Evasive Shareholder Meetings and Corporate Fraud

We examine how the strategic scheduling of AGMs to evade shareholders is related to the likelihood of committing corporate fraud.

“Do Korean Companies Conspire to Avoid Their Shareholders?”

- WSJ, March 13, 2014

Globally, the presence and the economic cost of corporate fraud is significant. Dyck et al. (2017) find that one-eighth of publicly traded firms in the United States are engaged in fraud, undermining these firms’ economic value by 22%. A large body of literature indicates that incidences of corporate fraud are associated with corporate governance factors, including composition of the audit committee (Beasley, 1996; Persons, 2005; Uzun et al., 2004) and audit committee meetings (Farber, 2005), CEO connectedness (Khanna et al., 2015), and ownership structures/board characteristics (Agarwal and Chadha, 2005; Chen et al., 2006). Despite a considerable body of research on the influence of corporate governance on fraud, detailed evidence that links evasive shareholder meetings and fraud is missing from the literature. Our research explores how evasive scheduling by managers is related to the likelihood of corporate fraud.

We measure the tendency of firms to evasively schedule their annual general meetings (AGMs) by holding them on certain popular dates—a behavior we refer to as clustering—so that managers can evade shareholders and any potential tension between shareholders and management that may arise in the AGM. Clustering can make it physically impossible for individual shareholders to attend all meetings, while making it difficult for institutional shareholders with limited human resources to fully and effectively participate.

The phenomenon of clustering has recently attracted attention in Asian countries. The Institutional Shareholder Services reports that, in 2011, AGMs were most clustered on three popular dates in Korea (69%), Japan (55%), Taiwan (47%), and Singapore (37%) based on the 2011 fiscal year. Although evasive scheduling practices exist globally, we focus on the extreme case of clustering in South Korea, where more than three-quarters of all public firms in sample years have scheduled their annual meetings on one of the three most popular dates.

Using a sample of 7,054 publicly listed firm-year observations on the Korea Composite Stock Price Index (KOSPI) or Korea Securities Dealers Automated Quotations (KOSDAQ) markets from 2009 to 2014, we observe that a sudden change in corporate policy toward clustering is positively correlated with the frequency of corporate fraud filings. Specifically, firms that had never held AGMs on clustering dates in previous years, but then changed to hold an AGM on one of the clustering dates were more likely to face a corporate fraud investigation filing in that year. For example, clustering firms have, on average, 26.7% higher corporate fraud cases than non-clustering firms. A similar pattern is also found for firms that changed their AGM schedule either from non-clustering to clustering dates or from clustering to non-clustering dates.

Globally, the presence and the economic cost of corporate fraud is significant. Dyck et al. (2017) find that one-eighth of publicly traded firms in the United States are engaged in fraud, undermining these firms’ economic value by 22%. A large body of literature indicates that incidences of corporate fraud are associated with corporate governance factors, including composition of the audit committee (Beasley, 1996; Persons, 2005; Uzun et al., 2004) and audit committee meetings (Farber, 2005), CEO connectedness (Khanna et al., 2015), and ownership structures/board characteristics (Agarwal and Chadha, 2005; Chen et al., 2006). Despite a considerable body of research on the influence of corporate governance on fraud, detailed evidence that links evasive shareholder meetings and fraud is missing from the literature. Our research explores how evasive scheduling by managers is related to the likelihood of corporate fraud.

We measure the tendency of firms to evasively schedule their annual general meetings (AGMs) by holding them on certain popular dates—a behavior we refer to as clustering—so that managers can evade shareholders and any potential tension between shareholders and management that may arise in the AGM. Clustering can make it physically impossible for individual shareholders to attend all meetings while making it difficult for institutional shareholders with limited human resources to fully and effectively participate.

The phenomenon of clustering has recently attracted attention in Asian countries. The Institutional Shareholder Services reports that, in 2011, AGMs were mostly clustered on three popular dates in Korea (69%), Japan (55%), Taiwan (47%), and Singapore (37%) based on the 2011 fiscal year. Although evasive scheduling practices exist globally, we focus on the extreme case of clustering in South Korea, where more than three-quarters of all public firms in sample years have scheduled their annual meetings on one of the three most popular dates.

Using a sample of 7,054 publicly listed firm-year observations on the Korea Composite Stock Price Index (KOSPI) or Korea Securities Dealers Automated Quotations (KOSDAQ) markets from 2009 to 2014, we observe that a sudden change in corporate policy toward clustering is positively correlated with the frequency of corporate fraud filings. Specifically, firms that had never held AGMs on clustering dates in previous years, but then changed to hold an AGM on one of the clustering dates were more likely to face a corporate fraud investigation filing in that year. For example, clustering firms have, on average, 26.7% higher corporate fraud cases than non-clustering firms. A similar pattern is also found for firms that changed their AGM schedule either from non-clustering to clustering dates or from clustering to non-clustering dates.