Market enforcement under different legal regimes: a comparison of France and Canada

For the purpose of this paper, internal governance mechanisms refer to firm-level governance features (e.g., board independence). By contrast, external governance mechanisms refer to country-level governance features (e.g., legal origin). Hence, internal (external) or firm-(country-) level governance are used interchangeably.

“The score ranges from 0.1 for companies that disclose a minimum amount of ESG data to 100 for those that disclose every data point collected by Bloomberg. Each data point is weighted in terms of importance, with data such as Greenhouse Gas Emissions carrying greater weight than other disclosures. The score is also tailored to different industry sectors. In this way, each company is only evaluated in terms of the data that is relevant to its industry sector” (Bloomberg variable description).

The active involvement of hedge funds (both Canadian and American) in Canadian stock markets injects liquidity onto them but also further enhances the monitoring of firms’ management as well as the conveyance of investors’ expectations to managers. The advent of proxy fights and of voluntary Say on Pay in Canada do suggest that there is ongoing market monitoring and enforcement going on. One of the paper’s authors is a member of the board of directors of a large institutional investor and a trustee of a sizable pension fund, both of which interact with hedge funds and other types of portfolio managers. He confirms that such investors provide liquidity to stock markets, rely on various types of financial instruments to implement their strategies (equities, bonds, options, futures) and actively monitor firms’ management.

In terms of economic significance, absolute values of abnormal returns are on average 0.085 in Canada and 0.125 in France (computed based on CAPM) while price volatility is 25% in Canada versus 27% in France. This suggests more information asymmetry and higher transaction costs in France in comparison to Canada.

We also present our results using a graphical representation with directional arrows. The arrows represent what we consider to be a logical relation between variables that is consistent with our arguments. However, we do not claim that such relations are causal.

In mediation and conditional process analysis under PROCESS, many important statistics useful for testing hypotheses, such as conditional indirect effects and the index of moderated mediation, require the combination of parameter estimates across two or more equations in the model. Furthermore, inference about these statistics is based on bootstrapping methods, given that many of these statistics have irregular sampling distributions, making inference using ordinary methods problematic (Hayes 2013; Shrout and Bolger 2002).

According to Hayes (2013, p. 80), “for models that are based entirely on observed variables investigators can rest assured that it generally makes no difference which is used [SEM or PROCESS], as the results will be substantively identical. The choice, in that case, is inconsequential”.

In Canada, almost all sanctions are imposed on so-called “penny stock” firms, i.e., firms with limited activities that trade on the Venture exchange (exchange for micro capitalization firms) or on investment advisers. During the period under consideration, no sanction was found to have been imposed on firms listed on the main exchange.

Eight firms, mostly banks, exhibit large positive abnormal returns surrounding the sanction date.

Consistent with prior research, we consider Canada to be a country having their legal origin in the Common Law. The Canadian province of Quebec has some influence from the French Civil Code but the main stock exchange is located in Toronto (Ontario), which follows common law and the Ontario Securities Commission effectively oversees the vast majority of Canadian listed entities.