The corporate governance-performance relationship. The impact of ownership structure and board independence on firm performance: Evidence from South Africa.

The corporate governance-performance relationship.

The impact of ownership structure and board independence

on firm performance:

Evidence from South Africa.

by

Marlen B. Fiedler

August 2009

Student Number: 1842080

Supervisor:

Tra Pham

Abstract

The corporate governance-performance relationship has been widely examined. However, empirical evidence on the developing world remains little. This study investigates the relationship between corporate ownership structure and board independence regarding performance on the company-level in South Africa. I use a panel data set of 465 observations. Non-financial companies over a three year time period are considered. Furthermore, different regression techniques such as pooled, fixed effects and random effects regressions are employed. Mainly insignificant results are revealed for managerial ownership and board independence. Institutional ownership seems positively related to firm performance. However, conflicts of interests may evolve from different aims and business connections of institutions with the target firm. Controlling for firm-fixed effects, the partly suggested endogeneity problem of corporate governance mechanisms is revealed. Not for all corporations are the same governance structures optimal in enhancing firm value.

Table of Content

1. INTRODUCTION ... 4

2. AGENCY THEORY – SOURCE OF THE PRINCIPAL-AGENT-CONFLICT ... 6

EMPIRICAL EVIDENCE ON CORPORATE GOVERNANCE AND FIRM PERFORMANCE...8

Managerial Ownership... 9

Institutional Ownership...11

Board independence...13

3. DATA & METHODOLOGY ... 16

SAMPLE COLLECTION... 16

VARIABLE DEFINITION &MEASUREMENT... 17

MODEL SPECIFICATION... 19

DESCRIPTIVE ANALYSIS... 22

4. RESULTS ... 25

5. SUMMARY & CONCLUSION... 34

REFERENCES ... 37

1. Introduction

The governance of corporate enterprises has been an essential issue in the landscape of past empirical literature and has been considered as of enormous practical importance. Researchers have been attempting to generalize the picture of the corporate governance-performance relationship. While empirical research on this subject has been widely available in industrialized economies (i.e. La Porta et al., 1998), especially the U.S. (i.e. Gompers et al., 2003; Morck et al., 1988; Demsetz and Villalonga, 2001). However, little is known in context of the developing world. It is widely suggested that good corporate governance is crucial for the value of the firm (Klapper and Love, 2004) However, a clear and general picture of which mechanisms have an impact on firm performance has not been given; the comprehensive structure of the corporate governance issue makes it difficult. Hence, an understanding of the determinants of what enhances firm-level performance is necessary when attempting to bring development to product markets.

evidence in the field of corporate governance in the developing world and may give further evidence to the suggested endogenous character of corporate governance and firm performance.

Although all developing countries are different, they can be seen as equal by the high cost of finance and limited access to credit. Banks as well as other domestic and international institutional investors are an important source of credit and capital for most corporations. As the McKinsey Global Investor Survey (2002) suggests, two-thirds of the 201 professional investors assess corporate governance as equally important to financial aspects in Asia and Latin America, and find it even more important (about 40%) than financials in Eastern Europe and Africa when considering their investment decisions. Even a significant majority is willing to pay a premium for a well-governed company in these developing and emerging countries. Properly governed corporations are better able to expand their resources and attract domestic and international capital at lower costs (Cooper, 2007). Corporate governance helps “to maintain the confidence of investors – both foreign and domestic – and to attract more, ‘patient’, long-term capital” (OECD, 1999, page 7) which strengthens the long-term competitiveness of corporations. For South Africa, the increasing participation in the global economy gives pressure to comply with international standards in corporate governance. As Rossouw et al. (2002) state, “in an increasingly integrated world characterized by highly mobile capital, investors’ expectations for more responsive corporate governance practices are something that governments and companies cannot afford to ignore” (page 299).

Since the external market for corporate control is less elaborate in developing countries and legal systems are rather weak, the focus on internal governance mechanisms is more important (Klapper and Love, 2004). On the one hand, responsibility for management supervision and accountability lies with the board of directors as internal control system (Rossouw et al., 2002). On the other hand, institutional investing is important in developing countries (Nganga et al., 2003). Institutions are seen as strategic investors which may actively take part in the decision making process (La Porta et al., 1998) and might be the most important governance mechanism. Hence, board and ownership structures are worth to be examined regarding firm performance.

collection and variable measurement. Furthermore, an overview about the applied methodology is given. Section 4 presents the estimation results and discusses the main findings. An overall summary and conclusion are given in section 5.

2. Agency Theory – Source of the Principal-Agent-Conflict

Various researches have been undertaken to examine whether corporate governance mechanisms affect firm performance. The upcoming section focuses on the main general theoretical framework in the field of corporate governance and reviews the empirical findings.

The concept of corporate governance has been based on the separation of ownership and control of corporations, as formulated by Berle and Means (1932). It has been generally argued that corporations are owned by widespread shareholders and that responsibility and control of all corporate assets is given to management because managers are seen as more educated and specialized in running the firm and in “maximizing the principal’s welfare” (Jensen and Meckling, 1976, page 6). Such a separation has been thought to be beneficial because of the increasing industrialization and complexity of corporate operations. Supported by the

Stewardship Theory which is based on the belief that managers will act honestly for the good of

the company’s shareholders (Tricker, 1994) firm profitability will increase. However, it has been recognized that directors are unaccountable (Berle and Means, 1932) and fail to act in the best interests of the shareholders.

Agency Theory, as superior foundation in corporate governance, is based on the belief that

It requires transparency and accountability of managers. Agency theory gives implications to understand managerial behavior and how to give incentives to them. It “explores how contracts can be written and incentives provided to motivate individuals to achieve goal congruence” (Hailemariam, 2001, page 38). Without any incentives and regulations given to the managers, they are likely to be able to exercise their managerial discretion and increase agency costs which lower the value of the firm and reduces the residual wealth of the shareholders (Jensen and Meckling, 1976). Governments, institutions and shareholders themselves, have been considering the rising interest in corporate governance mechanisms. On the one hand, incentives for managers might be given in form of equity stakes ex-ante aligning their interests with those of the overall shareholders. On the other hand, monitoring activity is necessary to watch the management’s decision making process. But to what extent do corporate governance mechanisms actually reduce agency problems in corporations?

Following theoretical foundations and implications for the relationship between equity ownership and board independence and firm performance, I review the findings of previous empirical researches. The overview considers managerial ownership, institutional ownership and board composition separately.

According to Jensen and Meckling (1976), share ownership by management is a crucial mechanism to reduce the agency problem between shareholders and the management of a firm. It is argued that managers take investment and financing decisions that benefit themselves but minimize the payoff for outside stakeholder. Managers will fail to maximize shareholder value without having a sufficient equity stake in the company. Referring to the so called

Convergence-of-interest theory (Morck et al., 1988) this would suggest a positive influence of ownership

concentration by managers on firm performance.

Whereas a positive relationship between ownership and firm performance can be clearly assumed with the convergence-of-interest theory, aspects of the entrenchment theory might explain the opposite.

When referring to shareholdings by institutions fundamental theories are less specified. However, it is theoretically argued that they act as a “counterweight to management’s incentives to block value-enhancing control changes” (Bhagat and Jefferis, 2002, page 24). With sufficient large equity stakes in the company and enough voting power, institutions are able to encourage successful investment strategies which improve the performance of their target companies (Bhagat and Jefferis, 2002). Hence, equity ownership by institutions is seen as a crucial mechanism to reduce agency problems and seems therefore associated with higher profitability of the firm.

Besides, institutional shareholders may be a complementary mechanism to the board of directors (Aguilera and Jackson, 2003). Whereas institutions may function as outside monitors, the board of directors is a crucial internal control system for an active monitoring of the corporate management. Copying agency conflicts to the relationship between the board of directors as principal and the CEO as agent implies that the board of directors should guarantee the supervision of executive actions and limit the power of self-serving directors (Tricker, 1994). Intuitively implicated, the board is recommended to contain a sufficient number of directors being independent from management and free from a business relationship (OECD, 2004) in order to be able to exercise objective judgment and to represent shareholders’ interests.

A great variety of empirical studies exists. Because of comprehensive databases and information disclosure in the industrialized world, most of the empirical evidence is based on U.S. data1 and Europe2. However, researchers have recently started to examine emerging and developing markets3. It is generally argued that good corporate governance will enhance firm value (Klapper and Love, 2004; Shakir, 2008). However, the empirical findings do not always find a relationship to support the intuition of corporate governance mechanisms. Researchers have examined the corporate governance-performance relationship from different aspects. Different data samples and proxies for firm performance are found among the vast empirical landscape of corporate governance. As proxy for firm value, Tobin’s Q has been widely chosen (i.e. Morck et al., 1988; McConnell and Servaes, 1990; Himmelberg et al., 1999). But also besides abnormal stock return behavior as another market based measure, accounting profit rates have been considered to explain operating profitability (i.e. Demsetz and Lehn, 1985; Hermalin and Weisbach, 1991). Differences lay in the focus on several mechanisms, variable measurement and different methodological aspects. Besides the investigation of (minority) shareholder rights (i.e. Gompers et al., 2003) and investor protection (i.e. Klapper and Love, 2004), it has greatly been focused on corporate ownership structure (i.e. Morck et al., 1988; McConnell and Servaes, 1990; Hermalin and Weisbach, 1991; Himmelberg et al., 1999), board structure (i.e. Baysinger and Butler, 1985; Bhagat and Black, 1999, 2001; Rosenstein and Wyatt, 1990, 1997), and their relation towards firm performance. Corporate governance mechanisms have been implemented to mitigate agency problems and thus to enhance firm performance. However, evidence on the corporate governance-performance relationship is rather inconclusive.

Managerial Ownership

Considering corporate ownership structure, predominantly managerial ownership has been examined (i.e. Morck et al., 1988; Himmelberg et al., 1999; Demsetz and Villalonga, 2001). According to the convergence-of-interest hypothesis ownership stakes by management suggest a positive relationship to firm performance. However, a linear relationship is unlikely to be found.

1 _{i.e. Demsetz and Lehn (1985), Hermalin and Weisbach (1988), Morck et al. (1988), Demsetz and Villalonga (2001)} 2

i.e. Faccio and Lasfer (1999), Müller and Spitz (2001), Bhattacharya and Graham (2007)

Evidence in the U.S. shows a non-monotonic behavior of managerial ownership concentration towards firm value which results from the competing effects, namely convergence-of-interests and the management entrenchment effect (Morck et al., 1988; McConnell and Servaes, 1990; Hermalin and Weisbach, 1991). It means that the relationship of managerial ownership towards firm value among others depends on the level of agency conflicts created by the concentration of ownership. Morck et al. (1988) find a piecewise linear relationship. Ownership shows an increase in firm value when ownership increases from 0% to 5%, a negative relationship between 5% and 25% and a slighter increase of firm value with managerial ownership beyond 25%. Consistent with that are the findings of Faccio and Lasfer (1999) who find higher inflexion points, namely 19.68% and 54.12% which suggests that UK managers become entrenched at higher ownership levels. The comparison of the results of UK samples is not as significant as the comparison of the U.S. samples. Contrary to the relationship found by Morck et al. (1988), Hermalin and Weisbach (1988) find a decreasing relationship from 1% to 5%, an increasing relationship from 5% to 20% and again a decreasing relationship beyond 20% for equity ownership by the CEO, not by the whole board of directors. Further evidence on a non-linear relationship, among others, is given by McConnell and Servaes (1990). They find a significant curve-linear relationship between managerial ownership and firm value. A rising slope is found up to an ownership stake of approximately 40% or 50%, after that the slope is going downward. This entrenchment effect beyond a certain threshold of ownership concentration is supported by Faccio and Lasfer (1999) for UK firms. Whereas the findings are rather weak for low growth firms, they find significance in high growth firms assuming that potential conflicts are greater in more mature firms. Research by Mueller and Spitz (2001) in Germany reveals incentive effects of managerial ownership even up to around 80%, after which the impact becomes negative. Furthermore they claim that companies perform better when more outside owners are involved. Contrary to the examination of mostly listed companies, however, this study is conducted in a sample of small and medium private limited liability firms (GmbHs).

So far, the findings imply that increasing equity stakes of management in lower ranges positively affects firm value which changes above a certain threshold of equity stakes.

impact on performance. Also Demsetz and Villalonga (2001) find no statistically significant relation between the ownership structure of the firm and performance. They explain their results with that, “although diffused ownership exacerbates some conflicts, it may yield compensating advantages that generally offset agency problems” (page 215). Differently, Demsetz (1983) suggest that the overall ownership structure of a firm is endogenously determined by the individual balance of various cost advantages and disadvantages and may therefore not be related to the profitability of the firm. Evidence consistent with this assumption is given by Demsetz and Lehn (1985). Using accounting profit rates, they find no significant relationship between corporate (managerial and institutional) ownership and firm performance for their U.S. sample.

Institutional Ownership

As Jensen and Meckling (1976) state, ownership stakes by different shareholders have different effects on firm performance. In the empirical landscape of corporate governance, not only managerial ownership has been considered but also institutional ownership in order to approach whether corporate ownership enhancing firm performance. Whereas for managerial equity ownership it can be argued with interest aligning entrenchment effects the implications for institutional investing are more unclear.

Aguilera and Jackson (2003) claim that institutions matter because they shape the social and political process of how stakeholders’ interests are defined. But the question remains if institutions as outside players really have an direct impact on firm value?

As Gillan and Starks (2000) find, institutions have become increasingly important in the U.S. equity market. Activism by banks, investment companies, pension funds or insurance companies does not only aim at getting a return on their investments, which is in line with the interest of all shareholders. The concept of institutional ownership has arisen to control the agency conflicts between managers and minority shareholders. Shareholder activism has been emphasized to push firms’ management towards improving performance and, thus, enhancing shareholder value (Gillan and Straks, 2000).

large shareholders can monitor management at lower costs. Furthermore, they are more knowledgeable in investing and have potential expertise and power to prevent managers from engaging in moral hazard. Hence, it could be assumed that the presence of blockholders may ensure the firms’ management to act in the interests of other shareholders. Consequently, institutional ownership is expected to be positively related to firm performance.

Indeed, authors find a positive relationship between institutional ownership and firm performance which supports the efficient-monitoring hypothesis by Pound (1988). Wahal and McConnell (2000) find a significant positive relationship between institutional ownership and investment expenditures. Positive, but insignificant, results are found by McConnel and Servaes (1990) and Demsetz and Villalonga (2001) on the relationship to Tobin’s Q. In his survey, Black (1998) claims that the effects on firm performance can be expected from the level of effort by institutions. For the U.S., it evidently does not seem to be much. However, Opler and Sokobin (1995) reveal results that are consistent with the view that not individual institutions but coordinated institutional activism creates shareholder wealth.

It could be suggested that such coordination of institutions is less likely. Various institutional groups may have different interests and intentions when investing in other businesses. Bhattacharya and Graham (2007) investigate a sample of Finnish firms. They segment institutions into classes and find only a significant relationship for institutions which are likely to have investment and business connections with the firm. A negative impact is revealed. Hence, whereas beneficial effects on firm value may result from greater motivation in business activity and monitoring activity by large shareholders (efficient-monitoring hypothesis), strategic alignment and business relationships with the firms’ management to maintain advantages may predict a negative impact of institutional shareholding on firm value.

In fact concentrated ownership is present in the industrialized world (La Porta et al., 1998). In developing countries, however, this pattern is more pronounced (Berlöf and Thadden, 1999). Investigating emerging and developing markets, concentrated ownership by the government, families or institutions is found (Berglöf and Thadden, 1999; Nganga et al., 2003). On the one hand, some evidence in developing countries supports the implied conflicts of interests between large and small shareholders. For instance, Shakir (2008) gives strong evidence that blockholdership as such (measured as ownership by all large shareholders owning more then 5%) is negative and significant towards Tobin’s Q in Malaysia. In China, Wei and Varela (2002) find that state ownership is negative to firm value (Tobin’s Q), whereas domestic institutional ownership does not appear to improve performance. On the other hand, also evidence for a positive corporate ownership-performance relationship is found, for example by Javed and Iqbal (2007) for Pakistan.

As it can be seen, corporate ownership, either by management or institutional shareholders, gives mixed results in determining firm performance. It might be wrong to generally assume that institutional investors always have interest aligning goals with other individual shareholders and that ownership concentration is necessary to ‘work against’ agency problems.

Board independence

independent judgment” (Cadbury, 2002, page 21). Those outside independent directors, on the other hand, bring their experience and independence of judgment and, hence, may counteract inefficient behavior of inside (executive) management.

The focus on board independence has risen by regulators and corporate governance codes which recommend a majority of independent outside directors (i.e. Cadbury Report, King Report II). Indeed, it has been recognized that boards employ more independent directors than executives (Cadbury, 2002).

The question remains whether independent boards are more efficient and contribute to better firm performance. Empirics have mostly examined the portion of independent directors at the board. Examining board structure in U.S. firms gives no statistical evidence on the board independence-performance relationship. Independent of which independence-performance measure is applied, neither for Tobin’s Q (i.e. Hermalin and Weisbach, 1991) nor for accounting measures (i.e. Hermalin and Weisbach, 1991; Klein, 1998) can be found any noticeable relationship between the proportion of outside directors of the board and performance. Also examining long-term stock market performance Bhagat and Black (2001) find no evidence.

However, not only considering the portion of outside directors but a change in board composition reveals clearer findings regarding subsequent firm performance. Rosenstein and Wyatt (1990) examine the same day stock price reaction when outside directors are added to the board. On average, they find a statistical increase of the stock prices in response to the announcement of such appointments.

For the developing and transition economies, board independence (as such) show stronger effects on firm performance. Javed and Iqbal (2007) as well as Zheka (2006) show that board independence has a significantly positive impact on firm performance.

determined by the firm’s contracting environment (Himmelberg et al., 1999). Regarding institutional ownership, Del Guercio and Hawkins (1999) point out heterogeneity in activism objectives and tactics which is consistent with different investment strategies. Neither might ownership structure nor board composition be easy to identify in the same way across companies.

As Coles, Lemmon and Meschke (2007) indicate, empirical research on corporate governance is afflicted with endogeneity problems. Klapper and Love (2004), investigating developing and emerging economies, also suggest corporate governance as a whole to be endogenously determined by the extent of asymmetric info and contracting imperfections. Hence, insignificant relationships will result from this heterogeneity across entities. Not all past researches consider this problem in methodology.

The status of corporate governance is not the same in developing countries. However, one of the shared shortcomings and challenges is the great need on availability and access to credit (Cooper 2007). In order to be attractive for domestic and international investors, good corporate governance is important (McKinsey, 2002; Cooper, 2007) and even as already empirically found this is correlated with better operating performance and market valuation (Klapper and Love, 2004; Zheka, 2006; Javed and Iqbal, 2007; Shakir, 2008). Due to weaker markets for corporate control (Mak and Li, 2001), the focus on internal mechanisms seems to be indispensible.

by many South African corporations might have been the source of a positive development of firm performance.

3. Data & Methodology

Sample Collection

In this study I focus on publicly listed companies on the Johannesburg Stock Exchange (JSE). I collected performance data, accounting data, measures for ownership and board structure from annual reports, and financial statements. The initial sample of companies consists of 341 companies4. Financial institutions, including investment trusts and real estate companies, are excluded because of their great debt structure. Excluded are also companies for which no website or financial reports could be found. That leaves 155 entity observations per year to be considered. To compensate for the great cut across companies, I base my estimation on a time period of three years, namely from 2005 until 2007. My data set can be characterized as a balanced panel since I have the same number of cross-sectional units for every year .

However, the established data set shows many missing values which result from nonexistent annual reports or not published information. The incomplete information infrastructure of South Africa reflects the status of a developing country which is not comparable to the great accessible data in the U.S. or the European market. As seen at the descriptive statistics (Table 2), most observations are present for the accounting measures, such as ROA and ROE (88 percent), firm specific control variables like firm size (89 percent), firm age (88 percent), and capital structure (89 percent). Here, the missing values are caused by non available annual reports, mainly for 2005. Fewer values are present for corporate governance mechanisms and Tobin’s Q. Even if annual reports are available and give insight in financial statements, information regarding ownership, board structures, and share prices they are less published in the reports. That is, only 53 percent of all observations across time and entities are present for Tobin’s Q. Data for managerial ownership is available with 58 percent, institutional ownership with 65 percent of all possible observations, and measures for board independence are present with about 63 percent of

all observations. During the analysis, many values will be thrown out whereby assumably valuable information can get lost. Though missing data are accounted for by the software, it imposes limitations for my research. The exclusion of the great number of companies entails loosing possible valuable information. That is, the analysis might not reflect the actual corporate governance-performance relationship in the South African economy. I am aware of the limitations of my sample creation and will consider the possible biasness when analyzing the subsequent results. The subsequent analysis will be based on a panel of 465 observations. I do not require a balanced sample.

Variable definition & Measurement

Conducting corporate governance studies, mostly financial ratios have been employed to measure firm performance. I base my analysis on the widely taken Tobin’s Q, Return on Assets (ROA) and Return on Equity (ROE). However, it needs to be distinguished between these: ROA and ROE are accounting-based performance measures and seen as backward looking. Given this, those are not affected by investors’ expectations and the fluctuations of the equity market. However, with respect to a correct specified valuation of the core business activities, limitations might exist in the possibility of manipulation by short-term profit driven management (Koller et al., 2005). In contrary, Tobin’s Q takes market effects into account and is expected to capture the market’s expectations and movements because of its assessment of being forward looking (Demsetz and Villalonga, 2001). The question arises which group is superior to the other. Tobin’s Q is assumable a noisy measurement for management or board performance (Morck et al., 1988), neither are ROA and ROE considered to be optimal measures to recreate performance. Tobin’s Q as well as ROA and ROE will be included because they have been applied in corporate governance studies and are expected to capture the limitations of the others.

respectively, are calculated as the ratio of net income to total assets and equity. Performance measures are not calculated as averages which would be preferable to capture the limitations of the point-in-time numbers of the income statement and balance sheet (Brooks, 2008). However, the sufficient high number of entities and three periods of my panel should compensate for possible differences across firms and allow for a good analysis. In the subsequent analysis the variables are labeled as Q, ROA and ROE. Analyses are conducted with all three measures. That is, possible differences might occur in the findings.

Ownership concentration has been measured differently in previous empirical research. In the framework of this study, I focus on managerial as well as institutional ownership since companies in developing countries are characterized by great equity stakes by outside (domestic and foreign) institutional investors. Managerial ownership (MNGT) is measured as the percentage of outstanding shares owned by the entire board of directors since it is unlikely for individual managers to have a sufficient stake in the company.

Considering institutional ownership, Demsetz and Lehn (1985) measure ownership as the percentage of shares owned by the 5 (20) largest shareholders. This, however, might include ‘minority’ holders if the company’s equity structure is characterized by rather diffused ownership. Here, ownership concentration by outside shareholders is measured as the fraction of outstanding shares owned by all largest shareholder above 5% (INST05). With the five percent threshold it can be assured that each incorporated shareholder has an appropriate ownership stake and, hence influence, coherent to the literature.

Board independence will be defined by the existence of directors who provide objective judgment and lead the board in an efficient manner. INDEP is measured as the percentage of directors on the board which are categorized as independent in the annual reports.

Several control variables are included. First of all, firm size is included to account for potential economies of scale. If those are present, the examination of larger firms would result in a positive relationship between size and profitability of the firm (Baumol, 1959). Firm size is measured by the logarithm of total assets (TA). Controlling for the capital structure of the firm, the debt ratio (DA) is defined as the ratio of calculated debt positions to the book value of total assets. The debt-to-assets ratio mirrors the leverage effect and, hence, the potential value of risk caused by borrowing. Depending on their capital structure, companies might take different investment decisions which in turn might (negatively) influence the overall firm performance. The firm age (AGE) will serve as control variable since agency problems may be different in young and mature businesses.

I include several dummy variables. Year dummies are included to control for country level changes or macroeconomic shocks. Those might be important in the analysis according to systematic institutional changes undergoing in the South African economy. Furthermore, industry dummies are included to capture possible differences between companies operating in other sectors. My sample of companies distinguishes 13 different industries (see Appendices 1a and 1b for the distribution of companies over industries as well as average descriptive statistics for each industry). “Mining”, “Building Materials” and “Software & Computer” companies together make up 49% of the total observations (Appendix 1c, row b). Of another interest is whether companies are dual listed on more than one stock exchanges. Firms additionally listed at the London stock exchange, for example, might be more attractive to institutional investors because of their compliance with better regulation. The dummy variable is labeled as DUAL.

Model Specification

I consider the following general model:

Yt = f (CGt, Ct)

where Yt are the dependent variables, CGt is a vector of corporate governance variables and Ct is

a vector of different control variables. T is the number of observations.

I will base my analysis on a pooled set of data which jointly embodies information across companies as well as across time. All values for the dependent variable are regressed on vectors of corporate governance and control variables (for observable firm heterogeneity) using a basic linear ordinary least square model. OLS is commonly used in corporate governance studies; however, it has its traps when assuming ownership and board structure to be exogenous, as I initially do here.

A next step is to extent the regression analysis with the set up of several interaction terms between corporate governance mechanisms and firm specific control variables. Those interaction terms are only little used in the previous research. Firm characteristics such as firm size, age or debt structure could influence management owning a particular stake of equity or taking more or less independent directors on board. The scope of agency conflicts could be different across entities which in turn might affect firm value. Too little evidence is given on how several interactions between corporate governance mechanisms and firm specific characteristics may influence the relation to firm performance. For instance, interactions with managerial ownership stakes are considered which may vary across entities and cause performance differently:

Besides interactions of managerial ownership, institutional ownership and board independence are multiplied with firm size, capital structure and age, respectively. With the inclusion of such terms I attempt to test how these may impact the results of corporate governance mechanisms and their influence on the performance of the firm.

In the second part of the analysis I investigate the question of whether the corporate governance-performance relationship is endogenously determined by unobserved factors. Endogeneity is a continuous challenge to corporate governance studies (Hermalin and Weisbach, 2003). Using a firm-fixed effects method partly controls the problem that the variables are not strictly exogenous. The fixed effects model allows for correlations between unobserved and already observed variables and thus attempts to solve the problem that already observed variables may be endogenously determined by other latent factors.

However, the technique requires the variables to change over time. Given the status as a developing country and rising economic environment, it is likely that the variables will change over time. As it can be seen in Table 1, the average change of the performance measures over time is obvious, whereas the corporate governance variables change rather less during the three year period. Whereas the pooled regression estimation assumes constancy over time, the fixed effects method, hence, is likely to be more efficient.

Descriptive Analysis

A short overview of the statistics of my variables is given in the following part. As already mentioned above, the variables on average are not stable over time. Table 1 shows the average values of particular variables for all three years. The variables for firm value and firm performance (Q, ROA and ROE) show obvious changes from one year to another. Ownership structures (MNGT, INST05) and the portion of independent directors (INDEP) change rather slowly; they are more consistent during the time period.

Table 1.

Mean and Median values of performance measures and corporate governance mechanisms for 2005, 2006 and 2007. The variables are initial variables. Outliers are included.

2005 2006 2007 2005 2006 2007 2005 2006 2007

Q Q Q ROA ROA ROA ROE ROE ROE

Mean 2.005 1.866 2.646 0.143 0.136 0.169 0.333 0.298 -1.029

Median 1.272 1.506 1.668 0.142 0.139 0.147 0.310 0.321 0.340

MNGT MNGT MNGT INST05 INST05 INST05 INDEP INDEP INDEP Mean 0.0559 0.058 0.066 0.562 0.482 0.476 0.387 0.380 0.389

Median 0.0050 0.006 0.012 0.529 0.463 0.474 0.392 0.375 0.375

For all variables the statistics for skewness and kurtosis improve qualitatively after adjusting for outliers but they are not normally distributed yet. However, it is not unusual for financial data to be not normally distributed and I encounter that when assessing the results of the regression analysis.

Table 2.

Descriptive statistics of the variables used in the analysis. Outliers have been excluded.

Q ROA ROE TA DA AGE MNGT INST05 NR05 INDEP

Mean 1.729 0.140 0.339 3.345 0.504 41.496 0.060 0.487 3.362 0.386 Median 1.474 0.143 0.333 3.420 0.502 29.000 0.006 0.483 3.000 0.375 Maximum 8.127 0.783 2.303 5.622 1.148 1.570 0.739 0.957 8.000 0.833 Minimum 0.074 -0.803 -0.874 0.230 0.005 0.000 0.000 0.000 1.000 0.000 Std. Dev. 1.141 0.155 0.343 0.882 0.207 34.921 0.127 0.205 1.455 0.225 Skewness 1.823 -0.770 1.222 -0.186 -0.174 1.056 3.498 -0.136 0.414 0.003 Kurtosis 8.502 9.648 9.796 3.271 2.951 3.400 16.370 2.360 2.889 2.145 Jarque-Bera 446.559 797.434 891.087 3.657 2.114 79.145 2,542.598 6.041 8.753 8.782 Probability 0.000 0.000 0.000 0.161 0.348 0.000 0.000 0.049 0.013 0.012 Observations 246 411 410 416 412 411 268 300 301 288 Nr of outliers excluded 5 2 5 0 4 6 0 1 0 0

The independent variables reveal appropriate test statistics. Considering managerial ownership, about 82 percent of the 268 observations reveal equity stakes by the board of directors less than or equal to 10%. Whereas considering institutional ownership, only about 31 percent of the institutions hold less than or equal to 10% of firms’ equity. Nearly 69 percent of institutional equity stakes above 5% are equal to stakes above 10%, confirming that institutional ownership concentration and, hence, the active influence of institutions on firms’ governance may heavily existent in South African companies.

Table 3.

Correlation Matrix. Correlations between the main variables used in the model. Pooled Data. Unbalanced panel.

Correlation Q ROA ROE TA DA AGE MNGT INST05 NR05 INDEP

Q 1.000 ROA 0.431 1.000 ROE 0.287 0.747 1.000 TA -0.084 0.097 0.114 1.000 DA -0.297 0.125 0.436 0.249 1.000 AGE 0.125 0.106 0.102 0.289 0.134 1.000 MNGT -0.089 0.011 0.001 -0.323 0.015 -0.156 1.000 INST05 0.101 -0.043 -0.044 -0.129 -0.131 0.064 -0.225 1.000 NR05 -0.194 -0.146 -0.118 -0.162 -0.069 -0.085 0.007 0.190 1.000 INDEP 0.054 -0.025 -0.030 0.363 0.065 0.155 -0.191 -0.284 -0.031 1.000

4. Results

Several regressions are conducted for all dependent variables: Tobin’s Q, Return on Assets and Return on Equity. Successively, the dependent variables are regressed on the corporate governance mechanisms and several control variables. Firstly, an OLS model examines the relation between firm performance and corporate governance variables. Besides, ownership and board variables, including several firm specific control variables examines whether these will drive the correlation between performance and corporate governance. Secondly, the regression analysis is extended by controlling for interaction terms between corporate governance and firm specific control variables. Using simple pooled regression, I treat the ownership and board structures as exogenous. However, it is often argued that these variables are endogenous. Hence, besides pooled regressions on Tobin’s Q, Return on Assets and Return on Equity I thirdly control for firm-fixed effects. Controlling for unobservable firm characteristics, I address the problem of endogeneity of corporate governance mechanisms. Fourthly, firm-random effects regressions have been conducted for all three dependent variables.

Applying the OLS estimator, several assumptions are made. Error terms are assumed to have a constant variance. Though the presence of heteroskedasticity leaves the OLS estimator unbiased, it will be inefficient and the p-values might be unreliable. To make the estimation results more reliable to the researcher, the reported coefficient estimates are accounted for heteroskedasticity giving robust standard errors5.

Furthermore, the OLS operator assumes the error terms to be normally distributed. Testing for this assumption, it has to be recognized that the standardized residuals are not normally distributed. The residual normality test statistics are presented in Appendices 3a and 3b. The Jarque-Bera test statistics reject the null hypothesis of a normal distribution of the residuals. This assumably gives inefficient estimation results. A way to proceed is by introducing dummy variables, but this is a sensitive method and might handicap the evaluation of the findings even

5 _{The White cross-section method could not be applied. Hence, I used the Cross-section weights method (PCSE)}

more since the variables have been already adjusted by severe outliers. I consider the pooled regression results with care and take into account that they might be not reliable.

In the following, I will subsequently discuss the results on managerial ownership, institutional ownership and board independence and whether the different corporate governance mechanisms have an significant impact on the different firm performances. Furthermore, I will distinguish between the different estimation techniques.

Table 4 presents the results of the regression analysis. The columns (1) to (10) show the results for Tobin’s Q, ROA and ROE. In the table, the findings of the pooled regressions, firm-fixed and random effects regressions for each dependent variable are displayed. The results for Tobin’s Q are presented in columns (1) to (4), results for ROA are presented in columns (5) to (7) and the columns (8) to (10) show the regression results for ROE.

Table 4.

Panel Data regression results for firm performance on Managerial Ownership, Institutional ownership and Board Independence, and Company-Related control Variables. Managerial ownership (MNGT) is measured as the percentage of shareholding by the board of directors. Institutional ownership (INST05) is measured as the percentage outstanding shares held by all institutional and large shareholders with equity stakes above five percent. NR05 reflects the number of institutional and large shareholders holding stakes in an individual company. Board independence (INDEP) is measured as the portion of independent directors on the board.

Tobin's Q ROA ROE

(1) Pooled Regression (2) Pooled Regression (3) Pooled Regression (4) Fixed Effects (5) Pooled Regression (6) Pooled Regression (7) Fixed Effects (8) Pooled Regression (9) Pooled Regression (10) Fixed Effects MNGT -1.301 9.156* 0.315 -0.009 2.337*** 0.137 0.062 5.889*** 0.237 (0.165) (0.052) (0.874) (0.878) (0.000) (0.448) (0.699) (0.000) (0.533) MNGT.0to5 -5.036 (0.395) MNGT.5to25 3.634 (0.335) MNGT.over25 -3.230 (0.775) MNGT^2 _0.258 (0.982) INST05 1.209* 0.904 -0.251 -0.772 0.091 -0.636* 0.126* 0.269 -1.113 0.280 (0.063) (0.103) (0.929) (0.317) (0.269) (0.073) (0.054) (0.209) (0.212) (0.105) INDEP -0.160 0.165 -6.175* -1.556 -0.065 0.009 0.068 -0.178 0.138 0.072 (0.696) (0.665) (0.082) (0.206) (0.315) (0.979) (0.113) (0.291) (0.877) (0.428) TA -0.121 -0.121 -0.376 -1.094 -0.024 -0.032 -0.029 -0.024 -0.094 -0.182 (0.403) (0.401) (0.433) (0.231) (0.359) (0.549) (0.628) (0.663) (0.462) (0.204) DA -1.694 -1.804** -6.535** -1.023 -0.044 -0.447* 0.513*** 0.578** 0.089 1.655*** (0.108) (0.011) (0.024) (0.354) (0.646) (0.073) (0.001) (0.018) (0.873) (0.000) AGE 0.005 0.004 0.020** 0.274*** -0.000 0.001 0.009 -0.001 0.003 0.031 (0.154) (0.123) (0.039) (0.003) (0.699) (0.699) (0.192) (0.169) (0.474) (0.115) NR05 -0.170** -0.208* -0.185** 0.066 -0.021*** -0.020** -0.006 -0.044** -0.038 -0.014 (0.022) (0.001) (0.020) (0.295) (0.009) (0.019) (0.465) (0.039) (0.113) (0.596) MNGT x TA -6.114* -1.010*** -2.651*** (0.086) (0.001) (0.001) MNGT x AGE -0.077 -0.010** -0.024** (0.161) (0.039) (0.044) MNGT x DA 1.735* 1.800** 5.018** (0.088) (0.024) (0.015) INST05 x TA 0.264 0.116 0.318 (0.784) (0.241) (0.188) INST05 x AGE -0.026 -0.001 -0.005 (0.177) (0.745) (0.513) INST05 x DA 4.106 0.726** 1.069 (0.319) (0.042) (0.222) INDEP x TA 0.956 -0.030 0.007 (0.237) (0.699) (0.973) INDEP x AGE -0.012 -0.001 -0.006 (0.293) (0.681) (0.211) INDEP x DA 5.703* 0.130 -0.107 (0.094) (0.669) (0.853) C 2.844*** 3.046*** 5.124*** -5.693 0.289** 0.479** -0.514* 0.159 0.396 -1.370** (0.001) (0.000) (0.003) (0.104) (0.011) (0.034) (0.066) (0.438) (0.453) (0.039)

Year dummies yes yes yes no yes yes no yes yes no

Industry

dummies yes yes yes no yes yes no yes yes no

Listing

dummy yes yes yes no yes yes no yes yes no

R-squared 0.340 0.275 0.419 0.832 0.241 0.361 0.902 0.279 0.394 0.887 Adjusted R-squared 0.229 0.157 0.271 0.684 0.134 0.226 0.818 0.178 0.266 0.791 F-statistic 3.047 2.323 2.823 5.638 2.256 2.677 1.075 2.752 3.079 9.203 Prob (F-statistic) 0.000 0.001 0.000 0.000 0.002 0.000 0.000 0.000 0.000 0.000

Reported coefficient estimates are accounted for heteroskedasticity using Cross-section weights method (PCSE). Significance levels are presented as *** (1% significance level), ** (5% significance level) and * (10% significance level). Coefficient estimates are displayed with three decimal places.

Considering managerial ownership and its impact on several performance measures and when looking at the pooled regressions, managerial ownership shows overall insignificant results throughout all performance measures. The negative influence on Tobin’s Q in the linear regression of managerial ownership (column 1) might suggest management not be considered trustworthy by the market in managing the firm’s resources according shareholders interests. Self-seeking behavior of top managers could be a reason for that result in firm value. However, the results are insignificant and hence might be not reliable.

Recent research claims a non-monotonic relationship of managerial ownership on Tobin’s Q. To go into that matter, an additional regression is devoted to a piecewise linear and quadratic relationship of managerial ownership to firm value measured as Tobin’s Q (column 2). Ownership levels are created according to Morck et al. (1988) which allows the slopes to change at 5% and 25% of equity ownership stakes. Looking at the estimation results shows no significant results. Considering the signs and significance, the findings are contrary to those of the previous researches.

Managerial ownership becomes significant and positive for all dependent variables when controlling for several interaction terms of managerial equity ownership and firm variables. Whereas it is only significant at the 10% level for Tobin’s Q, managerial ownership is even significant at the 1% level for the accounting measures ROA and ROE. It could be suggested that management has great expertise and knowledge to enhance firm performance and accounting profit rates but the impact is rather little on the overall value of the firm as it is assessed by the market.

Looking at institutional ownership, it can be seen that it positively influences Tobin’s Q with significance levels around the 10% when assumed to be exogenous (columns 1 and 2). This suggests less firm heterogeneity of institutional ownership when examining the relationship to Tobin’s Q as performance measures. As it is mentioned above, institutional shareholders are important players in corporate governance in developing countries and act as strategic players in the South African equity market. Having enough power as large shareholders, it enables them to take part in decision making and monitoring processes supporting the overall shareholders’ interests. That is, institutional investors play a crucial role in determining the value of the firm. For the accounting measures ROA and ROE, institutional ownership shows a significant relationship to ROA when controlling for interaction terms and fixed effects. For the accounting based performance measures, the institutional ownership variable shows a negative sign in the interaction terms regression (columns 6 and 9) but a positive sign in the fixed effects regressions (column 7 and 10). The significant results in the fixed effects regression, suggest that the relationship of institutional investing with regards to operating performance is less endogenously determined.

Throughout all performance measures, the number of institutional shareholders is significantly negative related to firm performance. That reveals that the more institutional players are involved in the governance of the firm, the more deviant objectives may collide and lead to inefficient decision making which in turn decrease the overall performance of the firm. Not all powerful shareholders seem to be acting in the interest of the shareholders of the invested firm but for their own interests and shareholders. Hence, the findings support the implications of concentrated ownership which large shareholders may expropriate small shareholders and do not align with their interests.

However, for Tobin’s Q, a significant negative impact is revealed in the regression where interaction terms are added (column 3). The relatively steep negative coefficient estimate of board independence on Tobin’s Q might suggest that South African companies appoint too many outside independent directors (Agrawal and Knoeber, 1996). They comply with the corporate governance recommendations although it might be more valuable for the companies’ business to appoint more inside directors to the board because they are more familiar with the firm’s operations. Too much independent objective judgment may hinder the management in their decision making. Another aspect in this relationship might be a possible overregulation or adding outside directors for political reasons (Agrawal and Knoeber, 1996).

On the other hand, the significance could be the result of the given correlation with the corresponding interaction terms. As already considered for the significant results on managerial ownership, it is quite obvious that corporate governance mechanisms are mainly significant when interaction terms with other firm characteristics are included. One could assume that these independent variables are highly correlated which produces large standard errors in the estimation process. Using the OLS estimation method, it is implicitly assumed that the explanatory variables are not correlated with one another. Multicollinearity could cause the p-values or coefficient signs to be misleading. Appendix 5 presents a correlation matrix of the corporate governance mechanisms and their corresponding interaction terms. In fact, high correlations of over 0.8 are revealed between managerial ownership and all three interaction terms. Institutional ownership and board independence show very high correlations of 0.812 and 0.939, respectively, with their interaction with firm size.

independence variable with its corresponding interaction term (INDEP x DA). When comparing the results of institutional ownership, the significance, should hence result from the interaction with the debt structure (INST x DA). However, the corresponding correlation coefficient is only 0.403, which seems not extraordinarily high, and in fact the slope of institutional ownership is not unreasonable. One thus could suggest that high correlations (higher than 0.7) between the variables and their corresponding interaction terms are the reason for the significant results. However, by omitting the variables I loose information which I a priori had theoretical reasons for. As it is stated in Brooks (2008), multicollinearity is rather a problem with the data than with the model itself. Due to the great lack of information in my data set it is insufficient to obtain estimates for all coefficients. I choose to keep all interaction terms and consider that the coefficient estimates for the remaining explanatory variables might be biased.

Encountering the endogeneity problem of corporate governance mechanisms is important because of the possibility that unobservable characteristics are correlated with the corporate governance mechanisms and, hence, have a great impact on firm performance, as Gompers et al. (2003) imply. It is concerned that firm performance and corporate governance variables are spuriously correlated by some other variables I do not control for, such as growth opportunities or capital expenditures. As already presented by the empirical researches, the heterogeneity across firms is an important aspect in investigating the corporate governance-performance relationship.

Furthermore, a random effects model is conducted. The results are presented in Appendix 7. The slope estimates for the corporate governance variables are not significant and change in signs are again compared with pooled and the fixed effects regressions. The test statistics seem rather insufficient. The values for R2 are close to zero for the regression on Tobin’s Q and ROA, and for ROE they are not even 0.2. The F-statistics reveal significance of firm random effects at the 1% level only for the ROE regression.

I perform the Hausman test to control whether the random effects are uncorrelated with the explanatory variables (Appendix 8). The p-values are 1 which would favor using the random effects model. However, it is warned that the performed robust standard errors may not be consistent with the assumptions of the Hausman test variance calculation. Ignoring the robust standard errors estimation reveals significant test statistics at the 1% level for Tobin’s Q and ROA and at the 5% level for ROE. Those results, on the contrary, indicate that the random effects model is inappropriate. The Hausman test statistics let one prefer the fixed-effects model.

Evaluating the results of the fixed effects regressions, only institutional ownership is positively related to firm performance (around 10% significance level), namely ROA and ROE. This supports my hypothesis that institutional ownership as a corporate control mechanism is important for company performance. Institutional shareholders take part as active and knowledgeable actors in the firms’ decision making process and operating the business. Furthermore, it suggests that institutional ownership as such is less endogenously determined. Whereas the number of institutional investors was overall significant and negative in the pooled regressions, it becomes insignificant. The number of investing institutions is dependent on company specific environments and, thus, it cannot be generally concluded whether too many large shareholders do negatively impact the firm’s performance. Here, the endogeneity problem is more present. For board independence, the inclusion of fixed effects reveals insignificant results as well.

it is negatively influencing ROA when controlling for interaction terms. Findings for the number of institutions are clearer. Mainly significant for the pooled and interaction regressions, they show an overall negative impact on firm performance, whereas when accounted for fixed effects the significance diminishes. Though significant and highly negative on Tobin’s Q, board independence seems not to have a sufficient impact on firm performance.

Furthermore I controlled for different firm specific characteristics. Firm size reveals throughout negative signs but is not sufficiently determining firm performance. The debt load of companies has a negative impact on firm value (Tobin’s Q) because the equity market might suggest high fractions of debt to be too risky and harmful for a sustainable valuation. However, a positive impact on the accounting based measures is revealed. Furthermore, controlling for firm heterogeneity, highly significant estimates show no difference across firms. Hence, it can be said that investigated South African firms are dependent on outside debt which is important for the operating business of most of the firms. Firm age reveals a positive impact on firm value, but is not significantly different from zero for ROA and ROE. Regarding firm value, the age of the firm is generally positive.

5. Summary & Conclusion

It has widely been emphasized that good corporate governance is important to establish investor confidence in equity markets and to enhance corporate profitability. However, research could not establish a clear and consistent view on corporate ownership and board independence and their relationship to firm performance. Especially for the developing world, the relationship between corporate governance and performance is little.

I extensively examined the impact of chosen internal corporate governance mechanisms on firm performance in 155 publicly listed South African companies. Tobin’s Q, Return on Assets and Return on Equity are regressed on ownership and board structure and several control variables. My results are rather weak in giving a general picture of how corporate governance affects performance.

Managerial ownership can be concluded to be overall insignificant in determining firm performance. As for managerial ownership, no relationship regarding firm performance can be revealed for board independence. On the contrary, institutional ownership shows positive results on firm performance but shows differences in methodology and performance measures. Whereas it is positive regarding Tobin’s Q in the pooled regression, it is positive regarding the accounting measures in the fixed regressions. Furthermore, the results on the number of investing institutions is significant throughout the pooled regressions and has an overall negative impact on all performance measures. Testing for firm heterogeneity, the influence, however, becomes insignificant.

Institutional ownership is an important factor in the corporate governance in South Africa. Ownership concentration is prevalent and may substitute for a weak legal system for external corporate control. Institutional ownership positively impacts firm performance. Institutions invest in other companies and are holding equity stakes because they are interested in getting a return on their investments like other shareholder but they also seem to take an active part in the companies’ decision making process.

Furthermore, the total number of institutional investors has a negative impact on firm performance. It is likely that the more institutional investors are present, the higher seem conflicts of interests between shareholder parties. Conflicts of interests may exist with minority shareholder and, more likely, between different large shareholders and in their different attitudes towards the company. Large investors are mainly financial institutions and investment funds but also, to a little extent, families and individual owners are considered in the variable of outside ownership. It is likely that the divergent interests and incentives of the shareholding parties, and different investment and business connections, negatively impact the value of the firm which they invest in. However, the findings are not robust when controlling for firm heterogeneous factors. Hence, not for all companies the higher number of institutional investors derogates performance. It is necessary to further investigate the character of individual groups of institutions and other non-institutional majority owners.

This study examined the partly suggested endogeneity problem in the field of corporate governance. Endogeneity of corporate governance is partly revealed. The fixed effects model is emphasized which supports that simple cross-sectional or pooled regressions may lead to unsatisfying evidence in the field of corporate governance.

On the one hand, the revealed endogeneity implies that the corporate governance-performance relationship in the South African economy is characterized by greater forces which are not easy to detect. Embedded in different environments, unobservable factors, such as firm management culture or firm ethics, may directly affect corporate governance as well as shareholder rights, and, hence, firm value. The heterogeneity in the relationship between corporate governance and firm performance furthermore implies no optimal use of each corporate governance mechanism for all firms operating in the South African equity market. The question of how different corporate control mechanisms work within different firm environments and affect firms’ performance is hard to answer. Hence, policy implications should be considered with caution when applying uniform standards across industries and companies.

investors remain private. With quantitative research alone, it is not possible to approach those questions.

References

Papers

Agrawal, A. and C.R. Knoeber (1996). Firm Performance and Mechanisms to control Agency Problems between Managers and Shareholders. Journal of Financial and Quantitative Analysis 31: 377-397.

Aguilera, R. and G. Jackson (2003). The Cross-National Diversity of Corporate Governance: Dimensions and Determinants. Academy of Management Review 28 (3): 447-465.

Baysinger, B. and H. Butler (1985). Corporate Governance and the Board of Directors: Performance Effects of Changes in Board Composition. Journal of Law, Economics and Organization 1: 101-124.

Bhattacharya, P.S. and M. Graham (2007). Institutional Ownership and Firm Performance: Evidence from Finland. Working Paper. Deakin University. Available at SSRN: http://ssrn.com/abstract=1000092

Berglöf, E. and E.-L. von Thadden (1999). The Changing Corporate Paradigm: Implications for Transition and Developing Countries. Conference Paper, Annual World Bank Conference on Development Economics, Washington D.C.. Available at SSRN: http://ssrn.com/abstract=183708 Berglöf, E. and S. Claessens (2006). Enforcement and Good Corporate Governance in Developing Countries and Transition Economies. The World Bank Research Observer 21 (1): 123-150.

Bhagat, S. and B. Black (1999). The Uncertain Relationship Between Board Composition and Firm Performance. Business Lawyer 54: 921-963.

Bhagat, S. and B. Black (2001). The Non-Correlation Between Board Independence and Long Term Firm Performance. Journal of Corporation Law 27: 231-274.

Black, B.S. (1998). Shareholder Activism and Corporate Governance in the United States. The

New Palgrave Dictionary of Economics and the Law 3: 459-465.

Coles, J., Lemmon, M. and F. Meschke (2007). Structural Models and Endogeneity in Corporate Finance: The Link Between Managerial Ownership and Corporate Performance. MPRA Paper

4374, University Library of Munich, Germany. Available at SSRN:

Cooper, S.M. (2007). Corporate Governance in Developing Countries: Shortcomings, Challenges & Impact on Credit. Modern Law for Global Commerce, Congress Paper.

Del Guercio, D. and J. Hawkins (1999). The Motivation and Impact of Pension Fund Activism. Journal of Financial Economics 52: 293-340.

Demsetz, H. (1983). The Structure of Ownership and the Theory of the Tirm. Journal of Law and Economics 26: 375-390.

Demsetz, H. and K. Lehn (1985). The Structure of Ownership: Causes and Consequences. Journal of Political Economy 93 (6): 1155-1177.

Demsetz, H. and B. Villalonga (2001). Ownership Structure and Corporate Performance. Journal of Corporate Finance 7 (3): 209-233.

Faccio, M. and M.A. Lasfer (1999). Managerial Ownership, Board Structure and Firm Value: The UK Evidence. Cass Business School Research Paper. Available at SSRN: http://ssrn.com/abstract=179008

Fama, E.F. and M.C. Jensen (1983). Separation of Ownership and Control. Journal of Law and Economics 26.

Gedajlovic, E. and D.M. Shapiro (1998). Management and Ownership Effects: Evidence from five Countries. Strategic Management Journal 19: 533-553.

Gillan, S.L. and L.T. Starks (2000). Corporate Governance Proposals and Shareholder Activism: The Role of Institutional Investors. Journal of Financial Economics 57 (2): 275-305.

Gompers, P., Ishii, J. and A. Metrick (2003). Corporate Governance and Equity Prices. The Quarterly Journal of Economics 118 (1): 107-155.

Grosfeld, I. (2006). Ownership Concentration and Firm Performance: Evidence from an Emerging Market. Working Paper, No. 834, William Davidson Institute, University of Michigan. Hermalin, B.E. and M.S. Weisbach (1988). The Determinants of Board Composition. Rand Journal of Economics 19: 589-606.