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Three essays are comprised in this dissertation to examine how institution and regulation frameworks affect the quality of financial reporting by banks. The empirical investigation on whether some governance mechanisms provide incentives for banks to report high quality financial information can have policy implications regarding bank regulation. Financial reporting quality is measured either by the level of earnings management or the extent of reporting conservatism. Using these two types of proxies for financial reporting quality, we examine whether reporting quality is affected by the legal protection on investors, bank supervision/regulation practices, or securities market governance mechanisms. In the first essay, we examine international differences in bank earnings management around the world. Following Leuz et al. (2003), we argue that bank earnings management is closely linked to private benefits of insiders. As a result, bank earnings management should be negatively related to institutional factors such as legal protection on investors and bank supervision policies that encourage market discipline on banks. Consistent with this prediction, we provide evidence that earnings management is less pervasive for banks in countries where investors are better protected and where supervision policies strongly encourage private-sector monitoring on banks. We also show that the legal protection mechanisms have stronger effects on curbing activities of earnings discretion, but bank supervision policies that encourage private-sector monitoring are better at limiting income smoothing activities. Our results also suggest that stringent capital requirement or strong government supervisions are less effective in reducing earnings activities of banks. In the second essay, we document that banks, especially those that are publicly traded, are conservative in their financial reporting. In particular, banks are conservative in reporting earnings changes and they incorporate more loan loss provisions when their operating cash flows decrease or when the amount of their problem loans increases. Banks also charge off more problem loans when their loan loss provisions increase. Our cross-country comparison shows that conservative financial reporting is more pronounced in countries where supervisors are empowered to take adequate actions against banks or where bank supervisory policies to encourage private-sector monitoring are more prevalent than in countries where there is less supervision or where there is less private-sector monitoring. In the third essay, we further investigate whether securities market governance explain the international differences of reporting conservatism across listing status of banks. Our results indicate that, after controlling for banking industry regulations, securities market governance has incremental effects on the reporting conservatism by public banks. The conservative reporting by public banks is stronger in countries where securities regulators are more empowered to intervene in banks for violations to securities laws. Furthermore, the stronger conservatism for public banks relative to private banks is widespread in countries with more developed bond market. The evidence suggests that public banks practice more conservative reporting than their private counterparts when debt contracting mechanisms function well.

This study consisted of two distinct research phases, performed within the context of the South African Council for Science and Industrial Research (and its current and potential research alliances). The purpose of the study was to develop a decision making model that would enable strategists at publicly financed research and development organisations to analyse and predict governance mode decisions, as well as select optimal governance mode structures (ranging from quasi-market structures, such as once-off contracts, to quasi-hierarchy structures, such as research joint ventures) for research alliances. During the qualitative first phase, the study aimed to identify impact domains within South Africa’s new Bayh-Dole-like Intellectual Property Rights legislative framework that consists of the Intellectual Property Rights from Publicly Financed Research and Development Act, as well as the Technology Innovation Agency Act, which could potentially influence research alliances (based on the Transactional Cost Economics, Resource-based View and Real Options Approach perspectives) with publicly financed research and development organisations. This was followed by the quantitative second phase, which attempted to verify the validity of a value-mediated governance mode model that included the highest ranked impact domains identified during the first phase as formative indicators for the perceived Intellectual Property Rights regime strength uncertainty factor. A qualitative online survey amongst senior managers at the Council for Science and Industrial Research, followed by Theme Extraction combined with Constant Comparative Method analysis, as well as a weighted frequency analysis, constituted the research methodology employed during the first phase’s identification and ranking of impact domains within the South African legislative framework. This phase demonstrated that the highest ranked impact domains (primarily driven by the Transactional Cost Economics perspective) included the choice of Intellectual Property Rights ownership, state walk-in rights on undeclared Intellectual Property, and benefit-sharing policies for the creators of Intellectual Property. The second phase consisted of a quantitative online survey, distributed amongst current and potential research alliance partners of the Council for Science and Industrial Research, followed by Structural Equation Modelling of a value-mediated governance model that included, amongst others, the perceived Intellectual Property Rights regime strength as an uncertainty factor. This phase revealed not only that the impact domains identified during the first phase could be used as formative indicators of the perceived Intellectual Property Rights regime strength, but also that stronger perceived regimes are positively related to the preference for quasi-hierarchy research alliance governance modes. Furthermore, it established that the expected value of a research alliance, which was shown to be positively influenced by the strength of the perceived Intellectual Property Rights regime, acted as a mediating factor on the relationship between the perceived Intellectual Property Rights regime strength and the preferred research alliance governance mode. Keywords: Bayh-Dole, Formative Indicators, Intellectual Property Rights, Research Alliances, Real Options Approach, Resource-based View, Quasi-Market Governance Modes, Quasi- Hierarchy Governance Modes, Structural Equation Modelling, Transactional Cost Economics, Value-mediated Governance Model. Copyright / Dissertation (MBA)--University of Pretoria, 2012. / Gordon Institute of Business Science (GIBS) / unrestricted