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Godfred A. Bokpin, Zangina Isshaq, Francis Aboagye‐Otchere, (2011) "Ownership structure, corporate
governance and corporate liquidity policy: Evidence from the Ghana Stock Exchange", Journal of Financial
Economic Policy, Vol. 3 Issue: 3, pp.262-279, https://doi.org/10.1108/17576381111152236
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JFEP
3,3 Ownership structure, corporate
governance and corporate
liquidity policy
262
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Abstract
Purpose – The purpose of this paper is to examine the impact of ownership structure and corporate
governance on corporate liquidity policy from a developing country perspective, Ghana Stock
Exchange (GSE).
Design/methodology/approach – The authors adopt multiple regression analysis in estimating
the relationship between ownership structure, corporate governance and corporate liquidity policy as
well as the impact of corporate governance on insider ownership.
Findings – The authors find that foreign share ownership significantly predicts corporate cash
holding on the GSE. The empirical result also portrays positive and statistically significant
relationship between board size, financial leverage, firm size, profitability and corporate liquidity
holding, and a negative and statistically significant relationship between board composition and
corporate liquidity holding. The authors also document positive and statistically significant
relationship between the various industry classifications namely manufacturing, distribution and the
pharmaceutical industry and corporate cash holdings on the GSE but did not however find significant
relationship between corporate governance and insider ownership on the GSE. The authors found
positive relationship between Tobin’s Q and inside ownership.
Originality/value – The main value of this paper is to analyze the relationship between ownership
structure, corporate governance and corporate liquid policy from a developing country perspective.
Keywords Ownership structure, Corporate governance, Cash holdings, Ghana
Paper type Research paper
1. Introduction
Researchers have looked for a unifying theory of the firm from various angles.
Our paper would certainly be a drop in that ocean. However, we intend to extend our
knowledge of what that “black box” (a firm) is ( Jensen and Meckling, 1976 revised),
by providing evidence of the relationship between ownership structure, corporate
Journal of Financial Economic Policy governance and corporate liquidity policy from a developing country context. In the
Vol. 3 No. 3, 2011
pp. 262-279 ideal situation, investors provide capital to a firm and managers manage the firm in
q Emerald Group Publishing Limited the interest of the investors for a fee (Mensah et al., 2003). In this case, there is a
1757-6385
DOI 10.1108/17576381111152236 separation between the financing and the management, implying a separation between
ownership and control (Berle and Means, 1932). This therefore presents concerns for CG and corporate
shareholders. Managerial behavioral models suggests that there is an inherent liquidity
contradiction between the interest of managers and shareholders.
Also given that both principals (owners) and agents (managers) are utility
maximizers, the principal has to do a lot to keep the amount of divergence in interest at a
minimum (Jensen and Meckling, 1976). This entails the incurrence of monitoring costs
263
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widely referred to as agency costs. Corporate governance institutions thus, are geared
toward ensuring that this divergence is at the barest minimum. And even though
corporate governance structures are put in place by managers – from agitations of
shareholders anyway – the tab is picked by shareholders. Thus, corporate governance is
essentially an act of agency-relationship monitoring. According to Crutchley and
Hansen (1989), managers’ choice of stock ownership in the firm, the firm’s mixture of
outside debt and equity financing, and dividends are meant to reduce the costs of these
agency conflicts excess liquidity may be viewed as managerial perk and therefore may
be associated with managers’ stake in their firm (Papaioannou et al., 1992).
Jensen (1986) argues that when a firm’s managers have more cash than is needed to
fund the entire firm’s profitable investment projects (i.e. free cash flow), there is an
incentive for the managers to invest the excess cash in unprofitable projects. Myers and
Rajan (1998) postulate that greater asset liquidity gives owners control over managers
but greater liquidity as well gives managers the power to transforms assets in their
owners’ favour. The reasons for this paradox are that managers have implicit rights in
the liquidity of assets and altering asset liquidity would affect these implicit rights.
Thus, agency problems are an important determinant of corporate cash holding
(Dittmar et al., 2003) and to Yun (2008), the choice of corporate liquidity is also a channel
through which corporate governance works. But, Ginglinger and Saddour (2007) find
that firms with strong shareholder rights hold more cash, contrary to the predictions of
agency theory with differences partly due to the positive correlation that exists between
governance quality measures and the degree of financial constraint faced by the firms.
But cash holdings may serve commendable purposes, allowing the firm to seize
profitable investment opportunities as they arise (Keynes, 1936); or they may, on the
contrary, indicate agency problems (Jensen, 1986). We learn from agency theory that
liquidity (cash availability) has implications for managerial behaviour coupled with
other factors related to management incentives. However, management incentives that
include stock options introduces issues for the alignment of managerial and shareholder
interests. The question is which way does managerial ownership affect the managerial
disposition towards the utilization of cash resources? What does the nature of corporate
governance structures do to better align the interests of inside equity, outside equity and
debt capital in a firm, and shape corporate liquidity policy? The empirical evidence
observed in the literature is inconclusive and pertains to developed capital markets. But,
corporate governance has been gaining ground in emerging markets especially after the
Asian financial crisis. IMF/World Bank-led economic reforms, coupled with recent
financial scandals in the west, are now driving the surging interest in corporate
governance practices in several developing countries (Rabelo and Vasconcelos, 2002).
The calls for governance reforms in emerging markets is right because to Gibson (2003)
there are good reasons to think that the effectiveness of corporate governance might be
quite different in developed and emerging markets. But, empirically much has not been
done to ascertain the impact these governance reforms are having on corporate liquidity
JFEP policy given that cash is the most important assets to be wasted by corporate managers.
3,3 Corporate governance in emerging markets has not been studied as intensively as in
developed markets (Shleifer and Vishny, 1997; Gibson, 2003) and particularly as it
relates to corporate liquidity policy and the fact that there is almost no empirical
evidence directly comparing the quality of corporate governance in emerging markets
and developed markets (Chung and Kim, 1999).
264 Empirical evidence further suggests that foreign investors avoid investing in
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2. Literature review
The literature review considers the three thematic areas of the study. We review
empirical evidence on the relationship between ownership structure and corporate
liquidity policy followed by the relationship between corporate governance and
corporate liquidity policy and finally the relationship between corporate governance
and ownership structure.
constraining variables that limit managers ability to exploit corporate resources for their
own utility-maximizing objectives included the product and factor market conditions.
Indeed, Jensen and Meckling (1976) note that ownership structure is influenced by a
company’s industry. With respect to liquidity holdings, Papaioannou et al. (1992) found
a negative relationship with inside equity, which was found not be significant. Luo and
Hachiya (2005), however, found that insider ownership plays a significant role in
determining cash holdings. The relationship between managerial ownership and cash
holdings is qualified, in a synthesis of the evidence of Papaioannou et al. (1992) and Luo
and Hachiya (2005), by the observation of Ozkan and Ozkan (2002) of non-monotonic
relationship between managerial ownerships and cash holdings. The indication is
therefore that the relationship between managerial ownership and corporate cash
holding is not linear. It is not farfetched to argue that the relationship between corporate
cash holdings and inside ownership could be nonlinear. The intuition is that at a point of
lower managerial ownership interests, the wealth of management invested in the
company would be lower, and an opportunity and temptation would exist to waste cash
through accumulation of cash which would be value destroying. However, as
managerial interest grows, managers’ wealth invested in the company would be higher
and managers would have more at stake and would be motivated to preserve the value of
the firm through prudent application of cash reserves rather than stockpiling for easy
expenditure of cash.
Others mentioned include choice of control variables and the functional forms of models
used to established relationships. Using a structural model, Coles et al. (2005) conclude
that managerial ownership and proportion of outside directors on the board are
complements in production. The reasoning is that managerial ownership comes as part
of a package of incentives for managers, and such incentives are expected to motivate
performance. The monitoring role of outside directors complements the motivating
factors for managers to perform according the managerial contract provisions.
Coles et al. (2005) conclusion corroborates, in part, the empirical evidence of
Hermalin (2005) of a negative relationship between board composition and managerial
ownership because productivity parameters are correlated. However, this does not
resolve the question of the conclusions of a positive relationship by some researchers
and a negative relationship by others about the same relationship. Coles et al. (2005) in
their analysis of empirical data in the framework of the principal-agent theory find that
CEO ownership and board independence are determined by exogenous productivity
parameters and variation over time and firms, and could lead to a positive or negative
CEO ownership and board independence relationships. Thus, suggesting that the
relationship between managerial ownership and board independence is not linear.
3. Empirical methodology
Our approach to modeling the system of interest in this paper incorporates the
arguments of Demsetz (1983)[1], evidence from Demsetz and Lehn (1985) and Demsetz
and Villalonga (2001). The argument is that the ownership structure of a firm is an
outcome of the decisions of shareholders and trading in the firm’s shares on the market.
Decisions should be viewed from the point that existing shareholders make the
decision to go public and to issue more shares subsequently. Management might play
advisory role, but in essence any changes in ownership structure reflect the influence of
shareholders. Thus, ownership structure should be modeled as an endogenous
variable. However, the system within which Demsetz and Villalonga (2001) reexamine
the evidence on ownership structure involves performance and ownership structure
(insider ownership and ownership concentration). Their model captures the view that
firm performance influences ownership structure and ownership structure might also
be influenced by firm performance. Highly performing firms would attract investors in
the market, and owners of highly performing firms can go public, is intuitive.
In the current study, we are interested in liquidity management and its relationship
with ownership structure and corporate governance. Cash accumulation could attract
outsider investors on the market, which would change the ownership structure. This
means a likely causal relation running from liquidity to ownership structure. As argued
earlier, insider ownership, via agency conflicts, may influence cash accumulation.
Therefore, we estimated a system of equations using seemingly unrelated regression
techniques as oppose to the two-stage least squares used by Demsetz and Villalonga (2001):
LIQDit ¼ b 0 GOV it þ d 0 OWNS it þ f 0 CONTRLit þ 1it ð1Þ CG and corporate
INSOWN it ¼ a LIQDit þ b 0 GOV it þ l0 CONTRLit þ hit ð2Þ
liquidity
Where subscript i and t represent the firm and time, respectively. In this case, i represents
the cross-section dimension and t represents the time-series component.
LIQD is the dependent variable and measures corporate cash holding (natural 269
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0.6532. Overall, dividend payout registers an average value of 0.0656, growth in sales
records 4.4172, inside ownership registers 0.1292, average foreign shareholdings
records 0.2300, average board size over the period was 8.4532. There are more local
firms in our sample than foreign firms throughout the sample period (Appendix 4).
Whilst at the beginning of the sample period, there were seven foreign firms as against
eight local firms, the number of local firms increased to 12 through additional listings
on the GSE whilst the number of foreign firms increased marginally to five in 2002.
On the average foreign firms appetite to accumulate more cash is more than twice local
firms (average cash balance for foreign firms is 963.87 as against 413.19 for local firms;
amounts are in thousands of Ghana cedis) as presented in Table II, there is greater
variation in this variable for foreign firms as compared to local firms. Industry
dynamics and cash holdings reveals firms in the printing and paper hold more cash
followed by firms in the food and beverage industry (see Appendix 3 and E for the
industry classification, cash holdings and number of firms in each industry over the
sample period).
Foreign Local
Stat. CASH INSOWN (%) CASH INSOWN (%)
equations. The Appendix, however, provides the complete results of the system which
includes corollary equations for foreign share ownership and Tobin’s Q. Our Tobin’s Q
equation borrows from Demsetz and Villalonga (2001) with some exceptions.
We left market risk to the error term and proxied firm-specific risk with income
volatility, and advertising and research and development expenditure with sales
growth (Table III).
Foreign share ownership shows a positive coefficient and is statistically significant in the
liquidity equation. Our leverage variable also bears a positive and statistically significant
coefficient in the liquidity equation. Income volatility does not have a significant
coefficient in the equation even though it shows a negative coefficient, contrary
to expectation. The dummy variables are all statistically significant and show positive
coefficients in the liquidity equation. These suggest that the various industries in which a
firm operates has a likely contribution to cash accumulation.
4.2.2 Ownership structure. Tobin’s Q is found to have a positive and statistically
significant coefficient in the insider ownership equation. Also noteworthy in the
ownership equation is that the corporate governance variables – board size and board
composition – are both insignificant even though they show positive coefficients. Firm
size also bears a positive coefficient in the ownership structure equation even though it
is not statistically significant. Foreign share ownership shows a negative coefficient in
the inside ownership equation even though the coefficient is not statistically
significant. Leverage is statistically significant in the liquidity equation with a positive
coefficient. Income volatility is however, insignificant in the inside ownership equation
even though it shows a negative coefficient. Of the industry dummies, only the mining
sector is statistically significant at 10 percent and positive.
corporate governance on inside ownership. Those that find a positive relationship Ryan
and Wiggins (2004) and Davila and Penalva (2004) and those who find a negative
association Denis and Sarin (1999), have both not been supported from our results. Our
results can be seen as a confirmation of the observations of Coles et al. (2005) that the
relationship between inside ownership and board independence might be nonlinear,
as a linear modeling approach has been used in the study. In the Ghanaian context,
the evidence indicates that corporate governance does not influence inside ownership.
One interpretation of this result is that owning part of the stock of the company in Ghana
is not related to corporate governance initiatives to align managerial interest with
shareholders. This interpretation reflects the positive result on Tobin’s Q in the insider
ownership equation. Firms listed on the GSE are among the country’s best performing
and managed where the company is not a subsidiary of a foreign company. Perhaps, this
fact overshadows what effect boards can have on managers to take up part of the
company’s stock.
Our results on the relationship between managerial ownership and increase in cash
holdings mirror that of Papaioannou et al. (1992). We confirm their predicted negative
relationship, but like their findings, the relationship is not significant. Luo and Hachiya
(2005) results is, thus, unconfirmed in the Ghanaian context. Our findings could also be
explained by the observation of Jensen and Meckling that ownership structure is
influenced by a company’s industry. The industry dummies were present in the liquidity
equation and even though industry influence on ownership structure is only found true
in the case of mining in the inside ownership equation, the point can be made that such
influences could curtail managerial misuse of liquidity to the point of insignificance.
We would like to qualify this conclusion bearing in mind the non-monotonic relationship
between inside ownership and cash holdings observed by Ozkan and Ozkan (2002).
Another interpretation of the results is that the financial environment restraints
liquidity misuse as part of the actions of managers in the Ghanaian context because
firms can only raise funds from banks, which has been very expensive over the past two
decades. Because all the industry dummies are significant and positive in the liquidity
equation, the foregoing interpretation is plausible. Also, there have been fewer than five
seasoned equity offerings on the stock market counting rights issues, which confirms
environmental constraints on management cash misuse of liquid balances interpretation
of the results. The theoretical implications is that managerial abuse of slack resources –
perhaps through pet projects, empire-building ambitions – could be curtailed in an
environment where raising funds is expensive. This is symptomatic of pecking-order
theory of capital structure choice. We believe the evidence does not explain pecking
order conjectures but rather indicates that where there are fewer opportunities to invest
excess liquidity, managers just accumulate them, perhaps, to earn interest at the bank
and to spend on board remuneration as alluded to earlier.
The significance of the foreign share ownership variable in the liquidity equation
confirms the findings of Mangena and Tauringana (2007) who found positive
JFEP relationship between liquidity and foreign share ownership. The negative relationship
3,3 insider ownership and foreign share ownership is also note worthy. It shows that
foreign investors would avoid firms with higher levels of insider ownership. Obviously,
a foreign investor would be wary of a firm far away from home where the managers
own a greater number of the shares and voting rights because without strong investor
rights protection in the domestic country, the foreign investment’s risk level would be a
274 few notches up.
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Two implications for corporate governance in Ghana are worthy of note. First,
corporate governance mechanisms in Ghana have no effect on alignment of
shareholders’ and managers interest. Second, corporate governance systems mighty be
costly for the listed firms. The fact that Ghanaian environment is yet to be faced with
debate over management and directors’ remuneration is a persuasive anecdote, a point
for further consideration. A theoretical implication for the literature is that the financial
and economic systems are likely constraining factors in managerial misuse or
otherwise of slack cash balances.
Note
1. We are thankful to an anonymous referee who point this out to us.
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Appendix 2
Appendix 3
2001 7 8 15
279
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2002 5 12 17
2003 4 17 21
2004 4 18 22
2005 5 17 22 Table AIV.
2006 6 17 23 Sample of foreign
2007 6 15 21 and locals
Appendix 5
Year
Industry 2001 2002 2003 2004 2005 2006 2007
Agric 0 1 1 1 1 1 1
Distributive 4 4 4 4 4 4 4
Food and beverage 4 4 4 4 4 4 4
ICT 0 0 1 2 2 2 2
Manufacturing 4 5 5 5 5 5 5
Mining 1 1 1 1 1 1 1
Pharma 1 1 2 3 3 4 2 Table AV.
Printing 1 1 1 2 2 2 2 Industry classification
Total 15 17 19 22 22 23 21 and number of firms
Corresponding author
Godfred A. Bokpin can be contacted at: gabokpin@ug.edu.gh