Corporate ownership and corporate performance and the moderate effect of board diversity : evidence from listed corporates in China, Hong Kong and Taiwan

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Corporate ownership and corporate performance and the moderate effect of board diversity: evidence from listed corporates in China, Hong Kong and Taiwan

MSc Business Administration International Management

Supervisor: Dr. Ilir Haxhi Second reader: drs. Erik Dirksen

Qilin Xu 6083420 23-06-2016

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Statement of originality

This document is written by Qilin Xu who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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Abstract

In this study, I investigate the relation between corporate ownership and corporate performance with the board composition as a moderator in this study. The study results of the analysis performed on a sample of 400 listed companies from 3 Asian countries: China, Hong Kong and Taiwan, show that board diversity has significant negative impact on the relation between corporate ownership and corporate performance. The findings in this study also confirm a significant positive impact of a greater portion of females on a board on corporate performance. There are no evidences in this study to support the estimations of a significant relation between corporate ownership and its performance. In addition, there is no evidence suggesting that corporate ownership has a significant relation with board diversity. In practice the findings suggest that is very necessary to devote special attention to the numbers of board directors, it is not always the more board members the better for a corporation. In addition, a gender balance board indeed positively influences corporate performance. This study fills the gap in the existing literature by adding the board diversity as a moderator in the relation between corporate ownership and corporate performance. This study also gives more flavors to the Asian corporate governance literature by using data from three main Asian economics.

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1. Introduction

Literatures about corporate finance performance often focus on the relation between firm performance and managerial incentives. Important early contributions include Morck, Shleifer, and Vishny (1988) which documents a non-monotonic relation between Tobin’s Q and managerial stock ownership, and McConnell and Servaes (1990), which reports an ‘‘inverted-U’’ or ‘‘hump-shaped’’ relation between Q and managerial ownership (Coles,

Lemmon, Meschke, 2012). The finance performance of a corporate is often linked to the decision made by its management team. In the corporate management practice, employees or top management team are often given shares of a company in order to motivate employee’s performance and boost the commercial performance of a company. For example, CEOs are often given stock shares as part of their payment bucket to stimulate the motivation of CEO performance to achieve corporate financial performance. If such a practice is generalized to all corporate, it can be that a corporate with private ownership will perform better than a state-owned corporate because of the extrinsic motivation effect of ownership of the corporate. In the past decade, there have been numerous corporate scandals which triggered quite more attention on the research of the relation between corporate ownership and corporate performance. Yet, the research results are mixed: There has never been solid evidence on the relation between corporate structure and corporate performance.

The mixed results of the existing studies about the relation between corporate ownership and corporate performance are due to the existing researches investigate the ownership-performance relation by using different data, various measures of performance and ownership structure, and different empirical methods. Berle and Means (1932) show that the ownership structure of US listed companies was already dispersed at the beginning of the twentieth century. Berle and Means (1932) argue that a dispersed corporate ownership

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structure is lacking powerful shareholders, this kind of corporate face a principal-agent problem, and managers can gain benefit or pursue their own goals at the costs of shareholders. In the past few years, there is also empirical evidence showing that listed companies located in non-Anglo-American countries are usually controlled by large shareholders (Aslan & Kumar, 2014; Kumar & Zattoni, 2014). In the large shareholders ownership case, controlling shareholders can solve or address opportunistic behavior by top management, but can behave at the cost of minority shareholders. Such consequence is another kind of issue in the large shareholder case. Because different kinds of corporate ownership can have different problem, corporate governance literature often believe in a U-shaped relation between ownership concentration and firm performance ( For instance, it hypothesizes that management expropriate the minority shareholders in a low concentration levels of corporate ownership and there is an effective monitoring system in corporate governance for high concentration levels of corporate ownership (Hu & Izumida, 2008).

Differences in corporate governance across countries appear to be the result of variation in corporate organizational structure, particularly the ownership patterns and the composition of boards of directors (Li, 1994). Paul M. Guest (2008) examines the trends and determinants of board structure for a large sample of UK firms from 1981 to 2002. They find that board structure determinants differ in predictable ways across different institutional settings. They also find that firms choose a board structures most appropriate for their own needs instead of complying with the regulation. They find that the ability to influence board structures even for the well performing CEOs is weak in the UK. In the Asian countries, quite a few studys have been published on this topic. Aboody et al. (2012) find that employee stock options provide sufficiently large incentive effects to favorably affect firms’ performance, but primarily so at the executive level. In their study, they find that re-pricings of executive stock options are associated with improvement in performance. However, Yermack (1995)

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concludes in his study that giving shares to CEO does not always have a robust effect on corporate performance. Corporate performance is subject to the qualification of the management teams. In the corporate ownership level of research, Liu et al. (2005) find significant evidence from the Chinese data that the class of shareholdings does matter for company performance. They also find that the least inefficient shareholding class is the holding companies that are wholly listed and have focused industrial business through the state indirect control of the downstream public corporate.

In 2013, Liu et al. documented a positive and significant relation between board gender diversity and firm performance. Female executive directors have a stronger positive effect on firm performance than female independent directors. Liu et al. (2013) also find that boards with three or more female directors have a stronger impact on firm performance than boards with two or fewer female directors. Lee (2011) et al. find that governance related to ownership structure and divergence between cash flow rights and control rights are important for a firm's market valuation. In particular, information about shareholdings of board directors and supervisors, shareholdings of controlling Individual and voting rights are influential for firm value. All the existing literature only researches the direct relation between board structure and corporate performance or corporate ownership and corporate performance. There is a gap in the existing literature: none of the studies study corporate board diversity as moderator in the relation between corporate ownership and corporate performance. The conflicting research results leads to the questions of this study:

What is the true relation between corporate ownership and corporate performance?

Does ownership have a positive, negative or no effect on corporate performance?

What is the effect of corporate board diversity in the relation between corporate ownership and corporate performance?

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This study investigates two interrelated themes. First, I specify the corporate ownership structure and corporate performance relation. Then I assume the corporate ownership has an impact of corporate board diversity and the board diversity moderate the relation between corporate ownership and corporate performance.

2. Literature review

In recent years, firms’ corporate governance structure and governance philosophy attract high amount of attention in the academic study field. The literature presents a kind of mixed conclusion on the relation between board structure and firm performance and on the corporate ownership and corporate performance. In the past, studies focused on the relation between board independency and firm performance indicate either non-significant or negative results. Despite the large number of previous studies, there is still debate on ownership concentration and firm performance. There is not a solid conclusion about which kind of corporate ownership is best for corporate performance. For example, a recent study shows that governance mechanisms (including ownership structure) can have an indirect effect on performance through investments in R&D (Zhang, Chen, & Feng, 2014). The identity of large shareholders plays a relevant role in corporate governance studies. Previous studies have shown that large shareholders of listed companies may vary across countries; and, in a large majority of cases, these are wealthy entrepreneurial families or the State (e.g., La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 1998; Zattoni & Judge, 2012). If ownership concentration determines the power of shareholders vs top managers, the identity of shareholders influences their economic interests and decision making. Governance scholars have hypothesized that institutional investors are the most efficient type of shareholders because they are intrinsically motivated to maximize shareholder value, whereas other types of shareholders may be tempted to look for personal benefits at the expense of the corporate value (Thomsen & Pedersen, 2000). More recent studies show that the relation between

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ownership structure and firm performance is complex and depends on context. For example, Individual business groups can create internal capital markets whose benefits may outperform the potential risks for minority shareholders (Jin & Park, 2015).

In this thesis, corporate ownership and corporate performance and the moderate effect of board diversity are studied by using data in three Asian countries: China, Hong Kong and Taiwan.

2.1 Asian corporate governance

As an emerging market, Asia’s rise in economic performance and economic power is remarkable. Asian corporates have attracted attention in the research field. The performance of the Asian firms has been studied. There are some positive effects in the relation between corporate governance mechanisms and firm value in some literature. For example, Chen et al (2006) find that board independence can reduce fraud for Chinese firms. The finding of such research is important for the corporates’ management because corporate needs to survive and grow in general. The more the management team understands the importance and the relation between corporate governance structure and performance, the more attention will be given to the design and construct of a corporate’s executive board. Lei et al. (2012) found that although incentive alignment would improve corporate governance, a more independently structured board of directors may be most valuable to investors in markets with concentrated ownership.

2.2 Corporate ownership in China, Hong Kong, Taiwan

Corporate ownership has evolved over the centuries to the point where, today, there are several major types in every country. The ownership structure of Hong Kong listed corporates is most commonly individual-based and concentrated ownership. As in the article by Lei et al. (2012), most of the top-100 listed companies are Individual-based or

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group-based, and 25 of the 100 highest-market-value companies are controlled by 10 big families. Guy Liu and Pei Sun (2005) looks at all Chinese quoted companies and identified that 81 per cent of the corporates are ultimately owned by the state, with an average shareholding of 48 per cent. The highly concentrated ownership structure also appears in Chinese private listed companies that the largest shareholder holds 36 per cent of shares on average. In their study, four pair-classes of shareholdings are compared in relating to firm’s performance. The state direct control versus the state indirect control, the state industrial companies versus the state investment holding companies, the specialized companies versus the diversified conglomerates, and the wholly listed companies versus the partial listed ones. They found that different classes of shareholdings over the downstream listed firms demonstrate consistent and significant evidence that the class of shareholding does matter for performance. In relating to the percentage of shareholders holding the company, it is found that disparity of shareholdings can lower a corporate’s profitability (Sung, 2003). In addition, study from Crespi-cladera et al. (2014) found that firms with dispersed ownership structures misclassify directors more frequently than do firms with large controlling owners. Generally speaking, independent directors are perceived as minimizing the potential opportunism of mangers, or large controlling owners, in a principal-agent theory setting. There also exists ownership bias exist regarding ownership structures in corporate governance. Milhaupt and Zhang (2015) argue that due to China’s institutional environment, large, successful firms regardless of

ownership exhibit substantial similarities in areas commonly thought to distinguish state owned entrepreneurs from private owned entrepreneurs: market dominance, receipt of state subsidies, proximity to state power, and execution of the state’s policy objectives.

In Taiwan, there is a similar situation of corporate ownership in Hong Kong. Lin et al., (2012) find that individual-controlled firms are prevalent in Taiwan and other East Asian countries; many firms’ ownership is highly concentrated and the Individual members belong

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to the management. Regarding corporate ownership, Claessens et al. (2000) explored the ownership structure of the listed firms in East Asia. They find that over two-thirds of the listed companies in East Asia (except Japan) are controlled by a single shareholder, and their management are mostly comprised or controlled by the controlling shareholders. Van Essen et al. (2015) emphasize how individual-controlled companies can outperform public corporates. Kavadis and Castañer (2015) find that favor restructuring processes aimed at increasing firms and distribute larger and more stable dividends.

2.3 Board structure and performance in China, Hong Kong and Taiwan

A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. In 2013, Liu et al. documented a positive and significant relation between board gender diversity and firm performance. Female executive directors have a stronger positive effect on firm performance than female independent directors. Liu et al. (2013) also find that boards with three or more female directors have a stronger impact on firm performance than boards with two or fewer female directors.

Regarding the determinants of board structure for Taiwanese firms, Chen (2014) finds that that the proportion of non-insider-affiliated outsiders on a board is sensitive to changes in firm and CEO characteristics, and to changes in government regulations. Government regulations significantly shape corporate boards, encouraging a smaller size, more outside directors, and fewer insider-affiliated outside directors. Chen (2014) states that for firms adopting agency and stewardship theories as governance arrangement, the determinants of board structure are diverse. Chen (2014) concludes that the board structure of principal– steward firms is less susceptible to changes in firm characteristics but more susceptible to CEO influence, and more responsive to government regulations.

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In relation to board structure and firm performance in Taiwan, it is found that corporate governance plays an important role in influencing efficiency for property-liability insurers in Taiwan. Specifically, insider ownership, cash-flow rights, and the presence of outside directors have positive impacts, whereas concentrated ownership, deviation between voting rights and cash-flow rights, board size, and the presence of CEO duality have negative impacts on insurers’ efficiency (Wanga, et al. 2007). Lee et al. (2011) find that governance related to ownership structure and divergence between cash flow rights and control rights are important for a firm's market valuation. In particular, information about shareholdings of board directors and supervisors, shareholdings of controlling Individual and voting rights are influential for firm value.

In the case of China, Tao Chen (2015) find evidence that a weaker helping hand from the government is associated with a higher number and proportion of outsiders on the board, after controlling for the effects of firm complexity, growth opportunities, CEO characteristics, ownership, and the potential endogeneity concern. He also shows that when firms are operating in a weak property rights environment, more outsiders in the board improve corporate performance.

In contrast with prior evidence from developed western markets, Lei and Song (2012) find that firms with independent board structure are associated with higher firm value on that are both statistically and economically significant. Their research results also suggest that board structure is the most important among the major internal corporate governance mechanisms. Different countries have different corporate governance mechanisms. Liu (2005) presents in his review study that legal based governance mechanisms that have been applied in the West may not help economies in transition. Liu (2005) study suggests that, at least in the transitional period, administrative-based governance with a certain degree of government involvement can be a viable alternative to ensure effective governance for

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corporates. How ownership influences corporate board structure? In the past, literature typically has focused on the research of Individual because corporate ownership in Hong Kong and Taiwan are mainly individual-owned businesses. However, Individual-owned corporates have perform differently in the international business world. The reasons that cause this kind of performance difference remain unclear. Is it possible that different corporate governance and board structure all play an important role in these three Asian countries (China, Hong Kong and Taiwan)? This research focuses on the comparisons of board structure in the relation with corporate’s financial performance in order to get an explanation.

2.4 Board diversity and corporate performance

Fraga et al. (2012) investigate the diversity of the boards of directors of Brazilian companies listed on the BM&FBovespa with respect to gender, age, educational attainment and independence, to ascertain whether there is a relation between any of these diversity measures and firm performance. The results of their study indicate that greater diversity in the educational disciplines and the presence or absence of independent board members negatively affect performance, while diversity in years of schooling has a positive effect. The presence of female board members is small, but firms that have at least one female director outperform those that do not.

Liu et al. (2014) investigate board gender diversity on firm performance in China's listed firms from 1999 to 2011. Liu et al. document a positive and significant relation between board gender diversity and firm performance. Female executive directors have a stronger positive effect on firm performance than female independent directors. Moreover, they find that boards with three or more female directors have a stronger impact on firm performance than boards with two or fewer female directors. Bantel (1993) does find that greater diversity in educational and functional background leads to better decision-making but suggests an

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industry effect due to the nature of the product or service. Tuggle et al. (2010) found that heterogeneous boards in terms of firm/industry knowledge and background devoted more consideration to entrepreneurial issues. Simons and Pelled (1999) find similar results but argue that the benefits of educational diversity on organizational performance can be observed for different sectors as opposed to being applicable in a specific industry. As shown with these various mentioned researches, board diversity indeed has an effect on corporate performance.

Previous research studys have broadened our view and knowledge of the relation between a corporate’s ownership and its financial performance. Previous research studys also explored the board different natures and the impacts of different board members on a corporate are financial performance. But previous researches have not yet explored the moderating effect of board diversity as a moderator. My study connects board diversity both with corporate performance and corporate ownership.

3. Theoretical framework.

3.1 Ownership structure and corporate performance

Although there have been some researches on a corporate’s ownership and its performance, the question remains whether the relation between corporate performance and corporate ownership. In the previous researches, the measures to test the relation between corporate ownership and corporate performance were not standardized. Some use Net income on sales, some use profit margin, some use long-term debt to equity, some use market value of the corporate, etc.

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Below is a table presenting the research done by Oswald and Jahera in 1991.

As we can see from this table, the relation between corporate ownership and financial performance yields mixed findings. Kim, Lee and Francis (1988) found a positive significant relation between inside ownership which is the stockholdings of officers and directors and corporate’s market value of outstanding equity shares. Ownership structure and its relation with corporate performance have been extensively researched. In addition, Shellenger, Wood and Tashakori (1989) also found a significant relation between the ownership of stockholding by directors and the return of 4 different financial measurements.

But not all researches with the same topic reached similar conclusion. On the contra, Pfeffer (1972) used profit margin and return on equity to test the relation between corporate’s financial performance and stockholdings of directors, and found no significant relation among

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them. Nevertheless, all researches point to a direction that ownership is important for corporate performance. Wei and Xie (2015) find that state and institutional shares are significantly negatively related to Tobin’s Q, and that significant convex relations exist

between Q and state shares. In China, in most of the companies, state shares and corporate share are set as the largest shareholders. Largest shareholders have more power on controlling the corporate and dominate the control of company. Due to the lack of profound corporate governance system in Asian countries, monitor of national people upon state-owned supervisor committee and incentive system are inadequate. State-owned supervision committee lack motives to raise asset value which will not allow formation of strict monitoring system upon business management. On the other hand, family-owned corporates have the financial incentive to perform a more restrictive control over the activities which might cause corporate value to decrease. Therefore, state-owned corporates should be negatively related to firm performance. Accordingly, the following assumption is set:

H1: Family-owned corporates have a better performance than a state-owned corporate.

3.2 Board diversity and corporate performance 3.2.1 Independent board director and firm performance

Board of directors has many characters, their age, there experience, their education, their gender, their belief, etc. all influence the nature and the capability of that individual board member in performing their duties of being a board member. The board of directors’ primary function is to advise on strategy formulation and decision-making (Holmstrom 2005; Adams and Ferreira 2007). However, most of the independent board directors are not involved in the daily management decision is made for a corporate’s operation. An important component of these board tasks is monitoring executive management to ensure that managers

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pursue shareholders’ best interests (Fama 1980; Fama and Jensen 1983). There is a general

consensus in the existing academic research that independent directors increase board transparency and that they monitoring board decisions making process. This is an almost no against voice for the ‘good’ of the independent board members. Corporate governance codes

such as the Sarbanes–Oxley Act strongly suggest and often mandate that a board should be comprised of a significant share of independent directors. As a result, the majority of the corporates in the world are complaining with ‘independent board members’ rule. However, (Terjesen, et al., 2015) study board diversity analyze the impact of independent directors on firm performance, with inconclusive findings.

The most popular theories that support the positivity of independent board members are agency theory, resource dependency theory, and upper echelons theory (Ruigrok et al., 2006). Agency theory is often mentioned in the corporate governance academic literature. It focuses on the inherent conflicts between owner’s interests and management interests. When one exam into the agency theory, it can be noted that an agent theoretical perspective suggests that independent directors have less potential conflicts of interest and can therefore provides greater integrity and offer impartial judgment (Fama 1980; Rosenstein and Wyatt 1997). An independent board member’s task and duty is to prevent other inside board members to make ineffective decisions that may harm a corporate’s performance. Hence, directors have incentives to maintain their own independence, preventing them from making injustice decision. In addition, independent directors are expected to be more likely to represent shareholder interests and potentially take a stand against a CEO when a decision might be harmful to shareholder’s interests (Adams et al., 2010). Thus, it seems it is always a good

thing to have independent board members and assure a corporate’s management behavior. Independent directors normally have experience outside of the corporate. They attend the

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boards with prior experience that may enable them to be more effective as monitors (Fama and Jensen 1983).

The second popular theory that states independent board members are good for a corporate’s financial performance is the resource dependency theory. Resource dependency

theory argues that the role of external resources in affecting firm behaviors (Pfeffer and Salancik 2003). Network of the independent board members are important for a corporate. Board members are treated as a human capital of a corporate. In general, independent directors have access to valuable knowledge and relation resources compared to directors only come from within the corporate. Board members tasks are to support corporate’s decision making or even directly impact a corporate’s performance. Such resource and relations of an independent board member can be a certain expertise, useful social networks and on other abilities that can be leveraged in their roles on the board to improve a corporate’s performance (Hillman et al., 2002). Board members are actually employees of a corporate. Thus, these board members can be viewed as a human capital in the theory of human resource. Human capital theory takes a person’s cumulative education and experience as a good thing for corporate’s performance. In addition, a board’s social network is in effect corporate’s capital. Social capital theory concerns social networks as a key advantage (Coleman 1988).

Another popular research theme on board diversity explores the direct relation between racial and gender diversity and firm performance (Toyah et al., 2009), in this study, investigate mediators that explain how board diversity is related to firm performance. Their research was based on signaling theory. Grounded in signaling theory and the behavioral theory of the firm, Toyah ect. use firm reputation and innovation as moderator, in a sample of Fortune 500 firms, they find a positive relation between board racial diversity and both firm reputation and innovation. The conclusion of their research is that reputation and innovation

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both partially mediate the relation between board racial diversity and firm performance. In addition, they find a positive relation between board gender diversity and innovation.

As early 1987, gender role theory (Eagl, 1987) has suggested that an individual’s

gender determines his/her behavior and its effectiveness with respect to influence. From human resource perspective, female is different than male in nature. Gender role theory claims that males and females’ behavior are assessed in terms of how it ascribes (or diverges) from expectations of the respective gender (Terjesen, 2015). In the board position, it can be that females or males who use tactics that are aligned to their gender tend to be perceived better by others, as stated by Eargly et al in 1995. Men and women have normatively prescribed behavior with respect to how they want to influence others using different communication channels, even including influencing tactics. In general, there is a prototype female character that women are expected to ascribe to more feminine roles such as care, sympathy and gentility (Eagly, 1987). Most of the gender role associated with women is flexibility which leads to a greater ability to manage ambiguous situations (Rosener, 1995). The theory of gender roles is generally relevant for the board as directors are human beings and must use communication tactics that are effective in terms of influence, as a board member, they want to perform and show their opinion and influence. Thus, I hypothesize that:

H2: A corporate with diverse board of directors and independent directors performs better than a corporate with a concentrated board structure.

There are sufficient amount of researches stating all the importance of independency of board member and the essential difference of female board members. However, the research found in the previous studies all research the direct impact between these two factors and the corporate financial performance. By searching in the existing studies database, no study is found that investigate the moderate effect of board diversity in the relation between

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corporate ownership and firm performance. Most of the studies either investigate a relation between board diversity with firm performance or corporate ownership with firm performance.

If the three elements of board diversity, corporate structure and firm performance are combined, it will be interesting to see if board diversity has an impact on the relation between corporate ownership and firm performance. One of the key challenges that a corporate faces is to maximize its profit. In order to maximize a firm’s profit, its performance needs to be maximized in term of human resource (top management, board) and corporate’s ownership structure. Corporate ownership has a relation with its financial performance, board characters have a relation with corporate performance. With these three elements all together, both corporate ownership and board characters might moderate the outcome of a corporate’s financial performance. Thus, corporate board of structure as a moderator is added for the research. The third hypothesis is as follow:

H3: Board diversity can moderate the relation between corporate ownership and corporate performance.

Each country is different compared to others and so is a corporate’s governance is also unique compared to other corporates. Li (1994) argues that national differences in ownership and board structure create different patterns of corporate governance between countries. Board structure of a corporate reflects the corporate governance mechanism of a country. In Li’s study, he analyzes board composition from an agency theory perspective. More specifically, he examines how ownership concentration, bank control and state ownership affect board independence. In other words, the study of Li is about the relation between

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corporate ownership and board diversity. The results of Li’s study suggest that corporate ownership indeed affect board composition and diversity.

A corporate with concentrated ownership structure and bank control is negatively related to the percentage of outside directors on the board. Another study that is done by Booth, Cornett and Teharanian (2002) examined whether regulation can be used to substitute for internal monitoring mechanisms to control for agency problems. Booth et al. (2002) found that high managerial ownership is correlated with small board independence. Additionally, CEO/Chairman duality is less likely to occur when managerial ownership increases. Their study also concludes that corporate ownership influence board diversity. The characters of a board and how diverse a board is also depend on how concentrated a corporate ownership is.

In countries where ownership is dispersed, the predominant problem is the agency problem between shareholders and managers as a result of the separation of ownership and control (Jensen & Meckling, 1976). In such an ownership structure, a board with more independence and supervision power might be needed. In this case, the board of directors must be configured primarily as a tool for supervision and control, aimed at aligning the interests of those who manage the company with the interests of those who provide the resources and hold the risk ( In addition, a research that was conducted by Denis and Sarin (1999) suggested that the determination of ownership and board structure is a dynamic process and they concluded that managerial ownership is negatively correlated with board independence and positively correlated with changes in board size. All of these studies indicate that corporate ownership influence board composition. However, none of the existing studies has used a consolidated board diversity score. Thus, the last hypothesis is formed as follows:

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H4: Corporate ownership influences board diversity, a corporate-owned ownership corporate has a more diverted board.

The objective of this research is to find the relation between corporate ownership and corporate performance and the moderating effect of board diversity in performance by using data collected in the stock markets of three countries: China, Hong Kong and Taiwan. The relations among the framework state are tested in this study. By testing the hypothesis devoted in this framework, this study answers the following question: Does ownership of a corporate

have an impact on the performance? If the board of a corporate is more diversified, will that corporate perform better with the same corporate ownership applied?

The research questions hypothesized in this study is examined in order to provide solid evidence on the relation between corporate ownership and corporate performance. There has only been research on the relation between board diversity and corporate performance, board diversity as a moderator has never been examined. By answering the research questions, this gap in the corporate governance field will be filled. This research will not only confirm the relation between corporate ownership and corporate performance, relation between board diversity and corporate performance, but also add understanding to the relation of board diversity in relating to corporate ownership and corporate performance.

3.2.2 Conceptual framework

Different type of corporate ownership results in different corporate governance practice and management action. Different corporate performance is a result of corporate governance practice including corporate management. Thus, corporate ownership should have a direct impact on corporate performance. Different type of corporate ownership also have an impact on the corporate board diversity because of the power difference among different

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shareholders in the decision making process of composing the board. A board duty or tasks are to monitor the management of a corporate. As a result corporate board diversity can influence corporate performance and, in the corporate ownership and corporate performance relation, board diversity can act as a moderator.

4. Methodology

4.1 Data collection

Ownership structure is a key variable in corporate governance studies as it determines who has the ultimate decision-making power in the corporate (Zattoni, 2011). There are a few forms of corporate ownership that depend on the investors of the corporates:

1. Institutional Investors (Institutional investor ownership relates to the stock market investments of institutional investors (pension funds, insurance companies, mutual funds).

2. Banks (bank stock ownership, banks can invest in stock for their trading portfolio or because they combine lending with direct investment)

3. Corporate investors (corporate ownership relates to shares held by firms) 4. State (State ownership refers to stock investments by governmental institutions)

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5. Individual Investors (Individual investors make up a small category of shareholders. With individual ownership, we refer to the stock market investments by private individuals)

6. Employees (Employee ownership is the investment in stocks of the firm where the investor is employed)

For the purpose of this study, the six ownership types that are identified by Zattoni in 2011 are grouped in five types: state-owned, corporate-owned, individual-owned, foreign-owned and other-owned. In this study, data was collected by using the listed companies’ data from 3 countries: China, Hong Kong and Taiwan. All data is secondary and was gathered through third party sources that contain reliable information about the public companies financial performance and governance structure. Most of the information was retrieved from database Orbis that is in the library of the University of Amsterdam. Some of the information that is needed for this research was not complete in Orbis, they were completed by using a company’s annual report or the information provided by the stock exchange market. The age

and education background of board members are taken from companies annual reports. Lastly, the way to determine a company is state-owned, individual-owned, and corporate-owned or other is to take the highest percentage of each of the five kind’s ownership. The kind with the highest percentage of the ownership determines a company’s main ownership.

4.2 Sample

In this study, the focus is on the ownership and the performance of 400 hundred listed companies in three Asian countries: China, Hong Kong and Taiwan. Data was collected together with other fellow students who can use the same data to do research on their project. The 400 companies consist of the 100 biggest companies which exclude finance sectors companies by using their market capitalization value. The 400 companies are from Hong Kong stock exchange, Taiwan stock exchange, Shanghai stock exchange and Shenzhen Stock exchange from China. The industry of these 400 companies are considered to be property

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development and management, oil and gas, retail, trade, warehousing, technical service, telecommunication, entertainment, mining, food service, agriculture, foresting, utilities and transportation. This research needs to compare corporate ownership and a firm’s performance and its governance structure. Therefore, the analysis is done on firm level. Companies in the data sample are cross-sectional. In addition, all data collected are from the financial annual report year of 2014.

4.3 Dependent variables

The first dependent variable used in this research is the return on asset of each company. Return on asset (ROA) is a great measure of how a corporate performed in a certain period of time. ROA is an accounting measure indicating the net income earned per dollar of assets employed. As such, it indicates how well a firm has performed. Return on asset explicitly takes into account the assets used to support business activities. Comparing return on sales, return on asset shows whether a company is able to generate an adequate return on these assets rather than simply showing robust return on sales. For some corporates, it can be that very heavy assets investment needed to generate some profit, other business that might need to take less investment in asset. Asset-heavy companies need a higher level of net income to support the business relative to asset light companies where even thin margins can generate a very healthy return on assets. The key question here in this research is to help corporates to form a better ownership or board structure to focus their own operation more tightly on the activities and assets. In order to have the most proper structure to support and generate higher financial performance on their asset investment. Comparing to return on equity, return on asset fosters a better view of fundamentals of the business which is the utilization of a company’s assets. Thus, a higher ROA number indicates a better financial performance by a corporate. The formula to calculate ROA is the net income of a corporate divided by its company’s assets.

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The second dependent variable is to measure how diversified a corporate’s board structure is. In this study, the variables used to create a ‘board diversified score’ is the number

of board members, the percentage of female board members, the percentage of independent board members and the percentage of foreigners in the board. In this research, it is important to understand that 100 percents female board or 100 percents independent board members does mean a board is more diversified. The highest percentage of female board members in the samples is 57 percents. And only 9 companies in the samples have more than 57 percents of independent board members. Only 4 companies have more than 57 percents of foreign board members. So the method to calculate the board diversified score can be simply calculated by adding up the percentages of those 4 variables. This diversified score indicates how diversified a corporate’s board structure is. It includes the numbers of board members, the percentage of female board members, the percentage of independent board members and the percentage of foreigners in the board. Normally, female in the board can present how diversified a corporate board is. But if the 100 percents of board members are female that does not mean a corporate’s board is highly diversified. In the data sample collected, the percentage of female in the board range from 0 percent to 57 percents of board, thus, the percentage of female on the board is fairly presented the diversification of a board. In the 400 listed companies, the percentage of independent board members varies from 0 percent to 60 percents. In term of the numbers of board members, a high score contributes to a more diversified board score.

4.4. Independent variables

The independent variables of this study are corporate ownership data from each listed company in the research scope of the three countries China, Hong Kong and Taiwan. The ownership in the data collected are the percentage of state-owned, individual-owned, corperate-owned, foreign-owned and others (investment banks) ownership. In the ownership

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structure of each corporate, the percentage of each kind of ownership is compared and the highest percentage of ownership determines the main ownership of that corporate. For example, a company is owned 73 percents by a state and 23 percents by other (investment banks), then its ownership will be categorized as state-owned.

Another independent variable will the corporate board diversity measured through the number of outside directors resulting in board independence, board gender, board education background. A score is given to the companies to indicate the board diversity. This score is used to test its correlation with a corporate’s performance in terms of return on assets. This variable is treated as an independent variable in testing the relation between board diversity and company return on asset. But this independent variable in the test of the relation between corporate ownership and board diversity is tested as dependent variable as stated in the dependent variable section.

4.5 Moderator

The moderator in this research is the corporate board diversity which influences the relation between a company’s ownership and its financial performance. With different board

members, a corporate may perform differently, for instance, the firm’s ability to comply with law and execute governance practices. The level of governance in a corporate relates to the boards knowledge and experience and pursued interests. Thus, hypothetically, more diversified board members may assist a company’s performance. A company’s management is based on thoughts, knowledge, and their background. Therefore, board diversity score is predicted to influence a cooperate’s performance.

4.6 Control variables

The control variables are the industry a corporate that it is in. To make data analyzable, the 400 companies are grouped into six categories. These six categories are Electronic, information, manufacturing, mining, real estates and other.

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4.7 Method

To test the hypotheses in this study, I use multi-linear regression method to present the relations among variables. In hypothesis 1 of the relation between corporate ownership and corporate performance, all four kinds of corporate ownership are tested with the corporate performance measure of return on asset. In Hypothesis 3, corporate board diversity score was composed and added as a moderator in the relation to test if board diversity can moderate the relation between corporate ownership and corporate performance. In addition, hypothesis 2 and hypothesis 4 are conducted to add more in-depth explanation and understanding into the relation between corporate ownership and corporate board diversity and corporate performance.

A linear regression analysis was used in this study to show the effects of the independent variable on the dependent variables. In this study, there are two independent variables, one is ROA, and the other is the board diversified score. To analyze the effect of the independent variables on ROA and the board diversity, a logistic regression was use and the models can be found in table 1:

Table 1-summary of the logistic regression models

Control variables Industry Corporate-owned Others-owned Individual-owned Foreign- owned State-owned %female over total Level of education %independnet over total Boared diversified score Model 1 x x x x x x Model 2 x x x x Model 3 x x x x x x x Model 4 x x x x x x Independent variables

The essence of regression analysis is to predict the outcome of the dependent variable ROA and board diversity from one or multiple independent variable. In the research, the model that was tested is linear by using the statistic tool of SPSS from IBM, linear regression means the data set is summarized by a straight line.

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To examine the variable that could influence a company’s ROA, several kinds of the corporate’s ownership and the board characters were codified. All the 400 corporates’ data were used and coded in a way that is suitable for use in the SPSS tool. The Database was created by several students and the companies were selected from for stock exchange markets in China, Hong Kong and Taiwan. The total dataset was constructed together with other project members and the reliability of the data input was examined before the data analysis.

5. Results and analysis

Table 3 presents both the descriptive statistic and the correlation between the variables that are tested in this research. The table shows a mean value of ROA of 0.07. As a rule of thumb, investment professional like to see a company’s ROA come in at no less thatn 0.05

(www.investopedia.com). Therefore, it can be concluded that in general there is a good return of a corporate’s assets. Furthermore, the descriptive statistics provide a mean of 0.22 state-owned corporates, a mean of 0.14 individual-state-owned companies, a mean of 0.16 corporate-owned companies, a mean of 0.13 of foreign-corporate-owned and a mean of 0.16 of other-corporate-owned corporates. It presents that in the data set, the different types of ownership are almost equal to each other. However, state-owned company is slightly higher than the rest of the ownership type. In addition, the mean of female board members is 0.1 which in means only one out of 10 board members is female. This mean can be applied to all cases in the dataset because it comes from the actual data of a company’s annual report. Lastly, the percentage of the

independent board members is 0.4 which indicates that on average all the companies are compliant to rules of public companies. If a company is listed in the stock market, it must follow corporate governance rules to be able to show commitment and transparency of a corporate operation. In other words, almost half of a cooperation’s board members should be independent. The board diversity score ranges from 5 to 23 in this research with a mean of 11.

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The table 3 also displays the correlation between the variables of the proposed model and the control variables. In addition the descriptive statistic and the correlation matrix presented in table 3, there was also a test executed for multicollinearity. This multicollinearity shows if there is a strong correlation among one or more predictors. As a measurement, the Variance Inflation Factor (VIF) in SPSS is used to decide whether or not multicollinearity exists. As shown in table 2 below, all the predictors are lower than 5. A VIF of 5 is the cut-off point to support that predictors are correlated to each other. So it is concluded that there is no multicollinearity exists in the independent variables. The multicollearity results for corporates ROA can be founded in table 2a and the results for the board diversity can be found in table 2b.

Talbe 2a- Multicollinearity Statistics for dependent variable ROA

Tolerance VIF (Constant) grouped industry .931 1.074 State-owned .339 2.949 Individual-owned .509 1.964 Corporate-owned .430 2.325 Foreign- owned .698 1.433 Others .889 1.124

Boared diversified score

.948 1.055

Collinearity Statistics

Talbe 2b- Multicollinearity Statistics for dependent variable board diversity

Tolerance VIF (Constant) grouped industry .958 1.044 State-owned .339 2.948 Individual-owned .509 1.964 Corporate-owned .431 2.322 Foreign- owned .699 1.430 Others .897 1.115 Collinearity Statistics

In SPSS, the correlations are calculated by Pearson correlation. In this study, the whole sample (400 corporates) is entered to calculate the Pearson correlation. Many of the variables in the correlation matrix are categorical in nature. The first dependent variable of ROA shows a negative of 0.130 correlations with board diversity score. This means a higher ROA

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correlated with a less diverse board. None of the independent variables show a significant relation with the Return on Asset of a company. The second dependent variable of board diversity score shows a positive of 0.1 correlations with the other-owned corporate ownership with a significant level of 0.06. This indicates that if a corporate is owned by banks or investment institution, its board members are more diverse. Industry type is correlated significantly with both a corporate’s Return on Asset and its board diversity with a factor of -0.123 and 0.188 respectively. Furthermore, the independent variables of percentage of female on the board and corporate-owned corporate are correlated at the -2-tailed level. When we look at the hypotheses, corporate-owned corporates indeed have a positive correlation with the board diversity. However, the significance level is not small (less than 0.05) enough to prove the leaner relation.

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Table 3 shows both the descriptive statistics and the correlation among the variables that are being tested in this study. Mean Std. Deviation Boared diversified score %independnet over total %female over total

Others-owned Foreign- owned Corporate-owned

Individual-owned State-owned

ROA (net income/assets)

% grouped industry

Pearson Boared diversified score 11.036 3.694

0.439 1.526 .447** .000 0.095 0.104 .031 -.015 .532 .763 0.155 0.216 .106* -.011 -.013 .035 .833 .799 0.125 0.199 -.095 .096 -.091 -.029 .057 .056 .068 .567 0.158 0.228 .067 -.030 .123* _-.013 _-.250** .183 .548 .014 .788 .000 0.141 0.205 -.048 -.005 .165** .041 .133** -.227** .342 .921 .001 .412 .008 .000 0.219 0.277 .023 -.010 -.165** _-.184** _-.260** _-.421** _-.466** .641 .835 .001 .000 .000 .000 .000 0.069 0.069 -.130** -.052 .134** .012 .006 .081 .006 -.119* .009 .296 .007 .814 .905 .104 .902 .018 3.890 1.486 .188** .074 -.025 .087 -.089 .050 -.062 .109* -.132** .000 .139 .621 .083 .076 .315 .214 .030 .008

**. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed).

Others

%female over total %independnet over total

grouped industry ROA State-owned Individual-owned Corporate-owned Foreign- owned

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The result of linear regression analysis can be found in table 4. I used a linear regression for the first independent variable of Return on Asset. The dependent variable is coded as numerical variable from the scale of -1 to 1. In the first model that relates to hypothesis 1, the control variable of the industry type of the 400 corporates is added to the analysis to see how much variance it causes in the analysis. The second model is related to hypothesis 2, model 3 is related to hypothesis 3 and model 4 is related to hypothesis 4. A summary of these 4 models can be found in table1.

To examine if a variable has significant influence on the Return on Asset of a corporate, significance return result should be smaller than 0.05 in SPSS test. In statistics, the beta shows the relation between a given predictive variable and a dependent variable. Model 1 is used to test the relation between a corporate’s ownership structure and its Return on Assets. These models test results present all negative relation between state-owned and corperate performance, Individual-owned and corporate performance, foreign-owned and corporate performance and other-owned ownership and corporate performance. Only corporate-owned ownership structure has a positive relation with corporate performance. Yet the significance levels of these correlations are two week to support the conclusion. Model 2 relates to hypothesis 2 which presents the relation between a corporate’s board diversity level and a corporate’s performance. In this model, percentage of female board members, percentage of independent board and the level of education were used to test the board diversity and a corporate’s Return on Asset. The result presents a negative correlation between the education level of the board and the Return on Asset. There is also a negative effect between the percentage of dependent board members and the Return on Asset of a corporate. But these correlations are not significant. However, there is a positive relation between a corporate’s Return on Asset and the percentage of female board members. In addition, the correlation between these two variables is significant with a level of 0.01.

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Considering the relation between a corporate’s ownership and its Return on Asset, a moderator of board diversity is used to test if a more diversified board structure can moderate the relation in model 1. Model 1 tests the relation between an corporate’s ownership and its Return on Asset, adding the moderator of board diversity score, it is found that there is a significant effect of board diversity on the corporate’s Return on Asset. But unexpectedly, the correlation is negative, which means that if there are more board members (in this test, number of board members is a key indicator of board diversity), the financial performance is lower than a board with fewer people.

Model 4 is to test hypothesis 4, to test whether corporate ownership structure influent the board structure. In this test, corporate-owned ownership has a positive correlation with board diversity; state-owned ownership also has a positive relation with board diversity; other-owned ownership has a positive correlation with board diversity. But foreign-ownership and individual-ownership both have negative relation with board diversity. None of these correlations is significant except for other-owned ownership with an almost significance level 0.06. None of the correlation is significant.

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Table 4 – Logistic regression analysis results

Dependent variable: ROA Model 1 Model 2 Model 3 Dependent variable: Board diversity score Model 4

Beta Sig Beta Sig Beta Sig Beta Sig

Conrol variables Conrol variables

Industry -.124 .015 -.129 .009 -.104 .042 _Industry .169 .001

Independent variables Independent variables

Corporate-owned .008 .915 .014 .847 _{Corporate-owned} .056 .456

Others-owned -.001 .982 .010 .850 _Others-owned .096 .066

Individual-owned -.060 .390 -.061 .380 _{Individual-owned} -.008 .908

Foreign- owned -.031 .602 -.037 .528 _{Foreign- owned} -.055 .348

State-owned -.138 .106 -.135 .113 _State-owned .028 .738

%female over total .126 .011

Level of education -.078 .117

%independnet over total -.040 .416

Boared diversified score -.116 .023

Constant Constant

6.897 .000 5.487 .000 7.145 .000 11.464 .000

R² .033 .042 .046 R² .052

Adjusted R² .018 .032 .028 Adjusted R² .037

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Table 5

Table 5 – Descriptive statistics and correlations of possible variables

Mean Std. Deviation Level of education in score Boared diversified score No. of board members Tobin's Q (total market value/total asset value) ROS (net income/tot al sales) ROE (net income/eq uity) % %independ net over total %female over total Others

Foreign- owned Corporate-owned Individual-owned State-owned ROA (net income/ass ets) % grouped industry Level of education in score 3.535 0.693 Perarson Boared diversified

score 11.036 3.694 -.101* No. of board members 10.45 3.295 -.114* .910** Tobin's Q 61.595 1162.151 .027 .044 .054 ROS -0.050 9.495 .017 -.058 -.072 .004 ROE 0.136 0.116 -.097 -.095 -.101* _-.027 .191** %independnet over total 0.439 1.526 .009 .447** .039 -.007 .008 -.022 %female over total 0.095 0.104

-.050 .031 .010 -.046 .052 .146** -.015 Others-owned 0.155 0.216 _-.232** .106* .118* -.016 -.066 .018 -.011 -.013 Foreign- owned 0.125 0.199 _.112* _-.095 -.151** .108* _.039 _.035 _.096 _-.091 _-.029 Corporate-owned 0.158 0.228 -.331** _.067 _.084 _-.018 _.035 .138** _-.030 .123* _-.013 -.250** Individual-owned 0.141 0.205 -.091 -.048 -.058 .032 -.052 .031 -.005 .165** .041 .133** -.227** State-owned 0.219 0.277 _.296** .023 .039 -.039 .001 -.224** -.010 -.165** -.184** -.260** -.421** -.466** ROA 0.069 0.069 -.079 -.130** -.126* _-.035 .246** .642** _-.052 .134** _.012 _.006 _.081 _.006 -.119* grouped industry 3.89 1.486 -.040 .188** .175** -.031 -.043 .011 .074 -.025 .087 -.089 .050 -.062 .109* -.132**

**. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed).

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6. Discussion

The purpose of this study is to provide insight into the relation between corporate ownership and corporate performance with the moderator effect of board. The board of directors is very important for shareholders, in practice, shareholders do not typically actively manage a corporate, indeed, a board of directors was elected to control the corporate in a fiduciary capacity. Board of a corporate reflects the shareholders’ idea of how their corporate should be operated and managed. Outside business directors (independent board members) turned out to be key drivers of improved firm performance (Pombo, Gutierrez, 2011). Appointments of outsiders are endogenous to firm ownership structure (Pombo, Gutierrez, 2011). But it is not necessary the larger the better for a corporate. While larger boards may result in a wider pool of expertise (Zahra and Pearce, 1989) and greater external linkages (Goodstein et al., 1994), larger boards may also lead to lower group cohesion (Evans and Dion, 1991) and greater levels of conflict (Goodstein et al., 1994). In part section 2 of this study, hypotheses are states and a theoretical framework is presented. In the section of hypothesis 3 and the test model 3, it is found that the board diversity score is negatively related to a corporate’s financial performance.

In addition, the second hypothesis is supported by the analysis. Female board member is positively related to a corporate’s financial performance and the result is significant. This is predicted because firms in a more complex environment are more likely to have gender balanced boards. This finding is consistent with most of the researches that was conducted in the field. For example, Terjesen et al. (2015) find evidence to support that female directors enhance boards of directors’ effectiveness. Firms with more female directors have higher firm

performance by market and account measures (Terjesen, Couto, Francisco, et al, 2015). However, there is no support that board education and the independent board members have a

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positive impact on a firm’s financial performance. This might be the case because board

members working experience and life experience might impact their decision making process rather than if they are independent or have a high education. In a lot of business cases, the owner of the corporate is a board member of the corporate. In the Asian culture, it is the owner’s opinion that counts, not that of an outsider. However, with female board members,

decisions made by a board are more effective on financial performance. But interestingly, according to the data collected of the 400 company for this research, only 64 companies have 20 to 50 percents female board members. Why are there so few female members? One might argue that this issue of gender representation on board is cultural and social in nature such that the society in a particular country views top management functions as more appropriate for men and that other jobs, such as housework, are more suitable for women (Gerson 1985; Schein et al., 1996). It might be that there are not as many females as male can make their career to the top management level of the corporate.

Furthermore, there is no evidence showing that corporate ownership has a significant impact on a corporate’s financial performance. In Hypothesis 1, such a relation is predicted because although all corporates ultimate goal is to make profit, different shareholders have different goals in their investment activity. A Chinese state-owned company might execute and invest because of political strategic political reasons. An investment bank’s goal is to make profit. So compared to a state, investments bank might be more actively involved in a corporates management operation and such corporates might generate higher Return on Asset. Theoretically, according to the notion of agency theory, a family/individual owned company should also results in a better financial performance because the greater the degree of ownership or financial attachment by those with decision making authority, the more likely it is that the performance of an organization. There are many other researches on the influence of corporate ownership on performance. Oswald and Jahera (1991) find that indeed the