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Corporate governance and Firm Value in international firms –
Focusing on ownership structure and board independence
Master Thesis
MSc International Financial Management
Final Version 30th of June, 2018
Supervisor: Dr. Raymond Zaal Co – Assessor: Dr. De Ridder
Faculty of Economics and Business Rijkuniversiteit Groningen
Ji Wenbin, S3292665
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Abstract
Using a dataset comprising of 1447 firms from 51 countries over the period of 6 years (2010- 2015), a positive relationship between corporate governance and corporate performance was established. Moreover, the relationship between corporate governance (ownership structure board independence) and firm value was investigated as a driver of internationalization, and the evidence only supports that blockholders (closely-held) ownership has a negative effect on firm value. Regarding ownership concentration, no effect was found on firm value. Nevertheless, the results of the research find that single biggest ownership and blockholders ownership have a positive influence on firm value without internationalization driven. Lastly, no evidence is observed on board independence (CEO/Chairman separation) in the promotion of internationalization, even the board independence has a positive relationship with firm value without the drive of internationalization. Furthermore, stronger investor protection will bring more benefits for the manipulation of corporate governance.
3 Table of Contents
1. Introduction ... 4
2. Literature review and hypotheses development: ... 7
2.1 Agency theory and corporate governance ... 7
2.1.1 Corporate governance and firm value ... 8
2.2 Ownership concentration (single largest shareholders, family ownerships) and internationalization ... 9
2.2.1 Single biggest owner ... 10
2.2.2. Family ownership... 11
2.3. Blockholders ownership (closely held shares) ... 11
2.4 Board Independence and Internationalization ... 13
2.5 Country level: corporate governance and Investor protection ... 15
3. Data and methodology ... 16
3.1 Sample and data collection ... 16
3.2 Measurement of variables: ... 17
Dependent variables: Tobin’s Q ... 17
Independent variables: ... 18
Control Variables: (Firm characteristics) ... 19
3.3 Moderator ... 20
3.4 Regression Models ... 20
4. Results ... 22
4.1 Descriptive statistics ... 22
4.2 TSLS analysis and Hausman – Taylor estimator ... 26
4.3 Results and Analysis ... 27
4.3.2 Analysis of the relationship between CG1 (single biggest owner, family ownership, blockholders ownership and board independence) and firm value in the driver of internationalization ... 30
4.3.3 Hausman- Taylor test for the analysis of corporate governance and firm value in the driver of the extent of internationalization ... 31
4.3.4 Analysis of country level - investor protection and corporate governance ... 35
5. Conclusion ... 35
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1. Introduction
Agency problems have the potential to lead to costly fees, and therefore, in the past decades, the modern theory proposes that proper corporate governance can help enterprises to overcome high capital and agency cost. In a contemporary perspective, stronger corporate governance will bring more benefits for corporate valuation, as stated in the notable paper by Gompers, Ishii, and Metrick (GIM, 2003), which find that good corporate governance associates with higher equity returns and better operating performance, and thereby promotes firm value. As such, based on their theory, corporate governance will associate with operating performance and equity price, which makes it a global issue in the financial circle in recent years. Along with Gompers, Ishii and Metrick (2003) and Bebchuk, Cohen and Ferrell (BCF, 2008) many researchers investigated the relationship between corporate governance and firm value to further develop the discussion fields around the topic. Herein Bhagat and Bolton (2008) find that stock ownership of board members and CEO-Chair separation positively correlate with better contemporaneous and subsequent operating performance. Following their findings, there is no significant relationship between corporate governance and firm value (Tobin's Q). Based on this point, their findings conflict with Gompers, Ishii and Metrick (2003) and Bebchuk, Cohen and Ferrell (2008) theory. Likewise, following Brown and Caylor (2006), they only find three of nine corporate governance provisions which are significantly and positively related to the corporate performance. However, many scholars manifest that within stronger corporate governance mechanisms and environments, the company will enhance their corporate value, such as Ammann et al. (2011) Bebchuk, Cohen and Ferrell (2009) and Core et al. (2006) proposed. According to these classical works of literature, agency cost will be reduced by proper governing management through effective management of shareholder ownership and board control structure, adequate corporation strategies and provisions. Consequently, in modern corporate governance theory, which is primarily focusing on board structure, ownership structure, executive remuneration and shareholders activism, can be regarded as leading influence factors on corporate governance.
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linear approach to investigate the impact of ownership concentration within firm's internationalization. Moreover, following Oesterle et al. (2013), the shareholders of firms with a very dispersed ownership structures have no incentives on monitoring cost and, they do not find stronger evidence to manifest that a firm's degree of internationalization will influence the concentration of ownership. As for the issue of internationalization that is not the irrational phenomenon, and (Aggarwal and Samwick, 2003; Chandler, 1962; Jensen, 1986) all mention that geographical diversification can bring a growing interest on managers benefits. However, the relation of corporate governance and firm value (Tobin's q) within the extent of internationalization, is sparsely discussed amongst scholars, especially when evolving around ownership structure and board independence. Therefore, the paper will try to fill this gap, and provide data to further deepen the discussion.
Moreover, regarding agency problem (Berle and Means, 1932; Jensen and Meckling, 1976) large shareholders have a high incentive to monitor managers and thereby reduce agency cost. Moreover, Morck et al. (1988) and Burkart et al. (1997) address a single controlling shareholder and large shareholders utilities; large investors have substantial voting power and stake that can provide reliable monitoring management and avoid the free-rider phenomenon. Furthermore, Shleifer and Vishny (1997) state that large block holders do not only have the incentive policy, but also powerful controlling advantages. Thus, large shareholders' influence is also an on-going issue in the modern corporate governance circle.
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strengthening investor protection is associated with effective corporate governance, which can be observed in the financial markets and the dispersed ownership of shares.
First, the article will examine the relationship between the corporate governance score and corporate value, whereby the empirical findings confirm the significantly positive relationship between corporate governance and firm value (Tobin's q), which is in line with the findings by GIM (2003), BCF (2009) and Ammann et al. (2011). Secondly, I concentrate on measuring the relationship between insider ownership and firm value, and therefore I respectively analyze single biggest owner (T1), family ownership (FO) and blockholders ownership (closely-held shares) to represent ownership concentration and study the relation with corporate profit. This finding is in line with Ammann et al. (2011), BCF (2008) , Bhagat and Bolton (2008) and GIM (2003), and proves that good corporate governance can enhance firm value. Furthermore, the research tests the internationalization effect on the relationship, the result only shows blockholders ownership has a negative impact on firm value. However, the evidence of board independence does not behave a significant effect on corporate value underlying the driver of the internationalization. The contribution of the research is to investigate how the utility of internationalization affect the relationship between corporate governance and firm value, but the research only acquires that blockholders ownership has a negative effect on firm value.
Main research question:
Are firm value and performance associated with ownership structure and board independence (corporate governance) in international firms?
To what extent can the degree of internationalization promote the positive influence of the relationship between corporate governance and firm value?
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2. Literature review and hypotheses development:
2.1 Agency theory and corporate governance
Following the theory by Jensen and Meckling (1976), which addresses the relation of agency costs issues and ownership structure, in which the objective of managers and funders are not identical, namely that shareholders aim at maximizing the return on investments and concentrating on stock returns and bonus. Managers on the other hand prefer to make profits on a short-term period and develop the growth value in a long-term period, whereas, the nature of their behavior will damage shareholders' interest. Therefore, both parties have different targets resulting in a direct conflict of attitudes, which then relates to their benefits and firm's interests. While a principle-agent problem occurs, companies need to seek a proper corporate policy to minimize the loss of the firm value. The conflicts between two parties also needs to be considered as there is no optimal contract and a high information asymmetry. In line with (Jensen and Meckling, 1976), share ownership by management is a highly important mechanism to reduce agency cost in shareholders and managers of firms. Therefore, while the agency problem between management and shareholders will be mitigated, the monitoring cost will be lowered, thereby increasing the profits.
Company’s managers are accountable for their firms and have to ensure corporate transparency mechanisms. Therefore, a highly valuable article (Gompers, Ishii and Metrick, 2003) that constructs a G-Index for corporate governance systems, the index in corporate governance regions, has become a benchmark. Herein, the construction of the score of corporate governance involves anti-takeovers, concentrated ownership structures and independent board directors amongst others. The paper indicates that good corporate governance will reduce the agency problems, and thereby positively influence firm value.
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managers are more likely to act on the benefits of the firm's shareholders and therefore firm's profitability will increase (Tricker, 1994). Additionally, the relevant literature (Byrd and Hickman, 1992) finds a strong significant relationship between the degree of agency problems and board memberships.
Lastly, before the literature of the ownership structure will be cited, the essay will review (Jensen and Meckling, 1976) again. They explain that shareholders may bear higher agency cost due to managers focus on the short-term interests for the firm's growth. Therefore, it will generate extra debt and outside equity. In order to minimize agency cost, they propose to separate ownership and control, to further reduce debt cost. As the paper (ibid) indicated, without any incentives and regulations given to the managers, they probably can make inappropriate managerial discretion and increase agency costs which lower the valuation of the firm and reduce the wealth of the shareholders. Nevertheless, Morck et al. (1988) find a positive influence of ownership concentration on firm value.
2.1.1 Corporate governance and firm value
Previous scholars, document that significant positive association exists between corporate governance and firm value. Here, comparably famous papers GIM (2003) and BCF (2009) point out a significant positive relationship between corporate governance and firm performance. Further, Brown and Caylor (2006) show that the Corporate Governance score is significantly and positively associated with Tobin's Q, and they examine which provisions drive the underlying relation within the governance score. These three papers, construct three benchmark indices in the corporate management fields. Ammann et al. (2011) also investigate the relationship between corporate governance and firm value again, and thereby find a significant and positive relationship on corporate governance and firm performance. According to the viewpoint of GIM (2003), corporate governance is positively and significantly associated with firm value. Moreover, Love and Klapper (2002) find that better corporate governance is highly correlated with better operating performance and market valuation across 14 emerging markets. Consequently, according to literature exhibition, the hypothesis will be drawn as:
H1: Corporate governance is positively and significantly associated with firm value (Tobin’s
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2.2 Ownership concentration (single largest shareholders, family ownerships) and internationalization
Focusing on the agency-principle problem, many researchers do the investigation in terms of the ownership structure of the corporation based on which, the derivation will separate the concentration of ownership and the dispersion of ownership. Studies such as Demsetz (1983), Shleifer and Vishny (1986), Morck et al. (1988) find that the focus of ownership still exists even amongst the biggest American corporations. Moreover, La Porta et al. (1998, 1999) discover that a high level of ownership concentration exists in other developed and developing countries. Claessens, Djankov, and Lang (2000), using 2980 East Asian corporations, find that a single largest shareholder controls more than two-thirds of voting rights in listed firms. Meanwhile, the 60 percent of firms which are not widely held, are related to family control of the shareholdings. Consequently, managers of closely-held firms have a preference towards these family-controlled firms. Also, they conclude that control and management cannot be separated, but ownership and management can be.
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Since Grossman and Hart (1983) find that when shareholders were not able to monitor managerial behaviour, the contract cannot exclude the activity, and managerial ownership can be used to induce managers to act in a manner which relates the interests of shareholders. This scenario could be attributed to the agency model because the interests' divergence between managers and shareholders is caused by shareholders reluctantly paying costly agent fees to managers.
2.2.1 Single biggest owner
Shleifer and Vishny (1997) address that successful corporate governance systems in the US, Germany and Japan deal with opportunistic managerial behavior by combining significant legal protection of investors and concentrated ownership. Concerning corporate governance, From Jensen and Meckling (1976), one can conclude managerial ownership can reduce agency cost because controlling concentrated shareholdings could decline the information asymmetry. Thus, concentrated ownership can enhance firm performance. However, for the relation of corporate management and managerial ownership in internationalization fields there is indeed less evidence to support the significant positive relationship. In line with owner-controlled firms (with a single block of equity which exceeds 5 or 10%), Gugler (2001) conducted a survey study in US and UK firms, in which a significant relationship outperforms manager-controlled firms. Given the clear numerical evidence from Claessens et al. (2000) which finds that in East Asia more than two-thirds of the listed firms have a single shareholder control. Across these countries, the control and management are not separated while the separation exists between ownership and management. Furthermore, while Chen (2001) finds that a positive relationship exists between ownership concentration and corporate value (Tobin's q), the proxy of ownership concentration is T1 (Single largest owner) and T10 (Top 10 largest shareholders).
Therefore, in the field of internationalization, the assumption between corporate governance and corporate value in international firms will be drawn as:
11 2.2.2. Family ownership
Large multinational corporations in particular increasingly aim to improve corporate management efficiency and attract capital funds quickly (Ahunwan, 2003; Maher & Andersson, 2002). According to the literature, the profitability of company may increase when the company has good corporate governance. Outstanding organizational governance structure can reduce agency costs; concentrated ownership will minimize agency rights when shareholders own more voting control rights. In line with this perspective, (Berle and Means, 1932) find a positive effect between ownership concentration and firm value when alleviating the interest conflicts between owners and managers. Moreover, according to (Kraus et al. (2016) analyze that the internationalization of family firms can be regarded as a corporate strategy, aiming to enhance the company growth. Furthermore, (Mitter et al. (2014) find that apart from family influence on governance that significantly affects internationalization when the advisory board have a strong incentive on monitoring. Yet, they do not prove that international activity can bring benefits for family firms. Likewise, Jacquemin and de Ghellinck (1980) and (Prowse, 1992) do not find significant relationship between firm performance and familial ownership, which only proves significant in French and Japanese firms. In addition, Ho (2005) did not find a linear relationship between family ownership and firm performance in an international analysis. In contrast, McConaughy et al. (2001) argue that family-controlled firms in America have greater value and fewer debts than other firms. Andres (2008) also finds supportive evidence on the relation between family ownership and firm value and shows that family-controlled firms are more profitable than widely held firms and other types firms. Thus, the hypothesis will be designed as following:
H2b: Family ownership significantly and positively associates with firm value when the degree
of internationalization increases.
2.3. Blockholders ownership (closely held shares)
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corporate performance. In their essay, it is stated that ‘because the majority of firms around the world be owned by closely held, the mechanism on which competition enhances efficiency is highly important for public policy in many countries' (La Porta et al., 1998). Also, an increasing competition lowers inside ownership and thereby increases the external shareholders of firms. Again, Cheung et al. (2005) describe the additional information on ownership concentration, and that the majority of the firm in their sample are closely held, whereby over 50% stakes are controlled by a CEO or Chairman have at least 10% voting rights. Concerning Thomsen et al. (2006) they find that in Continental European areas where ownership concentration is typically higher, the level of investor protection is lower, and therefore, block holders may have objectives others than shareholder value. Here, the closely-held shares are used by measuring block holders. The consequence of their results illustrates a negative association between block holders and firm value or accounting returns in next period. The definition of closely-held is shares held by insiders, and which indicates that a small group of shareholders control the majority of the shares.
Following Shleifer and Vishny (1986), regarding the growth of a firm, in which initially firms are closely held and within their growth finding substantial capital will be less, is consistent with the viewpoint that large shareholder’s also have the free-rider problem). Following Bennedsen and Wolfenzon (2000), the closely-held corporation with non-transferable shares could have potentially influenced more than one significant shareholder, furthermore their findings indicate the ownership structure determines which group of owners have control over the firm. Through their analysis, we can acquire useful information, such as the decision of an Initial public offering (IPO). For example, letting shareholders freely trade stakes rendering to ownership structure's stabilities, thus, before going public, they should weigh the downsides against the potential benefits of going public.
Negative side /Downsides
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ownership in Continental Europe has an adverse and significant effect on firm value, but in the Anglo-American areas such as U.S., England, there is no significant effect. In their article, the closely held shares can be regarded as the proxy of block holders, and they acquire both economically and statistically negative significant results on the relation of blockholders ownership and firm value. Also, they show the negative relationship between block holder ownership and firm value in Continental Europe. Consequently, the hypothesis will be drawn as:
H3a: In international firms, blockholders ownership negatively associates with firm value.
Positive side
According to La Porta et al. (1998, 1999) and Shleifer and Vishny (1997), which argue that in a legal system with lower levels of investor protection, large owners have a positive effect on the current value of the corporation. Therefore, block holder ownership may exceed value-maximizing levels while block holder ownership has variations on firm value in a systematic effect. Moreover, Bena and Xu (2017) show that ownership concentration positively associates with inside ownership and, outside ownership concentration is consistent with shareholdings concentrated stakes, which have greater private control benefits in higher entrenchment industries. Besides, one more related argument for the balance power of closely held corporations, is that there is a positive relationship between the cash flow of the controlling and firm value (Bennedsen & Wolfenzon, 2000). Therefore, the hypothesis will be stated as:
H3b: Block holder ownership positively associates with Firm value and performance in
international corporations.
2.4 Board Independence and Internationalization
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governance's rules with board independence and internal control which cannot enhance firm value in small firms in the United States. The authors' viewpoint is from an investors' perception, which does not start from shareholder’s wealth.
Regarding independent directors, Beasley (1996) acquired sufficient supporting evidence, that while the outside directors' ownership and tenure increases, the probability of fraud financial statement will be decreased. Thereby, the quality of corporate governance will be promoted. Rosenstein and Wyatt (1990) find that shareholder wealth significantly associates with board independence and outside directors. Considering board characteristics such as board independence, Agrawal and Chadha (2005) and Klein (2002) show that the presence of board independence and financial expertise will reduce the probability of earnings restatement. Moreover, Masulis et al. (2012) find that board independence and stock ownership significantly reduce the likelihood of deliberate earnings manipulation in the intentional misreporting of the financial statement. Concerning typical governance-related shareholder proposals and the independence of the board of directors, Davis and Kim (2007) state points which can remove "poison pills" structure and thereby enhance corporate governance.
In recent US studies, which account potential endogeneity in the relationship between firm value/performance and corporate governance in which is no conclusive statistical evidence on that. For example, Bhagat and Black (1999) state that they do not find a strong correlation between board independence and firm value in an international context, also, they find non-robust correlations between various performance (i.e. measured by Tobin’s q) and independent directors. Indeed, most research on board structures supposes the board independence is a directors' effectiveness function on the board management. Therefore, under the driven of internationalization trending, whether the independence of board associate firm value in international firms or not? The literature will be shown afterwards.
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abnormal returns in the UK financial market, which also strongly relates to various measurements of agency costs. In international firms, Ammann et al. (2011) also identify that CEO separation strongly relates to firm performance. Furthermore, Masulis et al. (2012) find the positive relationship between the separation of CEO duality and firm value. Hereafter, the hypothesis of this part will be designed as:
H4: Board independence is positively associated with firm performance in international firms.
2.5 Country level: corporate governance and Investor protection
La Porta et al. (2002) address that developed economic regions have a more suctions legal environment and stronger investor protection, however this is accompanied by higher revenues compared with developing countries. Subsequently, referring to Porta et al. (1998) who published their study on the effects of legal origin on shareholder protection and capital market development, to employ their anti-director rights index, their finding indicate that common law countries have a higher level of shareholder protection than civil law countries. Regarding (Aggarwal et al. (2008) observed that firm-level governance practices are complement with country-level investor protection, rather than substitutes. Likewise, Davis and Kim (2007) study disclosed the sample of large firms from Eurozone, whose legal protection of shareholder rights is stronger, will show a lower ownership concentration and, more independent directors.
Moreover, La Porta et al. (2002) argue that, common law countries such as U.S., England, Canada and Australia have greater investor protection than some countries with civil law tradition such as France, Germany and Spain. Meanwhile, the common law indeed has an outstanding performance on legal origin, for instance, in countries with the common law system, well legal rules protect outside investors that include both shareholders and creditors, whereas French and German civil law countries behave poorly on this point, as La Porta et al. (2002) found. Herein, common law could enforce the monitoring power and avoid insiders easily stealing profits, thereby enhancing the transparency of accounting standards and corporate value. Followed by upon literature, the hypothesis will be drawn as:
H5: The positive relationship between corporate governance and corporate value (Tobin’s q)
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3. Data and methodology
3.1 Sample and data collection
In the study, I concentrate on investigating the relation between corporate governance and firm performance, whereby the collecting data is from ESG_Asset4 over the world, ESG_ASSET4 sources from Datastream a fraction of Thompson Reuters, as well as the relative financial data collects from WorldScope. In the research, I consider the financial crisis period which could attribute to some bias factors on investigating the relation, and therefore the sample period will be designed between 2010 and 2015. Due to the fact that the insufficient CG-Score could lead to a disturbance of the date, all the CG scores that were less than three years during the collective six years were deleted. In addition, I used the same method to control the measurement of degree of internationalization, which is measured by 100% * Foreign Assets/Total Assets. Then, according to Barontini and Caprio (2006), which excludes SIC code 4900-4999 for non-regulated firms and SIC code 6000-6999 for financial companies.
17 Table 1. Sample Selection by country
Country Name ISO
Code Obs. Country Name
ISO
Code Obs.
United Arab Emirates AE 12 Indonesia ID 108
United States US 4248 Ireland IE 66
Austria AT 54 Israel IL 60
Australia AU 1332 India IN 312
Belgium BE 90 Italy IT 120
Hong Kong HK 546 Japan JP 1722
Czech Republic CZ 12 South Korea KR 390
Singapore SG 162 Kuwait KW 6
Norway NO 90 Taiwan TW 630
Brazil BR 270 Kazakhstan KZ 6
Canada CA 1278 Sri Lanka LK 6
Switzerland CH 258 Luxembourg LU 18 UK GB 1356 Poland PL 54 Sweden SE 168 Morocco MA 6 Chile CL 54 Mexico MX 108 China CN 258 Malaysia MY 144 Colombia CO 18 ZA 420
Germany DE 384 New Zealand NZ 60
Denmark DK 114 Philippines PH 48
Egypt EG 24 Portugal PT 42
Spain ES 132 Qatar QA 6
Finland FI 132 Reunion RU 84
France FR 324 Saudi Arabia SA 24
Netherland NL 162 Thailand TH 78
Greece GR 60 Turkey TR 72
Hungary HU 12 Countries 51 16140
The table shows the number of companies and observations over the 51 countries in the world. 3.2 Measurement of variables:
Dependent variables: Tobin’s Q
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Q ratio is a proxy to assess the organizational performance which is becoming a capital market-based indicator. In line with the majority of previous studies, Tobin's Q has been employed in the essential measure of corporate profit, and it also can explain varieties of economic phenomena such as corporate governance. Following Ferreira and Matos (2008), they regress Tobin's Q ratio in the global sample of firm-level and country-level variables. The calculation of Tobin’s q is book value of total assets plus market value of equity minus book value of equity, divided by total assets.
Independent variables:
Since GIM score established (GIM 2003), symbolizes a standardized index which can account for corporate management, can also be found from the Thomson Reuters data stream. Aggarwal et al. (2011) obtain 41 attributed scores from RiskMetrics and use that to calculate the index. According to literature, firms can be scored following the performance of their corporate management. Therefore, I used the Corporate Governance Score (CGVScore) which is produced by 'Thompson Reuters' ASSET4, for measuring the degree of corporate governance.
Regarding ownership concentration, Jensen and Meckling (1976) address that the single largest owner is a highly significant factor in ownership concentration. Moreover, following Chen (2001), wherein he uses T1 to become the proxy of the single biggest shareholder, to represent ownership concentration in his research. Moreover, relating to the current previous studies, family ownership within control and management do affect firm value (Villalonga and Amit, 2006). Furthermore, Fernández and Nieto (2006) find a corporate's blockholder may increase the likelihood of international export activities.
19 Control Variables: (Firm characteristics)
The collection of all control variables is from Thomson Reuters' Worldscope Database. In line with some literature (Ammann et al., 2011; Masulis et al., 2012; O’Connor, 2012)control variables may affect the investment value on firm-level, and also contain corporate governance affecting factors, such as relating board composition and foreign ownership control. Firstly, with respecting to some firm-level characteristics, the leverage ratio is calculated as total debt to total assets, as Myers (1977) states the presence of debt in the capital structure can prohibit a firm from investing in profitable projects. (Stulz, 1988) addresses that leverage concentrates insider ownership and therefore reduces the possibility of a takeover. (Jensen, 1986) stresses limited managerial discretion where the debt is highly vital over the use of free cash flow. Then, the profitability will be denoted as Earning before income and taxes (EBIT) over total sales. EBIT is often looking at operating profit, which will be often used to compare with peer industries. Firm size is measured by the logarithm of market capitalization, to account for potential economies of scale (Ammann et al., 2011). The percentage of research and development expenditures to sales (R&D/SALES) can check, if the ratio of capital expenditures to assets (CAPEX/ASSETS) can reflect the possible influence of investment on ownership. Concerning the relation between cash holdings and corporate governance as argued by Dittmar and Smith (2007), firms with better corporate governance will cancel out the negative impact of large cash holdings. The measurement of cash denotes net cash flow divide total assets. The last control variable on firm level is market to book value (MTBV), which infers the growth and investment opportunity (Guay, 1999).
Related control factors in corporate governance fields
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free float measure of foreign ownership have a positive effect on firm value and therefore is one consideration in the control variables relating to corporate governance area.
3.3 Moderator
Firm-level: the degree of internationalization
In international evidence, foreign assets divided by total assets is used to measure the degree of internationalization, which is further utilized as a moderator in corporate management fields in Ho (2005). According to Sanders and Carpenter (1998), the extent of foreign operation which can be measured as foreign sales over total sales or foreign assets over total assets, is positively correlated to the majority independent board memberships and institutional investors’ holdings. This paper uses foreign assets divided by total assets as the measurement of the extent of internationalization, since the data percentage of foreign assets over total assets can be directly gathered from WorldScope (WC08736).
3.4 Regression Models
With all the control variables, and CG score as the independent variable, in the second column I added the moderator (degree of internationalization) into the model, whereby the dependent variable is Tobin's q. The model aims to test the relationship between corporate governance and firm value, wherein the measurement of corporate governance is CGV Score.
𝑇𝑜𝑏𝑖𝑛𝑠′𝑄𝑖𝑡 = 𝛽 0+ 𝛽1𝐶𝐺𝑉𝑆𝑐𝑜𝑟𝑒 𝑖𝑡+ 𝛽2𝐶𝐺𝑉𝑆𝑐𝑜𝑟𝑒𝑖𝑡 𝑖𝑛𝑡 𝐷𝑖𝑣+𝛽3𝐵𝑜𝑎𝑟𝑑 𝑆𝑖𝑧𝑒𝑖𝑡 + 𝛽4 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟 𝑉𝑜𝑡𝑖𝑛𝑔 𝑅𝑖𝑔ℎ𝑡𝑠𝑖𝑡 + 𝛽5 𝐴𝑢𝑑𝑖𝑡 𝐶𝑜𝑚𝑚𝑖𝑡𝑡𝑒 𝐼𝑛𝑑𝑒𝑝𝑒𝑛𝑑𝑒𝑛𝑐𝑒𝑖𝑡 + 𝛽6 𝐶𝐸𝑂 𝑆𝑒𝑝𝑎𝑟𝑎𝑡𝑖𝑜𝑛𝑖𝑡 + 𝛽7%𝐹𝑟𝑒𝑒 𝑓𝑙𝑜𝑎𝑡 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 ℎ𝑜𝑙𝑑𝑖𝑛𝑔𝑠𝑖𝑡 + 𝛽8𝐹𝑖𝑟𝑚 𝑆𝑖𝑧𝑒𝑖𝑡 + 𝛽9 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑎𝑡𝑖𝑜𝑖𝑡 + 𝛽10𝐶𝐴𝑃𝐸/𝑇𝐴𝑖𝑡 + 𝛽11 𝑅&𝐷/𝑆𝑎𝑙𝑒𝑠𝑖𝑡 + 𝛽12𝐶𝑎𝑠ℎ 𝐹𝐿𝑜𝑤/ 𝐴𝑠𝑠𝑒𝑡𝑠𝑖𝑡 + 𝛽13 𝑀𝑇𝐵𝑉𝑖𝑡 + ∑ 𝑌𝑒𝑎𝑟_𝐶𝑜𝑛𝑡𝑟𝑜𝑙 + ∑ 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦_𝐶𝑜𝑛𝑡𝑟𝑜𝑙 + 𝑖𝑡 (Model 1)
CG1 = ownership structure + board independence
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Country level: Investors protection (Common law dummy)
La Porta et al. (2002) argue that common law countries such as U.S. and England have greater investor protection than civil law countries such as France, Germany and Switzerland, this is an influential discovery on measuring the country level. Thus, in the section, I deleted those countries that meanwhile possess two mixed traits such as Anglo-American and civil law. Consequently, five countries were removed such as Norway, Kuwait, Morocco, Qatar, Zambia. The observations statistically are locked at 15456 in the model.
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4. Results
4.1 Descriptive statistics
Table 2. Panel A: For the full parameters in Model 1
Mean Median Max Min Std. Dev. Skewness Kurtosis N
TOBINS_Q 1.904 1.502 15.039 0.253 1.311 3.170 17.950 5635
CGVSCORE 55.215 64.110 97.240 1.290 30.524 -0.389 1.686 5635
FA/TA 20.252 10.590 199.340 0.000 23.680 1.457 4.853 5635
BOARD_SIZE 10.207 10.000 28.000 2.000 3.253 1.125 5.549 5635
SHAREHOLDER_VR 53.758 67.370 69.730 1.250 27.404 -1.361 2.861 5635
AUDIT COMM INDEP 53.172 71.140 71.410 0.010 26.885 -0.940 2.090 5635
FOREIGN HOLDINGS 4.696 0.000 88.000 0.000 12.352 3.639 17.258 5635 EBIT/SALES -0.966 0.116 410.013 -2335.051 35.629 -53.337 3348.238 5635 LEVERAGE 0.229 0.218 1.743 0.000 0.160 0.863 5.435 5635 Firm Size 7.305 7.099 11.316 4.159 1.081 0.499 2.963 5635 CAPE/TA 5.435 3.840 197.610 0.000 6.598 8.982 181.563 5635 R&D/SALES 33.509 1.840 95800.000 -0.580 1481.041 57.717 3472.753 5635 CASHFLOW/ASSETS 0.009 0.003 0.983 -3.526 0.113 -5.835 210.593 5635 MTBV 3.875 2.040 2043.040 -884.060 45.132 33.440 1460.604 5635
The table 2 panel a reports descriptive statistic of the key variables used in the Hypothesis 1, which mainly measures the relation between CG-Score and Frim value (Tobin’s q)
Panel B: Full parameters in Model 2
The panel b. reports descriptive statistics of the key variables used in the following Hypotheses that include H2, H3, and H4, which investigates the relation between ownership structure, board independence and Tobin’s q.
Mean Median Max Min Std. Dev. Skewness Kurtosis N
TOBINS_Q 1.927 1.527 12.836 0.412 1.314 3.021 16.173 4953
SINGLE BIGGEST OWNER (T1) 5.837 0.000 99.800 0.000 12.886 2.977 12.562 4953 Employee/Family Holdings 19.632 10.730 99.850 0.000 22.578 1.166 3.384 4953 CLOSELY HELD_SHARES 16.682 10.200 99.800 0.000 17.689 1.654 5.237 4953 CEO/CHAIRMAN SEPARATION 54.479 71.140 71.410 0.010 26.164 -1.049 2.323 4953 FA/TA 4.858 0.000 88.000 0.000 12.652 3.576 16.677 4953 BOARD_SIZE 46.395 75.390 79.960 7.270 33.875 -0.134 1.029 4953 SHAREHOLDER_VR 20.487 10.850 199.340 0.000 23.823 1.442 4.841 4953
AUDIT COMM INDEP 10.209 10.000 28.000 2.000 3.220 1.125 5.652 4953
23
24 Table 3 Correlation matrix
Note: Table 2 shows the information of correlation for variables and used in the regression of the empirical analysis, e.g. ***, **, * which means each coefficient’s p-value at 1%, 5%, 10% significant level respectively.
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
TOBINS_Q 1
SINGLE BIGGEST OWNER 0.055*** 1
CLOSELY_HELD_SHARES -0.025* 0.408*** 1
EMPLOYEE/FAMILY_HELD -0.003** -0.003 0.613*** 1
SCORE__CEO_CHAIRMAN_SEPARATION -0.010 0.019 0.139*** 0.108*** 1
FOREIGN ASSETS/TOTAL ASSETS -0.078*** 0.037*** 0.007 -0.034** 0.146*** 1
25
26 4.2 TSLS analysis and Hausman – Taylor estimator
The most crucial researching papers examine the relationship between stock ownership and firm performance, which involves endogeneity of the firm's ownership structure. For example, Morck et al. (1988) assume the causality effects on ownership and firm performance, yet Kole (1995) argues a reverse causality existing between them because managers tend to acquire their compensations rapidly from their stock shares when firm performance is high. In the current researching articles such as Bhagat and Bolton (2008), Seifert, Gonenc, and Wright (2005) in respect of the endogeneity of the ownership structure and corporate governance all be concluded in that, moreover, they all use 2SLS methodology in their articles. Therefore, I will utilize 2SLS regression as well, the benefit of the methodology is to use auxiliary parameters reducing the fitted values for the dependent variables. Another reason is, the model 2 examines the causality between firm value and ownership of concentration (i.e. single biggest ownership and family ownership), blockholders ownership, as well as involving board independence factor. The 2SLS'usage can reduce the omitted value. The purpose of the paper is to examine a fashion issue between corporate governance and corporate value, here the more treasure points are concentrating on ownership structure, which includes the equity ownership of single largest owner, blockholders and family owners, meanwhile considering about the influence of board independence.
The paper will exert panel OLS, fixed-time effect OLS and 2SLS regression to analyze the relation between ownership structure, board independence and performance. The 2SLS equation for the scenario of the ownership, board independence and firm performance are determined as below:
On which
Tobin Q = f (constant, the independent variables, control variables in Model 2 excludes shareholder voting rights and foreign ownership)
Board structure = g (constant, CG-Score, ROA, all control variables in Model 2)
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4.3 Results and Analysis
Table 4 Corporate governance score and firm value
Tobin’s' q Variable (1) (2) Constant 1.362*** 1.1727*** (0.154) (0.167) CGVSCORE 0.005*** 0.007*** (0.000) (0.001) CGVSCORE*DOI -0.000*** (0.000)
Foreign Assets/Total Assets 0.000
(0.002) BOARD_SIZE -0.039*** -0.034 (0.005) (0.006) SHAREHOLDER_VOTING RIGHTS 0.001* 0.001 (0.001) (0.001) AUDIT_INDEP 0.005*** 0.005*** (0.001) (0.001) FREE_FLOAT FOREIGN HOLDINGS 0.009*** 0.009***
(0.001) (0.001) EBIT/SALES 0.000 0.000 (0.000) (0.000) LEVERAGE -1.05*** -1.1327*** (0.099) (0.107) Firm Size 0.059*** 0.077*** (0.018) (0.019) CAPE/TA 0.016*** 0.018*** (0.002) (0.003) R&D/SALES 0.000*** 0.000*** (0.000) (0.000) CASHFLOW/ASSETS 0.196 0.222 (0.145) (0.148) MTBV 0.0017*** 0.002*** (0.000) (0.000) F-statistic 35.9133*** 31.125***
Year fixed effects Yes Yes
Industry fixed Yes Yes
Observations 6241 5635
28
The first column of the table reports the relation of corporate governance Index and firm value that be involved in international diversification; the second column also examines the same relation yet does not include global diversification factor. The panel least squares regression uses ***, **, * to denote statistical significance at 1%, 5%, 10% level respectively.
4.3.1 Corporate governance and firm value and performance, be involved internationalization
Table 4 presents the regression results of Model 1, which utilizes OLS and Fixed-period effect methods. Through observes, the table delivers the positive information to us, corporate governance positively associates with firm value, which is consistent with the first hypothesis. To add the moderator to examine the internationalization effect on the upon the relationship. The results indicate corporate governance significantly and negatively associates with Tobin's q (e.g. Allen & Pantzalis, 1996; Goerzen & Beamish, 2003). The indication of that illustrates the degree of internationalization could decrease the market valuation of firms due to foreign assets of firms increased. Regarding other control variables, for instance, audit independence, foreign holdings, of which, all positively associated with firm value. However, unpredictably is, board size has a negative effect on firm value in the driver of the internationalization. The coefficient is -0.039, which indicates under the internationalization driven, the numbers of the board should be controlled and decreased, and the perspective is corresponding with the findings of Li and Zaiats (2018) and Masulis et al. (2012).
Furthermore, as shown in the table above, the moderator (foreign assets / total assets) is not significantly associated with firm value. For the other control variables, such as firm size (log market capitalization), market to book value and R&D/Sales, which all have a positive effect on market valuation, the findings shed light on previous studies. Only the ratio of net cash flow to assets has not presented significant effect on firm value. It is different from descendent researches. In terms of leverage, the result statistically reports a negative effect at 1% significance level that indicates good governance will alleviate the debt cost of the company, is consistent with Masulis et al. (2012) viewpoint.
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Variable OLS time-fixed 2sls
Constant 1.420*** 1.510*** -9.640***
(0.167) (0.169) (0.637) SINGLE BIGGEST OWNER(T1) 0.010*** 0.010*** -0.011
(0.002) (0.002) (0.008) EMPLOYEE/FAMILY Ownership(FO) 0.003** 0.000 -0.014* (0.001) (0.002) (0.007) BLOCKHOLDER Ownership(CHS) -0.005*** -0.002 0.027** (0.001) (0.002) (0.011) CEO/CHAIR SEP 0.000 0.001*** -0.009 (0.001) (0.001) (0.006) DOI*T1 0.000 0.001** (0.000) (0.000) DOI*FO 0.000*** 0.001** (0.000) (0.000) DOI*CHS 0.000** -0.001** (0.000) (0.001) DOI*CEO/CHAIRMAN SEP. -0.000*** 0.000* (0.000) (0.000) FOREIGN ASSETS/TOTAL ASSETS -0.004*** 0.000
(0.001) (0.005)
SHAREHOLDER VOTING RIGHTS 0.002*** 0.002*** (0.001) (0.001)
BOARD_SIZE -0.029*** -0.027*** -0.015*
(0.006) (0.006) (0.009)
AUDIT COMM INDEP 0.008*** 0.008*** -0.002
(0.001) (0.001) (0.001) FOREIGN_HOLDINGS 0.007*** -0.001 (0.002) (0.002) EBIT/SALES 0.000 0.002 0.000 (0.000) (0.000) (0.001) LEVERAGE -1.049*** -1.089*** -0.447** (0.114) (0.114) (0.202) Firm Size 0.060*** 0.039** 1.664*** (0.018) (0.019) (0.072) CAPE/TA 0.012*** 0.012*** 0.000 (0.003) (0.003) (0.003) R&D/SALES 0.000*** 0.000*** 0.000*** (0.000) (0.000) (0.000) CASHFLOW/ASSETS 0.129 0.141 0.090 (0.167) (0.167) (0.097) MTBV 0.001*** 0.001*** 0.000 (0.000) (0.000) (0.000) F-statistic 27.003*** 19.971*** 20.099***
Year fixed effects No Yes Yes
Industry fixed Yes Yes Yes
Instrument rank 1472
Observations 4953 4953 4953
Adjusted R2 0.078 0.084 0.780
30
time fixed effect model and 2SLS estimator. ***, **, * indicates 1%, 5%, 10% significant level of each coefficient respectively.
4.3.2 Analysis of the relationship between CG1 (single biggest owner, family ownership, blockholders ownership and board independence) and firm value in the driver of internationalization
Given Table 4 illustrates that single largest owner has a positive effect on firm value, the coefficient is 0.01 around at 1% significance level in all three estimators in Tobin's q model. The result is optimally consistent with Gugler (2001), Claessens et al. (2000) and Chen (2001). However, while bringing into the extent of internationalization in the research, in OLS time-fixed effect, I cannot find significant evidence between single biggest owner and firm value, whereas, the assessment of 2SLS model that reports a positive effect at 0.05 significant level. As a result, the estimator does not actively support hypothesis 2b due to the conflict existing the two models after, and therefore I will use Hausman estimator to test the relation of that again afterwards. The table 4 statistically reports family ownership significantly and positively associate firm value, but the effect only exists in OLS model, with two other estimators that do not indicate having any significant influence. Nevertheless, to the extent of internationalization on Tobin's q which shows a positively significant influence in time-fixed effect and 2SLS estimator. Herein, the result supports the perspective of McConaughy et al. (2001) and Andres (2008), the family ownership will have better performance on firm value due to the concentrated ownership, and therefore in the driver of global diversification, family-controlled firms are more tending to have a good performance on market valuation to compare with other firms. Thus, the hypothesis 3a is accepted.
31
The table 4 report that CEO and Chairman’s separation significantly and positively associate with firm value in time-fixed model and 2SLS model. The finding is consistent with previous studies expectation (Ammann et al., 2011). However, for the effect of the extent of internationalization, the result cannot get supportive evidence. Therefore, I will utilize fixed effect, random effect and Hausman test to examine the relation then, the result will be shown in Table 5. Consequently, the implication of board independence is, in international firms the CEO and Chairman separating is positively associated with firm value. The inference of which is light in previous studies, such as Masulis et al. (2012), Davis and Kim (2007) and GIM (2003). the independence of the board structure plays a vital role in corporate governance spectrum. However, to test the utility of the moderator (internationalization) in the model, wherein I cannot acquire a significant effect. Therefore, the finding is not corresponding with hypothesis 4.
As the table 4 reported, these control variables in OLS and time fixed regressor, which present a same direction linear. For example, shareholders voting rights positively associate with firm value. Moreover, audit committee independence, firm size and capital expenditure to total assets as well as including the cost of research and development to sales, all of them have a positive effect on firm value. The leverage ratio is significantly associated with firm value, this is corresponding with pecking order theory that shows profitability should be negatively related to leverage. Nevertheless, the cash flow to total assets is not significant in the model, which conflicts with Dittmar and Smith (2007) conclusion. In 2SLS estimation, only audit independence is different with the first two outcomes, there is no significant effect on corporate value. In next section, I will utilize Hausman test to examine ownership is an endogenous variable.
32
Table 5 CG1(ownership structure and board structure) and Firm value
Table 5 illustrates the investigation of whether internationalization affect the relationship
between ownership structure, board independence and firm value of which uses fixed effect, random effect and Hausman test. ***, **, * indicates 1%, 5%, 10% significant
level of each coefficient respectively.
Variables Fixed Random Hausman
Constant -10.136*** -0.553** -10.325*** (0.446) (0.215) (0.419) T1 0.005** 0.006*** 0.0062** (0.002) (0.002) (0.002) FO 0.001 -0.002 0.000 (0.002) (0.001) (0.002) CHS 0.003** 0.000 0.003*** (0.001) (0.001) (0.001) CEO/CHAIR SEP 0.001* 0.001** 0.001* (0.000) (0.001) 0.001 DOI*T1 0.000 0.000 0.000 (0.000) (0.000) (0.000) DOI*FO 0.000 0.000 0.000 (0.000) (0.000) (0.000) DOI*CHS -0.000* -0.000** -0.000** (0.000) (0.000) (0.000) DOI*CEO/CHAIR SEP. 0.000 0.000 0.000 (0.000) (0.000) (0.000) FA/TA (DOI) 0.000 0.000 0.001 (0.001) (0.001) (0.001) BOARD SIZE -0.012* -0.026*** -0.013* (0.008) 0.006 0.008
Shareholder voting rights 0.001** 0.001* 0.001*
(0.001) (0.001) (0.001) Audit IND -0.002 0.003*** -0.002* (0.001) (0.001) (0.001) FOREIGN HOLDINGS -0.001 0.004** 0.000 (0.002) (0.002) (0.002) EBIT/SALES 0.000 0.000 0.000 (0.001) (0.000) (0.001) LEVERAGE -0.355** -0.867*** -0.373*** (0.138) (0.110) (0.133) Firm Size 1.677*** 0.361*** 1.704*** (0.059) (0.026) (0.054) CAPE/TA 0.003 0.005** 0.002 (0.002) (0.002) (0.002) R&D/SALES 0.000*** 0.000*** 0.000*** (0.000) (0.000) (0.000) CASHFLOW/ASSETS 0.113 0.137* 0.116 (0.008) (0.079) (0.080) MTBV 0.000 0.001* 0.000 (0.000) (0.000) (0.000) F-statistic 20.067*** 16.550*** 20.046***
Year fixed effects YES YES YES
Industry fixed YES YES YES
Observations 4953 4953 4953
Adjusted R2 0.850 0.059 0.849
33
34
Table 6 Investor protection and corporate governance analysis
Table 6 reports the relationship between corporate governance and investor protection, in which I follow Porta et al. (1998) to test the relation between corporate governance and firm value in common law countries
Variables Constant 1.161*** (0.168) SINGLE_BIGGEST_OWNER 0.009*** (0.002) EMPLOYEE/FAMILY HELD -0.002*** (0.002) CLOSELY HELD_SHARES -0.001 (0.002)
SCORE CEO/CHAIR SEPAR. 0.002***
(0.001) DOI*T1 0.000 (0.000) DOI*FO 0.000*** (0.000) DOI*CHS -0.000*** (0.000) DOI*CEO/CHAIR SEPARA -0.000*** (0.000) BOARD_SIZE -0.032*** (0.006)
SHAREHOLDER VOTING RIGHTS 0.001*
(0.001)
AUDIT COMM INDEP 0.005***
(0.001) FOREIGN_HOLDINGS 0.006*** (0.002) EBIT/SALES 0.000 (0.000) LEVERAGE -1.025*** (0.113) LOG_MKTCAP 0.09*** (0.019) CAPE/TA 0.010*** (0.003) R&D/SALES 0.000*** (0.000) CASHFLOW/ASSETS 0.192 (0.165) MTBV 0.001*** (0.000) COUNTRIES DUMMY 0.350*** (0.040) F-statistic 23.3301***
Year fixed effects Yes
Industry fixed Yes
Observations 4953
35
(e.g. U.S., UK, Australia etc., using English language countries) and civil law countries (such as France, Germany and Spanish and some continental European countries) respectively. ***, **, * indicates 1%, 5%, 10% significant level of each coefficient respectively.
4.3.4 Analysis of country level - investor protection and corporate governance
Following the table 6, country dummy is significantly associated with firm value, which indicates common law countries (such as U.S., England and Australia) have a better investor protection than civil law countries. Thus, the hypothesis five is accepted. Moreover, such shareholder voting protection, board independence and single biggest owner have a significantly positive effect respectively in common law countries. Basically, the results are consistent with Table 4. But, in here the block holder of foreign holdings also has significant effect, this illustrates common law countries have more strength protection. Interestingly, when the country dummy adding into the equation, MTBV has a significant effect. The closely held companies significantly and negatively associate with firm value. According to the upon findings, the results support Porta et al. (1998) findings, in common law countries, the investor protection has more fruitful way to understand corporate governance.
5. Conclusion
The intent of the article is to examine the relationship between the corporate governances and firm value and performance, also employs the moderating effect of the degree of internationalization to test the relationship. In addition, concerning the factors of corporate governance, the article is concentrating on single biggest owner, family ownership and closely held share that constitute the discussion of ownership structure. Subsequently, the board independence factor also be involved in construction of corporate governance.
36
the internationalization concept into measuring the relationship between corporate governance and firm value (Tobin’s q). The results show ownership concentration that involves single largest shareholder and family ownership, which significantly and positively associate with both of firm value and performance, it implies that the insider ownerships have more outstanding impact on that; simultaneously which manifest the concentration of ownership can reduce agency cost, is consistent with the conclusion of Jensen and Meckling (1976). Regarding the impact of closely held firms, is negatively significant associated with firm value, whereas in the driven of internationalization the consequence is not significant. The influence of CEO and Chairman separation is significantly positive associated with firm value, however, when affiliating internationalization, the result is significantly negative effect, which is not consistent with previous studies.
Furthermore, the research also examines how the extent of internationalization affects the upon relation. The result shows that only closely held firms have a significantly negative effect with firm value (Tobin’s q), the empirical finding confirms foremen studies such as Bena and Xu (2017), Bennedsen and Wolfenzon (2000). However, to other three main variables which do not find significant empirical evidence in the internationalization. Block holders (closely-held shares) also have negative influence in which, the implication is supporting (Shleifer and Vishny, 1986) viewpoint, because the closely held firms have favorable investment in small firms, but in the driven of internationalization, investors tend to invest large companies. Thomsen et al. (2006) also find a negative effect on that in European countries, in more developed countries, non-transferable shares may lower the profitability of firms. Nevertheless, there is no evidence to be found in CEO/Chairman separation.
Lastly, concerning the influence of country-level, the finding is consistent with (La Porta et al., 1999) who documents good investor protection countries will have good corporate governance, and in common law countries the firm value and operating performance will have better performance than code law countries have, because they have a better law system on investors protection. Therefore, the corporate governance can be better manipulated in these countries.
37
1 in OLS and time-fixed estimators, the results of explanatory variables are somewhat low, and therefore the finding in model 1 is less convincible. Thirdly, concerning the effect of internationalization moderate the relationship between corporate governance and firm value, the results of the 2SLS estimator and Fixed effect have a bias because the research is adding ROA variable and CGV-Score into 2SLS model.
38
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