Documente Academic
Documente Profesional
Documente Cultură
Ming-Cheng Wu
Department of Business Education, National Changhua University of Education No. 1, Jin-De Road, Changhua 500, Taiwan, R.O.C. mcwu@cc.ncue.edu.tw
Hsin-Chiang Lin
Department of Business Education, National Changhua University of Education No. 1, Jin-De Road, Changhua 500, Taiwan, R.O.C. octopusdevilfish@msn.com
I-Cheng Lin
Department of Business Education, National Changhua University of Education No. 1, Jin-De Road, Changhua 500, Taiwan, R.O.C. finicl@yahoo.com.tw
Chun-Feng Lai
Department of Business Education, National Changhua University of Education No. 1, Jin-De Road, Changhua 500, Taiwan, R.O.C. m97322002@hotmail.com
ABSTRACT
The main purpose of this study is to examine the impact of the corporate governance mechanism on firm performance. The variables, employed in this study to measure firm performance, include return on assets, stock return and Tobins Q. The empirical results indicate that firm performance is in negative and significant relation to board size, CEO duality, stock pledge ratio and deviation between voting right and cash flow right. On the other hand, firm performance is in positive and significant relation to board independence and insider ownership. Keywords: board structure, ownership structure, firm performance
Field of ResearchFinance
I. INTRODUCTION
Since 2001, Enron Xerox, WorldCom had been caught of getting involved in accounting scandals, which leads to the credibility of corporate financial reports under suspicion, furthermore, shocking investors confidence. Consequently, corporate governance mechanism has been a crucial issue discussed again. Sarbanes-Oxley Act was enacted in 2002 to enhance corporate government mechanism which is viewed as the priority of financial revolution, in the expectation that governance mechanism may be reinforced, public confidence retrieved, accuracy and reliability of financial information assured. This research conducts empirical analysis to examine the effect of corporate governance mechanism upon firm performance among listed and over-the-counter firms in Taiwan. The ownership of the listed and OTC firms in Taiwan is most held by controlling shareholders; accordingly, this paper considers the degree of deviance of shareholders ownership as well. The purpose of this research is to examine the impact of corporate governance mechanism upon corporate performance.
a) Board Structure
Veliyath (1999) pinpoints that the board serves as a bridge between owners and managers; its duty is to protect shareholders interests. Specifically speaking, taking responsibility for managing and supervising, the board should monitor managers behaviors for shareholders interests, make important decisions, employ management team and superintend firms to obey the law. Jensen (1993) finds out that directors in a large board have diverse opinions and
consensus is difficult to reach, then the efficiency being lower, the situation could deteriorate if directors increaseLipton and Lorsch, 1992. Yermack (1996), Eisenberg, Sundgren and Wells (1998) and Singh and Davidson (2003) unveil that board size is negatively related to corporate performance. Nevertheless, Bacon (1973) holds an opposite opinion that larger board implies members with diverse background and viewpoints, which is helpful for the quality of decisions; additionally, a wide range of their interests may neutralize decisions. Also, Zahra and Pearce (1989) and Kiel and Nicholson (2003) reveal board size is positively related to corporate performance. A board includes internal and external directors. Fama and Jensen (1983) detect that internal directors, by virtue of their positions, possess much more information, are likely to collude with managers and make decisions against shareholders. By comparison, external directors in neutral position, acting as supervisor, are good for eliminating principal-agency problem. Beasley (1996) investigates the relation between board composition and financial scandals, revealing that the ratio of independent directors in the firms with no scandals is higher than the firms which have been caught manipulating financial reports. Bhagat and Black (2002) take the ratio of independent directors minus the ratio of inside directors as a proxy, and the result discloses that board independence, significantly and negatively, correlates with short-term performance, but board independence makes no difference in improving corporate performance. According to Agency Theory, when a chairman assume the role of CEO, namely acting as decision maker and supervisor at the same time, the function of the board to minimize agency cost could be weaken tremendously; in the end, corporate performance goes down.Jensen and Meckling, 1976Fama and Jensen, 1983 Patton and Baker, 1987Empirical studies by Daliy and Dalton (1993) and Dahya, Lonie and Power (1996) unveil that CEO duality could bring about negative effects for corporate performance. Nevertheless, according to stewardship theory, executives responsibility may neutralize self-interest behaviors derived from CEO duality, and they are even much more devoted to advance corporate performance. Boyd (1995) agrees to that CEO duality brings in positive effects for corporate performance.
b) Ownership Structure
Berle and Means (1932) set forth that ownership dispersion implies management is distinguished from ownership, which, as Jensen and Meckling (1976) emphasize, may contribute to agency problems between managers and shareholders or
shareholders and debtors. On the other hand, Shleifer and Vishny (1986) and Morck, Shleifer and Vishny (1988) detect the phenomenon of ownership concentration. La Porta et al. (1999) and Claessens et al. (2000) usher in the conception of ultimate controller; they define firm ownership as voting rights, unearthing that many controlling shareholders of listed firms predominate firms by means of pyramid structure and cross holding, which could result in central agency problem. Kao, Chiou and Chen (2004) reveal that firms in financial distress are closely related to high ratio of the shares pledged by directors, causing concern about the agency problem resulting from the pledge of corporation shares. Chiou, Hsiung and Kao (2002) indicate that, directors and supervisors could fund by the collateralized shares and further purchase more firm stocks to manipulate stock price or enhance their power. Directors and supervisors financial stress, because of the collateralized shares, is closely related to share price. Share price slumping, the value of the collateralized shares depreciates and even drops below the standard of the required margin; correspondingly, collateralizing shareholders will be requested to collateralize more shares, while debtors fail to afford more shares as collaterals, financial institutions as creditors will close the position of collateralized shares. As a result, collateralizing shareholders, making use of their position, may make a prey of small shareholders or embezzle company funds.
a) Board Size
Boards of directors may have a difficulty communicating with each other in a large size board, which causes great detriment to firm performance. Yermack (1996), Eisenberg et al. (1998) and Singh and Davidson (2003) prove that board size has a negative relation with firm performance. Based on the statement abovementioned, this paper proposes the hypotheses as follows. H1Board size is negatively related to firm performance.
b) Board Independence
As for the relation between board independence and firm performance, if outside directors are independent and have professional ability, they could be more objective to make decisions and monitor managers. Empirical research by Weisbach (1988),
Rosenstein and Wyatt (1997) and Huson et al. (2001) corroborate that the higher ratio of independent directors accounts for boards, the better firm performance could be. H2Board independence is negatively related to firm performance.
c) CEO Duality
As the chairman serves as the executive, playing roles of decision-maker and supervisor simultaneously, the board could lose its independence and monitoring power, consequencely performing a weak function as a bulwark against agency problems. Daliy and Dalton (1993), Dahya et al. (1996) attest to that CEO duality seems to deteriorate firm performance. In light of the statement abovementioned, this paper proposes the hypotheses as follows. H3CEO duality is negatively related to firm performance.
d) Insider Ownership
About firm performance, according to convergence of interest hypothesis, higher insider ownership could reconcile managers and outside shareholders interests, which would lessen agency problems. Empirical results by Kesner (1987), Oswald and Jahera (1991), Eng and Mak (2003) bear evidence of that insider ownership has a positive relation with firm performance. On the basis of the statement above, this paper proposes the hypotheses as follows. H4Insider ownership is negatively related to firm performance.
Claessen et al. (2002), and Cronqvist and Nilsson (2003) detect that when the deviation between controlling shareholders voting rights exceed cash flow rights is larger, they may have more incentives to misappropriate firm assets, which would not only damage small shareholders interests but also debase firm value. Based on the statement represented above, this paper proposes the hypotheses as follows. H6Deviation between voting right and cash flow right is negatively related to firm performance.
B. MODEL
According the hypotheses proposed above, this study constructs a regression model for carrying out empirical analysis. Model The relation between governance mechanism and firm performance
Performanceit = a0 + a1 Board sizeit + a2 Independentit + a3 Dualityit + a4 Insider ownershipit + a5 Pledgeit + a6 Control minus ownershipit + a7 Firm sizeit + a8 R & Dit + a9 Capital expenditureit + a10 Leverageit + it
where
Performanceit
is the return of assets, the return of stocks and Tobins Q of firm i in year
t
Board sizeit is the board size of firm i in year t
is a dummy variable for CEO duality of firm i in year t Insider ownershipit is the ratio of insider ownership of firm i in year t Pledgeit is stock pledge ratio of firm i in year t
Dualityit
is the deviation between voting right and cash flow right of firm
i in year t. is the size of firm i in year t R & Dit is the expenditure of research and development of firm i in year t Capital expenditureit is the capital expenditure of firm i in year t Leverageit is the leverage ratio of firm i in year t
Firm sizeit
C. Sampling
This study, excluding banking, finance and insurance industries, examines all the other listed and over-the-counter firms in Taiwan over the period from 2001 to 2008. Incomplete information disclosure and cross-sectional data are omitted.
D. Procedure
The characteristic of the sample is cross-sectional and of time series, therefore panel data model being employed to analyze data to eliminate the autocorrelation of variables in time series and heteroskedasticity of individuals in cross section. Panel data are of two regression models, fixed effect model and random effect model, respectively.
7130 7.451 7130 1.298 7130 0.624 7130 0.114 7130 0.313
-91.210 7.110 -94.279 -0.421 0.280 0.191 0.000 0.000 0.190 0.000 0.000 11.553 0.000 0.000 1.460 1.083 0.606 0.000 0.000 23.280 0.000 1.240 15.023 0.009 0.017 39.100
7130 25.984 13.959 7130 10.183 19.183 9.237 0.033 0.397 7130 15.187 1.310 7130 0.020 7130 0.067
Table 2
variable 1.Board size
3 -0.125 1 -0.056**
**
4 0.138
**
5 -0.077
**
6 0.117
**
7 -0.024
*
8 -0.030
*
10 -0.090
**
11 0.023
*
2.Independent 3.Duality 4.Insider ownership 5.Pledge 6.Control minus ownership 7.Firm size 8.R&D 9.Capital expenditure 10.Leverage 11.ROAt-1 12.ROAt-2
0.048**
0.049** 1
0.249** 0.104**
-0.045** -0.045**
-0.002 -0.034**
-0.207** -0.145** -0.158** 0.265** -0.014 0.053** 0.013 -0.009 -0.045** -0.045** -0.015 0.017 -0.037** 0.104** 0.110**
-0.214** 1 -0.018
0.018 1
0.099** -0.014 1
-0.018 -0.206**
Stock return (2) 34.2821*** ( 0.001 ) 12.0933*** ( 0.005 ) 2.5872 ( 0.610 ) 0.3103 ( 0.839 )
Board size
Independent
Duality
0.0081 ( 0.651 ) 0.0341 0.0041*** (0.000) ( 0.555 ) 0.0418 ( 0.276 ) 0.0023*** ( 0.000 ) 0.0028*** ( 0.005 ) 0.0771*** ( 0.000 ) 4.7590*** ( 0.000 ) 0.0087 ( 0.668 ) 0.0059*** ( 0.000 ) Industry Year 7130 0.218
0.1237 ( 0.149 ) 0.6346 ( 0.258 ) 23.8172 ( 0.306 ) 1.6343 ( 0.342 ) 0.2336*** ( 0.000 ) Industry Year 7130 0.204
R&D
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