichholtz@berfin.unimaas.nl
NILS KOK, University of Maastricht - Limburg Institute of Financial Economics (LIFE)
Email: N.Kok@finance.unimaas.nl

REITs offer a natural experiment in corporate governance due to the fact that they leave little free cash flow for management, which reduces agency problems. We exploit a unique and leading corporate governance database to test whether corporate governance matters for the performance of U.S. REITs. We document for a sample including governance ratings of more than 220 REITs that firm value is significantly related to firm-level governance for REITs with low payout ratios only. Repeating the analysis with the complete database that includes more than 5,000 companies, and a control sample of firms with high corporate real estate ratios, we find a strong and significantly positive relation between our governance index and several performance variables, indicating that the partial lack of a relation between governance and performance in the real estate sector might be explained by a REIT effect.

SANFORD M. JACOBY, University of California, Los Angeles
Email: sanford.jacoby@anderson.ucla.edu

This paper considers the association between financial development and labor-market outcomes such as risk and inequality. The relationship is not straightforward, however. It is mediated by politics at the national and corporate levels. Politics spurs financial development, which sets in motion countervailing efforts to restrain the effect of finance on inequality and risk. The empirical analysis relies on historical, comparative, and contemporary evidence. Emphasis is given to recent events in the United States: the political origins of contemporary financial development and attempts by organized labor and its allies to re-regulate finance and reshape corporate governance. [N.B. This version supersedes all previous versions.]

DIRK HEREMANS, Catholic University of Leuven (KUL) - Center for Economic Studies
Email: Dirk.Heremans@econ.kuleuven.ac.be

Corporate governance is not only a question of equity governance, but for banks specific debt governance issues are also involved. It is analysed how debt governance, and in particular the incentives and power of the parties in the banking firm to assume (excessive) risk are affected by different governance mechanisms and structures. Hence, approaching the question from a financial stability perspective, the conclusion is that compared to non-financial firms corporate governance models and the functioning of the board of directors should be designed differently for banks.

ASSAF HAMDANI, Hebrew University - Faculty of Law
Email: ahamdani@mscc.huji.ac.il
ALON KLEMENT, Interdisciplinary Center Herzliyah - Radzyner School of Law
Email: aklement@idc.ac.il

Criminal convictions of business entities can trigger their demise, as graphically illustrated by the unraveling of accounting firm Arthur Andersen. The threat of going out of business is commonly perceived as providing firms with powerful - perhaps even excessive - incentives to contain misconduct. This Essay, however, demonstrates that the corporate death penalty may undermine deterrence. Specifically, we show that in many cases harsh corporate penalties may lead to less monitoring for misconduct and undermine compliance incentives within professional firms. We also explore the conditions under which more lenient liability regimes - such as holding firms liable only for sufficiently pervasive misconduct - might enhance deterrence. Our analysis has implications not only for entity criminal liability but also for collective sanctions more generally. For example, the insight that draconian penalties might undermine deterrence in group settings sheds a new light on the wisdom of allowing law and accounting firms to organize as limited-liability entities.

GAURAV KUMAR, University of Arkansas at Little Rock
Email: gkumar@ualr.edu
DALE L. FLESHER, University of Mississippi - School of Accountancy
Email: acdlf@olemiss.edu
TONYA FLESHER, University of Mississippi - School of Accountancy
Email: actonya@olemiss.edu

Accounting fraud has been widely publicized in recent years, especially the large frauds perpetrated at U. S. companies such as Enron and WorldCom, but frauds are not country specific, and similar events have occurred in the past decade in many countries, including Italy and India. What is noticeable about the Italian Parmalat fraud and the Indian UTI fraud is their similarity to the Swedish/American fraud perpetrated for many years by Ivar Kreuger and uncovered in 1932. Although the Kreuger & Toll fraud was discovered following the suicide of Kreuger in March 1932, he, or at least his ideas about accounting and auditing, have been reborn in Italy and India. The Parmalat and UTI cases shared many similarities to that of Kreuger, particularly his view that audits and periodic reporting to shareholders were unnecessary. Whether talking about the Ivar Kreuger of 1932, the Indian UTI episode of the 1990s, or Parmalat of 2004, the story is the same; history repeats itself.

DON M. AUTORE, Florida State University
Email: dautore@cob.fsu.edu
TUNDE KOVACS, Northeastern University
Email: t.kovacs@neu.edu
VIVEK SHARMA, University of Michigan at Dearborn - School of Management
Email: vatsmala@umich.edu

We examine whether sell-side analyst recommendations reflect shareholder rights. Our rationale is that analysts should be influenced by external governance only if market participants do not efficiently price its value. We find that stronger shareholder rights are associated with more favorable recommendations. Further analysis reveals that analysts favor firms with strong shareholder rights only when strong rights appear to be warranted, but do not penalize firms for having strong rights when not needed. These findings occupy middle ground in the debate on the pricing efficiency of shareholder rights. Moreover, we find that firm value is positively associated with the strength of shareholder rights regardless of the expected external governance structure. The latter result is consistent with a "one-size-fits-all" interpretation, and implies that firms across the board should reduce their number of anti-takeover provisions.

KURT A. DESENDER, Autonomous University of Barcelona - Faculty of Economics and Business Studies
Email: kurt.desender@uab.es

Corporate governance failures and new legislation have emphasized the importance of enterprise risk management (ERM) in reducing agency costs and preventing fraudulent reporting. Despite the increased attention on ERM, little research has been done to explain why some organizations embrace ERM while others do not. The objective of this paper is to explore how the board composition is related to the degree of enterprise risk management implementation. Our main findings are that the position of the CEO in the board has an important influence on the level of ERM. We find that board independence alone does not induce enterprise risk management implementation. Only boards with a separation of CEO and chairman, tend to favour more elaborated ERM. Firms with independent board and separation of CEO and chairman show the highest level of ERM. One possible explanation for our results is that CEOs do not favour ERM implementation and are able to withstand pressure from the board when they are occupying the seat of chairman.