Examination of NZ Finance Company Failures: The Role of Corporate Governance

Wilson, William R.; Rose, Lawrence C.; Pinfold, John

doi:10.2139/ssrn.1536874

Cited by 5 publications

(9 citation statements)

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“…A review of New Zealand’s legislative environment is important when attempting to understand the causes and effects of the collapse of financial companies. In this country, the legal environment for depositors and financial companies is considered weaker than in the developed world (Wilson et al , 2010). Wilson et al .…”

Section: Regulatory Environment For Financial Institutesmentioning

confidence: 99%

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Related party transactions and finance company failure: New Zealand evidence

Bhuiyan

Roudaki

2018

PAR

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Purpose This paper aims to examine the existence of related party transactions (RPTs) in failed financial companies in New Zealand when firms have interlocking directors on the board. We also examine the role of auditors in the review of RPTs. We anticipate that inter-company director relationships promote RPTs, while reputable large auditors (i.e. Big4) restrict the practice. Design/methodology/approach This study uses multivariate analysis to examine the determinants of RPTs. We use an unique, hand-collected database of New Zealand finance companies all of which collapsed during the years 2006-2011. Findings Using a sample of 65 firms (including 38 failed finance firms) and 219 firm-year observations, we found that almost half of the failed finance firms were engaged in RPTs. For the failed firms, those that were engaged in RPTs were mostly represented by interlocking directors and were audited by non-Big4 auditors, implying lower monitoring quality may facilitate RPTs. Using a sub-sample, we also found evidence that firms engaged in RPTs were later convicted of questionable accounting and disclosure practices. Practical implications This research is beneficial to regulators and audit professionals in understanding the potential for adverse outcomes associated with interlocking directors and undisclosed RPTs. While interlocking directors could enrich the external connections of a firm which might facilitate capital resourcing, this study suggests regulators might encourage firms to disclose RPTs when the firm has higher interlocked directors. Originality/value This study is the first to examine the association between RPTs and interlocking directors using a sample of failed finance companies. RPTs and lack of disclosure were widely attributed with being the determinants of corporate failure in the finance sector. However, failed finance firms remain widely under-researched because of a lack of available data. This study circumvent this limitation by using print media and business news portals to collate information on RPTs and interlocking directors. While prior research indicates that weak corporate governance leads to poor accounting practice, using the interlocking board as a proxy for weak corporate governance, this study is the first to substantiate the adverse effect of interlocking boards and undisclosed RPTs with corporate failure.

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Section: Regulatory Environment For Financial Institutesmentioning

confidence: 99%

“…In this country, the legal environment for depositors and financial companies is considered weaker than in the developed world (Wilson et al , 2010). Wilson et al . (2010) describe New Zealand’s legal system regarding Non-Bank Deposit Takers (NBDT) as retarded and unclear.…”

Section: Regulatory Environment For Financial Institutesmentioning

confidence: 99%

Related party transactions and finance company failure: New Zealand evidence

Bhuiyan

Roudaki

2018

PAR

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“…Finance companies play a significant role in the New Zealand economy, providing much of the funding for consumer credit, small businesses and development projects (Wilson et al ., ). Funds generally come from the general public, in the form of fixed‐term deposits for terms up to 3 years.…”

Section: Introductionmentioning

confidence: 97%

“…An alternative view is presented by Wilson et al . (, p. 3), who argue that the collapse of five finance companies in the third quarter of 2007 induced a wave of withdrawals (at the maturity dates of their deposits). Some companies were unable to fully accommodate this outflow, because their asset duration exceeded their liability duration and because many of their assets were illiquid, which pushed them into default.…”

Section: Introductionmentioning

confidence: 99%

“…The final question concerns the extent and implications of information asymmetry between depositors and companies. Some observers have argued that the asymmetry was very significant and arose from poor levels of disclosure and complex firm structures that obscured related‐party transactions (Wilson et al ., , pp. 13–14; Commerce Committee, , pp.…”

Section: Introductionmentioning

confidence: 99%

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New Zealand finance companies and risk premiums

Lally

Prasad

2013

Account Finance

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This article uses the recent implosion of the finance company sector in New Zealand to examine a number of questions. In the period between the upsurge in the default rate in 2006 and the implementation of a Government Guarantee Scheme in October 2008, we find that the debt risk premiums within the deposit rates of these institutions were grossly inadequate to compensate for default risk, that depositors continued to make significant new deposits even into firms that failed shortly afterwards and that the failure of the companies to increase the risk premiums was likely out of concern that this would aggravate perceptions of default risk.

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Corporate governance structures and firm performance in large agriculture companies in New Zealand

Roudaki

2018

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Purpose This study aims to explore the role of corporate governance (CG) characteristics on the financial performance of large agricultural companies in New Zealand. External auditor remuneration and board characteristics, such as board ownership, board compensation, board independence and board gender diversity, are addressed in the context of New Zealand’s agricultural companies by applying agency theory. Design/methodology/approach This paper uses a balanced panel data generalised least square regression analysis on 80 firm-years of observations over the period from 2012 to 2015. Findings Empirical analysis revealed that external auditors’ remuneration and board characteristics, such as board compensation and board independence, except for board ownership and board gender diversity, held no association with the agricultural companies’ performance. While board ownership and board gender diversity were negatively, but significantly, associated with firm performance, these results were pronounced in the listed agricultural companies rather than in the non-listed companies. Research limitations/implications This study encountered limitations commonly associated with the majority of industry-specific studies, i.e. small sample size and lack of published financial information from databases. Therefore, for generalisation, these limitations were considered relevant. Practical implications The results of this research project are beneficial for authorities and agricultural company directors in implementing CG principles and guidelines to empower such companies in international competition. Encouraging agricultural companies to maintain a high level of transparency in financial reporting is of central interest for the government’s economic development, and stock market investors achieve a high level of transparency in non-financial disclosures, the chief objective of this study. Finally, the results of this paper may encourage auditors to scrutinise CG disclosures by agricultural companies in more detail, looking for undisclosed information. Social implications The results of this paper may encourage managerial transparency by providing appropriate disclosures for the public benefit. Investors may benefit from the disclosure provided in their economic decision-making and the public may expand on the information disclosed in facilitating development through exports, expansion of foreign investments and the indigenous economy. Originality/value The findings contribute to the literature by providing novel and original insights into using a sample of listed and non-listed agricultural companies to extend the current understanding of the governance-performance nexus.

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Examination of NZ Finance Company Failures: The Role of Corporate Governance

Cited by 5 publications

References 0 publications

Related party transactions and finance company failure: New Zealand evidence

Related party transactions and finance company failure: New Zealand evidence

New Zealand finance companies and risk premiums

Corporate governance structures and firm performance in large agriculture companies in New Zealand

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