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Master Thesis Accountancy
17 July 2015
Are Investments in Fixed Assets Different When An Dutch
Organization Has Good Corporate Governance?
Abstract
In this research I try to search for ways in which corporate governance affects fixed assets. I assume good corporate governance follows from board diversity and several types of shareholders. Using data on Dutch companies I find that foreign directors have a positive effect on fixed assets but reject all other hypotheses. This means that corporate governance
hardly influences the fixed assets numbers on the balance sheet. I also find that current liabilities explain a large part of my results and conclude that current liabilities have a very significant effect on fixed assets. With this research I contribute to the understanding of how
fixed assets are influenced and the impact on corporate governance in the Netherlands. Key words: Corporate governance; fixed assets; foreign directors; current liabilities;
investments; Netherlands.
By:
Peter Van der Veen Student number 1788019
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1. Introduction
Corporate governance has been a hot topic over the past decade, primarily because of multiple cases of fraud that prompted many nations into making regulatory recommendations (Cadbury Report, Principles of Corporate Governance, Turnbull Report) to laws (Sarbanes-Oxley Act, C-SOX, Loi de sécurité financière & CLERP 9) or enact new codes by the national
government (Code Tabaksblat & Deutscher Corporate Governance Kodex).
However these new laws and regulations were unable to prevent the financial and banking crisis at the end of end first decade of the 21st century.
The majority of the discussion about corporate governance focuses on the relation between manager and owners (Misangyi & Acharya, 2014) or debtholders. (Jensen & Meckling, 1976) Fewer studies have focused on finding a relationship between corporate governance and fixed assets. This is not surprising when one reads Shleifer and Vishny’s (1997) definition of corporate governance as "the ways in which the suppliers of finance to corporations assure themselves of getting a return on their investment, " which implies corporate governance only focuses on the right side of balance sheet. This is incorrect as almost all companies earn by the use of the assets that are stated on the left side of the balance sheet. The earnings of a company go to the owner but the manager controls the assets. Thus assets are just as important and maybe even more important than debt or equity in the agency problem. Some managers indeed use assets to influence their own compensation (Dechow et al. 2009), this is called earnings management. Fixed assets might not need governance rules as strict as intangible assets (Klapper et al. 2004) but managers could adjust depreciation on machinery or make extra investments in research and design (R&D) to receive an extra bonus for reaching a target, despite those decisions not being as profitable in the long run for the company. But earnings management is not the only hazard when talking about managers taking the less beneficial actions for the company.
Managers of firms with excess in cash and a poor corporate governance structure have been known to invest in less productive assets (Oswald & Young 2008, Richardson 2006). It is evident that assets play crucial role in a company and research shows relationships as indicated above between various kinds of assets such as financial assets, intangible assets and corporate governance but also changes in assets and firm performance are related (see oa Bianco et al 1999 & Ferreira et al. 2007). However the research on fixed assets is lagging behind. This is most likely because financial assets are easy to study as a lot of information is readily available. In addition, R&D is very important in the current society where knowledge plays an important role (Badaracco, 1991) with constantly evolving possibilities and standards in the IT sector, making it a popular subject to be studied.
With the importance of fixed assets and the massive attention paid to corporate governance in the current society, it is interesting to link both factors and investigate if there are relations between corporate governance factors and fixed investments. In this paper, I will explore the relationship between corporate governance indicators and investments in fixed assets. In this study I will focus on the Netherlands because of the importance of the quality of corporate governance when making investments decisions in the European Union (EU) (Weil et al., 2002).
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2. Theoretical Background and Existing Literature
Fixed Assets
In a company fixed & intangible assets are the backbone of almost all companies, whether these are fixed assets such as buildings, machinery, current assets, goods in inventory, or intangible assets like copyright and patents. Companies thus need to invest in their assets in order to stay competitive as the IFRS Framework states that future economic benefits are expected from assets. Of course the importance of investing in a specific kind of asset differs by company but where some type of investments like those in R&D have been seriously investigated (see for instance Graves, 1988; Hansen & Hill, 1991; Mallette & Fowler 1992, Lee & O'Neill 2003, Kor 2006) the investments in fixed assets have not received similar attention. This is baffling because fixed assets are part of almost every company their balance sheet whereas a lot of companies hardly invest in R&D because of their business model. Next to the general importance of investing in fixed assets to stay competitive in an operational sense investing in fixed assets does also send signals financial investors, shareholders and other stakeholders of a company. An example is a case study by De Jong et al. (2005) where it is implied that the level of capital expenditure (CAPEX) investments might say something about a CEO’s involvement in empire building or using investments to create shareholder value. Other studies (Gompers et al. 2003 and Titman et al 2004) focus on performance of companies and found that reduction in CAPEX is related to a better financial performance. This conclusion seems counter to my earlier statement about investments being important for a company in staying competitive but an investment also needs time to pay out. The cost of acquiring, installing and getting used to using new fixed assets can be quite large. It is only after a while when the company starts showing performance the positive returns may slowly decline as competition also invests in new equipment and starts to outperform the company, at that point, a manager might be inclined to again invest in new equipment fearing low return may anger shareholders or to create high shareholder value using the tax deductible
depreciation. This is rather a short-term vision as they shed profitable assets. In some cases CAPEX investments might not be profitable or even have a negative impact when investors think the money is wasted (Chen & Ho,1997; Lang, Stulz, & Walkling, 1991).
The studies mentioned in this section all have something else in common besides their focus on fixed assets. They incorporate elements of corporate governance to predict the outcome or if these corporate governance factors affect the variables.
In the examples above bad managers create a problem but stronger shareholder rights can prevent them from making bad investment decisions. (Gompers et al. 2003)
Bauer et al. (2008) also includes corporate governance in their study. They find that elements of investor-sensitive corporate governance have significant negative effect on CAPEX of companies throughout the entire European company after taking into account several regional differences in legal system, board structure and corporate governance codes.
In a more recent study Fung et al. (2012) investigated the effects of different types of
investors on CAPEX and firm performance. They found that there are indeed different types of investors and that some types of institutional investors (institutional advisors and
independent institutional investors) improve the effectiveness of CAPEX due to monitoring capabilities. However they also find that some factors that are noted to weaken the internal governance also are less important for CAPEX and firm performance when the firm is in the hands of institutional investors. These factors are the absence of long term incentive plans for CEO's, the CEO serving on the board of directors, and staggered boards. They conclude that institutional investors act as substitute for the governance system.
4 As previously stated this paper focuses on the Netherlands and published research on fixed assets in the Netherlands is very scarce. One exception is a study by Degryse and De Jong (2006); they focus on corporate governance measures and how these measures influence fixed investments-cash flow sensitivity. They provide evidence that managerial problems in the Netherlands are more important than asymmetric information problems. They hypothesize that this is because of the limited shareholder rights, the large blockholders and the
importance of bank ties in the Netherlands. To clarify managerial problems are causing overinvestments whereas information asymmetry causes under investments. (see also Fazzari et al. 1988 and Hoshi et al. 1991)
They continue to test corporate governance factors that can influence either managerial problems or asymmetric information. Structured regime, which provides the supervisory board with extra powers, dividends, and limited shareholders influence and takeover defenses are not significant in their research. Managerial shareholdings are found to even increase managerial problems and thus increases overinvestments in fixed assets. On the other hand they find that higher leverage has the opposite effect and decreases managerial problems. However none of their corporate governance factors has a significant relationship to asymmetric problems.
Corporate Governance
Corporate governance is defined by Shailer (2004) as a series of mechanisms, processes and relations by which corporations are monitored, controlled and directed. The agency theory concerns the relationship between the managers of a corporation and the owners who hired the managers (see also Berle and Means 1932, Jensen & Meckling, 1976). But in a report from 2004, the organisation for economic co-operation and development (OECD) also
stresses the role of other stakeholders, like the company’s employees, creditors, suppliers, and local communities. This means many parties are involved when talking about corporate governance and the literature is very extensive. However, the OECD points out that there is no single model for good corporate governance.
Legal systems and ownership structures are important in achieving a stable return on
investment (ROI), with the legal system being more important (Gugler et al. 2004) especially in nations with English origin these nations have a good corporate governance structure. Whereas in other country groups the effect between legal system and ownership structure is less and ROI does not exceed the cost of capital. However, Gugler et al. (2004) remains unclear about how the legal system helps to achieve a high ROI for firms in their nations. One subject that is covered extensively is the role of insiders and outsiders on the board. Raheja (2005) states that the optimal trade-off for the number of outsiders and insiders on the board depends on the directors' and organization's characteristics.Research done by Adams & Ferreira (2009) in the United States (US) focuses on the impact of women on the board and their results from data collected from 1996-2003 suggests better attendance of all directors leads to better corporate governance and that women are more likely to join monitoring functions in a firm. However, they also find that women on the board negatively impact the firms' performance, confirming research done by Ryan & Haslam (2005). Norwegian
evidence (Torchia et al. 2011) suggests female directors can also effect the amount of money spent on innovation but only if they are backed by more women on the board. A threshold of at least three female directors is needed to be effective. A similar threshold has been has been
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found in Germany, where a firm with a board consisting of over 30% of women realizes a higher performance than all male boards (Joecks et al. 2013).
The research reference above does not necesarily imply that similar results can be found in the Netherlands as a study from 2006 Wojcik states that the corporate governance structures in Europe are very diverse but also notes that they are converging slowly. It is possible that Wojcik's statement has become outdated 10 years later, but even without that assumption it is safe to say that the economies and culture of several European nations are different even if they are neighbours or implement similar laws.
Hypothesis Development
As previously stated there is not one good model for corporate governance and there are many factors that are seen as corporate governance instruments. As there are so many corporate governance factors, I will focus on only a selected few to test. The variables selected are based on appropriateness, availability, and ability to test them.
Age, nationality, gender are quite common to investigate as the factors show the diversity of a board. Women and foreigners on the board in Switzerland are known to have a very different age, educational level and tenure compared to male board members from the same country as the company, bringing more diversity by just selecting them on one of these two
characteristics (Ruigrok et al. 2007).
More diverse boards in the US are found to produce better firm performance (Erhardt et al. 2003) and thus could also affect fixed assets.
This is most likely due to the different characteristics within the boards (Erhardt et al. 2003), women for example, have a different approach to handling problems and issues within a company and the board. The same can be said about age. A popular saying says that “older people have more wisdom but younger people dare to take things on differently as they are not or less hindered by social aspects as traditions or structure as they have experienced this yet.” This can lead to improvements in ways of thinking and acting in companies. Foreigners often bring different cultures to a company and thus might also bring different ways of thinking, leading to innovative ideas. (Erhardt et al. 2003)
However it is not evident that a diverse board helps; it might also create tensions and counterproductive workenvironment. Also the lack of experience or knowledge of cultural aspects of the company and their surroundings can lead to less effective decisions and action. But as the positive influence of diversity is proven in past research and the negative influence just a theory, I expect a positive relation between fixed assets and my diversity indicators H1: There is a positive relation between the diversity in age of the members on the board and the level of fixed assets in the Netherlands.
H2: There is a positive relation between the number of foreign members on the board and the level of fixed assets in the Netherlands.
H3: There is a positive relation between the number of women on the board and the level of fixed assets in the Netherlands.
Institutions are organizations with large amounts of capital that they invest in companies to make a profit. If an institution is present among the shareholders of a company it is called
6 institutional ownership. These companies are often pension funds, banks or investment funds and their goal is to maximize their returns. However they cannot afford to lose large sums of money as their clients will lose faith in the institution and their capabilities, meaning fewer people trust these institutions with their money leading to less investment opportunities and thus less profit. Furthermore if confidence drops too significantly, clients will want their money back, directly leading to a run on banks and bankruptcy of the institution.
Thus, institutions have incentives to actively monitor the companies they invest in as bad performance might not only lead to less profit but also harms their reputation as investors. H4: There is a positive relation between presence of institutional ownership among the shareholders and the level of fixed assets in the Netherlands
Government ownership could be regarded as a special kind of institutional ownership; however, the intentions of the government are very different from institutional owners. A government wants the best for society rather than making profit for themselves (Central Government Mission Statement Netherlands). A government can have multiple reasons for being a shareholder; examples include maintaining control over their actions like in
universities and chemical plants, ensuring good service like transportation and energy companies, or to preventing companies from collapsing and damaging the unemployed and economy like in the past financial crisis.
Government shareholdership does bring extra pressure from society. Voters are going to complain if a company is making decisions they do not like, forcing the government to take action. A good recent example in the Netherlands is the case of ABN AMRO where the directors got a salary raise and the public disagreed and turned to the government who currently (May 2015) are the owners of ABN and put the directors under pressure to reverse the raise.
H5: There is a positive relation between presence of government ownership among the shareholders and the level of investments in fixed assets in the Netherlands
Blockholders are people who own a significant amount of the shares of a company and have significant influence over who is on the board, and thus indirectly monitor how a company is managed. Another way of indirectly influencing managers' decisions is that blockholders can threaten to sell their shares sending a signal to the outsiders that something is wrong. This makes it harder for the managers to attract new capital and make other deals. Because of the large amount of money blockholders invest in a company, they are more inclined to monitor management actions.
The presence of blockholders does not necessarily imply a positive thing a blockholder can own more shares in other companies diminishing the importance of their stake in this company and the their interest in monitoring. They can also use their influence within a company to strengthen the position of another company in which the blockholder has an interest (Edmans, forthcoming). However, Wruck (1989) found a positive relation between firm value and increase in shares held by the largest shareholders in the US. Also Yafeh & Yosha (2003) associate higher shareholder concentration with lower expenditure on activities that the manager can use for personal benefit in study on chemical companies in Japan. Therefore, I deduce that a positive relation will exist between blockholders and fixed assets. H6: There is a positive relation between presence of blockholders among the shareholders and the level of fixed assets in the Netherlands
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3. Data and Methodology
Research Design & Sample
To find out how fixed assets are influenced by board diversity and different types of shareholders, I have performed a linear regression and panel data analysis to investigate if there is a relationship between these variables. I performed both fixed and random panel data analyses, but the independent variables hardly changed during the time my data was gathered so all independent variables were omitted in the fixed panel data analysis because of
multicollinearity. The tests were performed in Stata.
The data I used was retrieved from the ORBIS database. It contains data on 107 Dutch companies with more than 100 employees during the time period of 2005-2011.The minimum of 100 employees was chosen to obtain a dataset without a bias for many
companies managed by only one director with all shares held by one shareholder. It contains information about board size, gender of board members, nationality of board members and if there are blockholders, institutions, or governments amongst the company’s shareholders. Also included is information on the company's characteristics and key financials such as number of employees and turnover. The last item in the dataset was the value of the Fixed
Assets in the company; this item was used as the dependent variable in the regressions and
panel data analysis.
Independent Variables
Using data from the database I deduced the number of female board directors and then divided that by the number of total directors, both male and female directors, which gives the percentage of females (noted as %Female). In the same manner, I calculated the percentage of foreigners on the board and denoted it as %Foreigners. The presence of blockholders,
government, and institutions as shareholder is noted as a dummy value of 0 if not present and 1 if they are present among the shareholders. The last independent variable is age. I followed the method of Kang et al (2007) of dividing directors into different age groups and then counting how many age groups are represented in the company. The age groups are 40 years and younger, 41-50, 51-60, 61-70, and 70 years and older. Directors who did not disclose their age where assumed to be in the same age as the other directors and only companies in which the majority of the directors disclosed their age have been included in the data. This gives us a scale from 1 to 5 with 1 only having directors in one age scale and 5 with directors of all age scales. I also followed up on Joecks’ (2013) evidence that females on the board will only be effective when 30% of the directors are female. I choose the method of Joecks over Torchia’s because of the fact that in the data boards with more than three female members are scarce.
Control Variables
The control variables used are enterprise value and number of employees to control for the effects of size of the companies, as according to Aldrich (1979), size influences the value of assets. Thus it is important to see if the independent variables particularly those related to diversity keep their relevance when checked for size in a more direct manner. More diversity can be related to size, as a bigger company needs more directors to manage the company and thus the more different directors a company can have. To control for the size bias all control variables, except for number of employees, and fixed assets are divided by turnover
8 profits in the periods following those investments. (Thatcher and Oliver 2001). However, high profits can also be used to invest in more assets and in that case are the indicator for higher fixed assets. For this reason I included gross profit as a control variable. Industry is used to check for a bias in industry to see if changes in fixed assets are comparable over all industries not just one or two. The companies industry is divided in five different categories: 1 =
wholesale, 2 = transportation, 3= service, 4 = industrial, and 5 = all others.
Total current liabilities (TCL) is the last control variable and is included because fixed assets are expected to create revenues that will be used to pay their current liabilities. Also most fixed assets are only kept for a short period (inventory for instance) and these assets are funded by current liabilities rather than long-term debt. Hence it is to be expected that current liabilities and fixed assets are positively related.
Empirical Model
The linear regression model with the previously described variables is denoted as:
Fixed Assets = β0 + β1 * %Female + β2 * %Outside directors + β3 * Age + β4 * Institution +
β5 * Government + β6 * Blockholders + β7 *Industry + β8 * grossprofit + β9 *
totalcurrentliabilities + β10 * #employees + β11 * Enterprise Value + ε
In the model β0 stands for the constant for the model and indicates the level of investments in
fixed assets when all variables are 0. This is because even when the tested variables are zero there can be investments in fixed assets.
ε
indicates the regression error term.And for the panel data analysis
Fixed Assetsit = α + β1 * %Femaleit + β2 * %Outside directorsit + β3 * Ageit + β4 *
Institutionit + β5 * Governmentit + β6 * Blockholdersit + β7 *Industryit + β8 * grossprofitit +
β9 * totalcurrentliabilitiesit + β10 * #employeesit + β11 * Enterprise Valueit + μit +εit
With t denoting the time factor in which period between 2005 and 2011 the data stems from. The i indicates from which individual/company, of my dataset companies, the value is used. α is similar to the β0 in the linear regression model.
The error term distinguishes the random effects model from the fixed model.The main difference between the fixed and random model is that the random model does allow time-invariant variables to play a role as an explanatory variable and the fixed model does not allow this to happen. This way the fixed model can predict the net effect of the independent and control variables on the dependent variable.
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Results
In Table 1, I have summarized the descriptive statistics. There are 749 observations of 107 companies during seven years. In one year, one company did not publish their numbers on fixed assets. Also, several companies didn’t always consistently publish numbers on turnover, enterprise value, gross profit, and/or current liabilities. The average number of directors on the board is four. The 107 companies together hired almost 3000 directors but only 400 of them were female, meaning that approximately 13.25% of the director were female, whereas the number of foreigners on Dutch boards exceeded a 1,000 or 34.5%. Most boards didn’t have much age diversity in fact the maximum score of five different age groups was not found in this dataset. The mean of 1.87 also points out that there were a lot of boards in which all members belonged to the same age group. This can also be the result of the boards in the Netherlands being quite small, as mentioned earlier. Not noted in Table 1 are the number of blockholders, institutions, and government shareholders in the data; during the seven years the 107 companies were observed they had in total 56 periods where there was governance
shareholdership present. There was an institution among the shareholders 196 times and a blockholder was observed 637 times.
Table 1: Descriptive Statistics
Variables N Mean S.D. Min. Max.
Number of Directors 749 4 3,477 1 26 Number of females 749 0,53 0,951 0 7 Number of foreigners 749 1,38 2,469 0 20 Age 749 1,87 0,844 0 4 Fixed Assets 748 1,430 3,921 0 34,019 Number of Employees 749 9184 28331,7 100 327680 Gross Profit 428 1,185 2,895 -0,022 21,228 Turnover 659 3,487 8,852 0,036 10,758 Total Current Liabilities 144 1,708 2,322 0,036 10,758 Enterprise Value 217 4,079 6,100 0,028 35,121
10 Table 2: OLS (1 & 2) & Robust (3 & 4) Linear Regression
***, **, * implicate significance on the respectively 1%, 5%, and 10% level. #Employees *10-6
The results of the ordinary least squares (OLS) linear regression are given in Table 2 under model 1 that gives only the independent variables and model 2 with both independent and control variables.
In the first model (1) we see that almost all variables are not significant and gives mixed results. Note that the R2 is 0.0023 and very low with the F statistic giving a value of 0.28 and thus not significant. The R2 denotes that the regression explains a lot of the variability in the
models, the R2 is 0,5739 in the second model and the F statistic is 16.28 and significant. This all indicates that the β is the linear models are not equal to 0 and the model is valid. Looking at model 1 again, we see that the P-value of most variables is now higher than 0.10, meaning that these variables did not have any contribution to explaining Fixed Assets. This is different for model 2 where there many variables that are significant. We see that %Foreign and gross profit are significant at the 1% level and have a very large positive co-efficient compared to the other variables. This means that an additional foreign board member increases the level of fixed assets a company holds. Depending on the model an increase of a foreign board
members of 10% (say the 10th board member is a foreigner) will increase fixed assets by the factor 0.0782. Gross profit is also positively related to fixed assets in the regressions. This can mean two things either fixed assets help to increase (gross) profit or the profit that companies make is invested in fixed assets. Age, blockholders, and enterprise value are also significant but at the 5% level. All these variables have a positive co-efficient which is in line with my hypothesis. %Female is significant at the 10% level but is surprisingly negative which
Fixed Assets (1) Fixed Assets (2) Fixed Assets (3) Fixed Assets (4)
Intercept 0,215 -0,785** 0,215*** -0,785*** %Female -0,517 -0,337* -0,517 -0,337** %Foreign -0,245 0,782*** -0,244 0,782*** Age 0,087 0,092** 0,087 0,92*** Institution -0,156 0,036 -0,157 0,037 Government 0,320 -0,147 0,320 -0,147* Blockholders 0,565 0,296** 0,565* 0,296*** Industry -0,014 -0,014 Gross Profit 1,110 *** 1,110*** TCL 0,296 .296 #Employees 35,5 35,5 Enterprise Value .063** 0,063 N 740 145 740 145 R2 0.0023 0.5739 0.0023 05739 Adj R2 -0,0059 0.5386 F-statistic 0,28 16.28*** 11,21*** 29,36***
11 contradict the hypothesis formulated earlier. Institution, government, and TCL is positively related to fixed assets, but insignificant.
The changes in model 1 and 2 can be explained by the addition of enterprise value and TCL, as it is seems they have more explanatory powers given the rise in R2 and are thus better predictors than the other independent variables despite the later not being significant it is remarkable however that with the inclusion of those two variables that some independent variables also become significant in model 2. Untabulated robustness checks confirm these statements when including enterprise value in model 1. The increase insignificance can be explained by the reduction of the dataset following the inclusion of TCL and enterprise value as only a limited number of companies provided data for those variables.
Lastly robust linear regression results (models 3 and 4) are similar to the OLS regression. However blockholders among the shareholders is now also a significant factor in model 3 and positively related to fixed assets. However, the significance level is quite low barely below the 10% margin. In model 4 %Female, age, blockholders, and gross profit have increased in significance, and enterprise value is no longer significant which is in line with robustness checks preformed on model 1. Government also becomes significant but only at the 10% level. The negative co-efficient is also different from model 3. The negative effect of governance on fixed assets also contradicts my hypothesis.
Table 3: Panel Data: Random Effect Model
Fixed Assets (1) Fixed Assets (2)
Intercept 0,512 -0,815** %Female -3,835 -0,522 %Foreign -3,509 0,922*** Age 0,621 0,011 Institution -1,308 0,186 Government --1,303 -0,076 Blockholders -2,505 0,199 Industry 0,003 Gross Profit 0,970 TCL 1,091*** #Employees 35,8 Enterprise Value -0,052 N (groups) 740 (107) 145 (21) R2 0.0013 0,4687***
12 As stated, the fixed panel data analysis had some issues with multicollinearity so I have chosen to ignore that analysis. The random model, however, did give some interesting results (see Table 3). The first model without control variables has an R2 of 0.0013. However the probability value is larger than 0.1000, thus questions the validity of the model. It is important to note that in this model none of the variables are significant in line with the linear
regression. Also R2 is not very different than the one in the linear regression models.
Fortunately for the model with the control variables included the P value drops to 0.000 and thus gives a good significant model with an R2 of 0.4687 which means the model explains a considerable amount the variance of fixed assets by its independent and control variables. Looking at the variables, we see percentage of foreigners and total current liabilities to be significant and positive for %Foreign this is not surprising as it was also a significant factor in the regression models. It also keeps its positive coefficient. TCL however is suddenly
significant at the 1% level. For both variables their positive effect is even bigger in this model than it was in the linear regressions. The significance of all other variables has disappeared. Based on the results of the regressions and the random effects model. I need to reject all my hypotheses except for my second hypothesis. While some models do give indications that certain variables can have a significant influence this often disappears when including the control variables and not consistently over all the models. Only %Foreign gives consistent results to conclude that foreigners on the board do positively affect fixed assets. For the other variables it is impossible to accept my hypothesis and further research is needed.
Robustness checks
Changing the percentage of female directors to a dummy that indicates if 30% or more of the directors are women in the random effects model as suggested by Joecks (2013) has no significant effect on the relation between women on the board and fixed assets. Other variables remain unchanged in significance just as the R2 and the P value.
Replacing the percentage of foreign and female directors in the linear regression models 2 and 4 by their absolute number and including the total number of directors increases R2 with 0.01 and the probability remains 0.000. In this model (untabulated) total current liabilities is now significant at the 10% level and positive and increases to a 0,343. The number of foreign directors is also positively related to fixed assets and again significant. The coefficient has increased drastically and this can be explained by the significant but negative effect extra directors have on fixed assets. In other words, an extra foreign director has a negative effect because there is an extra director on the board, but an extra foreigner on the board has an even bigger positive effect, thus cancelling out the negative effect of the extra director on the board. Also in this model, age (0.959**), gross profit (1,204***), and blockholders (0,276***) are again significant and positive.
In one of the first linear regressions model (2), we observed that enterprise value was a significant factor. When performing multiple robustness checks, I was unable to reproduce this result hence I do not draw a conclusion from this observation.
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4. Conclusion
In my research I explored the relationship between corporate governance and fixed assets. My corporate governance factors focused on diversity in the board and the different types of shareholders a company can have and their controlling influence over the managers and the companies (des)investments in fixed assets. My models shows that there are few indications to imply that corporate governance helps positively affects fixed assets as only the foreign directors showed a significant positive effect on fixed assets and this result holds for all my models. Other variables showed non consistent results, and thus I do not draw any
conclusions about the effects they have on fixed assets.
I must conclude from these results that foreign directors have a significant impact on Dutch companies their (des)investments in fixed assets and total current liabilities explain variation on fixed assets.
Contribution to the field
To my knowledge there has not been any direct link made between corporate governance and fixed assets in the Netherlands. Thus I have explored a new area in corporate governance and accounting. This research gives new insights about corporate governance and fixed assets and extends the knowledge of what influences fixed assets and how corporate governance works in the Netherlands. The influence of foreign directors on fixed assets need more investigation in foreign countries to determine whether it is only in the Netherlands that this effect is observable or that it can also be observed in other nations.
Limitations
This research only uses data from Dutch companies, which limits generalization to other nations unless further research has been done. The time frame includes the financial crisis starting at the end of 2008 in the Netherlands; this might have affected the amount of fixed assets in companies. As noted earlier and as the results indicate, the data lacked information on changes in shareholder types and information about directors through time. Also this research ignores the fact that a company can over- or under- invest in fixed assets. This could be an important factor as to why certain corporate governance factors help to increase,
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