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To cite this document:
Krishna Reddy Stuart Locke Frank Scrimgeour, (2010),"The efficacy of principle-based corporate
governance practices and firm financial performance", International Journal of Managerial Finance, Vol. 6
Iss 3 pp. 190 - 219
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An empirical investigation
Krishna Reddy, Stuart Locke and Frank Scrimgeour
1. Introduction
This study addresses the question whether principle based-corporate governance
practices have a positive impact on financial performance of large listed companies in
New Zealand. There are theoretical reasons to assume that improved governance
practices will lead to better financial performance through:
.
an increase expected cash flows accruing to the investors; and
.
a reduction in the cost of capital.
Shareholders believe that with improved governance practices more of the firms free
cash flow will be returned to them as dividends rather than being expropriated by the
managers who control the firm ( Jensen, 1986; La Porta et al., 2002; Shleifer and
Wolfenzon, 2002). Empirical studies support the view that improved governance
practices lead to better firm financial performance (MacAvoy and Millstein, 2003;
Millstein and MacAvoy, 1998). Studies using data from large economies show that
better-governed firms reduce control rights, which stockholders and creditors confer
on managers, increasing the probability that managers invest in shareholder value
creating projects (Shleifer and Vishny, 1997)
Consistent with this perspective regulators and governance advocates, after the
failure of high profile companies such as Adelphia, Enron, Parmalat, Tyco and
WorldCom, considered ways in which corporate governance practices could be
improved. In New Zealand, the debate focused primarily on whether to adopt a flexible
principle-based governance approach[1] compared to a one size fits all rule-based
approach that was adopted by the USA namely Sarbanes-Oxley Act, 2002. New
Zealand adopted a principle-based approach similar to the UK, Canada and Australia
with the view this will minimise the compliance costs. Several empirical studies in the
USA investigate the effect that a rule-based governance model has on firm
performance. However, investigations focusing on the principle-based model are
relatively scarce. This study, by reporting the findings of empirical tests in a
principle-based environment and contrasting these with those previously conducted in
the US rule-based environment, makes an important contribution to understanding
corporate governance in a global context.
New Zealand is a particularly interesting case to analyse for a number of reasons.
First, the passage of the Companies Act 1993, the Financial Reporting Act 1993 and
related legislation made it mandatory for publicly listed companies to report
governance related information in their annual reports. An increase in reported cases of
poor financial performances has been associated with poor governance practices in
many sectors of the New Zealand economy. Sufficient time has now passed since the
implementation of the revised governance practices in 2003 to make it possible to study
whether they had any effect on the financial performance of listed companies in New
Zealand. Is the corporate governance principles adopted in New Zealand are similar to
those implemented in other overseas jurisdictions it is possible in further research to
make international comparisons.
Although New Zealand did not suffer scandals to the extent reported in larger
economies, such as the USA, UK and Australia, concern with poor performance (Healy,
2003) and sub-standard governance practices were highlighted by both local and
international market participants (Godfrey and Horsely, 2003). The failures and
sub-standard corporate governance practices signal that urgent attention is required
from the policy makers should New Zealand wish to maintain integrity in the capital
market.
To harmonise corporate governance practices with trading partners and to boost
investor confidence, the New Zealand Securities Commission (NZSC), in 2004,
promulgated nine high level principles and guidelines that are intended to contribute to
high standards of corporate governance in New Zealand entities. The aim is to increase
shareholder confidence in the governance processes. The three key elements of the
NZSCs principles and guidelines that are also found in the corporate governance rules
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and codes in the USA, the UK, Canada and Australia include: independence of chair,
non-executive/independent director, and board committees. It is assumed that the
adoption of such international best practices will lead to an improvement in the
corporate governance practices in New Zealand listed companies. Although the NZSC
recommendations are not mandatory, all companies listed on the stock exchange in
(NZX) are required to observe NZSC guidelines to the fullest extent effective from 29
October 2003[2]. The companies reporting on corporate governance practices are
required to cover all the recommended principles, and departures from these must be
explained to the shareholders (NZSC, 2004).
This study extends the current literature on the corporate governance practices,
examining the efficacy of the corporate governance practices recommended by the
NZSC (soft regulation) on large listed companies financial performance. This adds to
the understanding of the workings of the underlying mechanisms of so-called soft
regulations and its effect on financial performance. The results will also contribute to
understanding of how good governance mechanisms work in the global economy. The
comparative analysis of findings from a principle based framework with the findings
of the studies conducted under the US rule-based model will contribute a more
fundamental understanding of the governance-financial performance nexus. The
ensuing discussion of the effects that the rule-based versus principle-based model have
on financial performance from an international perspective, including the effect (if any)
of international financial reporting standards (IFRS) will have on such practices in the
future, contributes significantly to understanding how governance contributes to
value.
The next section reviews prior research and is followed by a description of the
methods and procedures used for this empirical study. The results and conclusions
then follow.
2. Literature review
Agency problems arising from the separation of ownership and control are studied by
a long tradition of scholars from Smith (1776), Berle and Means (1932), Jensen and
Meckling (1976), Fama and Jensen (1983) and Shleifer and Vishny (1997) among others.
They postulate that the diffuse ownership structure provides incentives for managers
to expropriate firms assets in a manner that adversely affects shareholder wealth. The
corporate governance literature identifies a variety of mechanisms that are available to
the shareholders to ensure managers act in the best interest of the shareholders. These
mechanisms are classified as both internal, such as ownership by managers and the
board, independence of the board, size of the board and the establishment of the board
committees and external, such as block ownership, the level of debt financing, the
market for corporate control, and product market competition (Barnhart and
Rosenstein, 1998; Denis, 2001). However, most of the studies on corporate governance
concentrate mainly on a specific aspect of governance, such as insider ownership
(Mehran, 1995), blockholding (Demsetz and Lehn, 1985; McConnell and Servaes, 1990;
Mikkelson and Ruback, 1985); board composition (Bhagat and Black, 2002; Denis and
Sarin, 1997; Hossain et al., 2001), and leverage (Agrawal and Knoeber, 1996; Begley and
Feltham, 1999). The study uses an extensive set of governance variables which provide
comprehensive picture of the company and industry level governance practices and the
mechanisms that have been recommended internationally to improve governance
practices. The study includes three additional control variables, that is, audit
committee, remuneration committee and dividends.
A problem of endogeneity, which plagued many previous corporate governance
studies (Himmelberg et al., 1999; Holderness et al., 1999; McConnell and Servaes, 1990;
Morck et al., 1988), will also be addressed in this paper. Himmelberg et al. (1999) and
Palia (2001) argue that endogeneity in the performance-ownership relationship may
have been caused by omitted variables that have a potential to affect both performance
and ownership, thus leading to spurious relationships. Himmelberg et al. (1999)
suggests that the unobserved level of intangible assets induces a positive correlation
between managerial ownership and performance (Tobins Q). Firms with a high
proportion of unobserved intangible assets will require a higher level of managerial
ownership to align interests. At the same time, they will also have a higher Tobins Q
value because the market will value intangibles while the book value of assets (in the
denominator of Tobins Q) will understate the value of intangibles.
The quality of monitoring technology is another unobserved variable that has the
potential to affect both, the level of insider ownership and firm value. Those firms that
have superior monitoring technology may need lower levels of insider ownership to
align incentives resulting in and have higher firm value because fewer resources will
be diverted to managerial perquisites.
2.1 Ownership structure
The interest alignment hypothesis posits that equity ownership by insiders (officers
and directors) will better align managers goals with shareholders goals (see Berle and
Means, 1932; Jensen and Meckling, 1976). As the managers proportion of equity
ownership increases, their interests coincide more closely with those of outside
shareholders, reducing the agency problems and improving firm financial
performance. Demsetz (1983) argues that firm performance will only increase if the
ownership structure is in disequilibrium. Some studies find a positive relationship
between an out-of-equilibrium level of insider equity ownership and firm performance.
For example, Mehran (1995) examines the executive compensation structure of 153
randomly-selected manufacturing firms and reports that firm performance (measured
as Tobins Q and ROA) is positively related to the percentage of equity held by
managers as well as to the percentage of their compensation that is equity-based.
From a corporate governance perspective, managerial ownership is a new concept
for New Zealand; however, the trend to issuing warrants and shares to senior staff is
growing. The evidence available (Elayan et al., 2003; Hossain et al., 2001; Reddy et al.,
2008a) supports the view that the proportion of managerial ownership in New Zealand
companies is still less than optimal. Therefore, it is assumed that any increase in
managerial ownership is likely to have a positive effect on financial performance.
Therefore,the first hypothesis is:
H1a.
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agency cost. The average block ownership of 76.3 percent in New Zealand firms
(Hossain et al., 2001) is consistent with New Zealands weak minority shareholder
rights. Also, the existence of weak regulations regarding shareholder rights allows
initial owners to continue to hold large blocks of shares in companies after going
public. Since blockowners hold undiversified large stakes it is argued, consistent with
the interest alignment hypothesis that the blockholders will provide a similar level of
vigilance as if they owned the company themselves. Blockholding also solves the
free-riding problem making manager monitoring easier (Agrawal and Mandelker,
1990; Hill and Snell, 1988, Hill and Snell, 1989; Shleifer and Vishny, 1986). Since
blockholding is an important feature of the company ownership structure in New
Zealand, it is assumed that the presence of blockholders will have a positive effect on
firm financial performance.
Thus the second hypothesis is:
H1b.
There is no one optimal size for a board. However, organisational behaviour research
suggests that as group sizes grow larger, total productivity exhibits diminishing
returns (Hackman, 1990). Consistent with this view, Jensen (1983) suggests that a board
should have a maximum of seven or eight members to function effectively. In
Australia, the boards of the 250 largest companies have on average 6.89 members
(Psaros, 2009). From an agency perspective, smaller boards are more likely to reach
consensus and also allow members to engage in genuine debate and interaction
(Firstenberg and Malkiel, 1994). Alternatively, larger boards tend to provide an
increased pool of expertise, greater management oversight, access to wider range of
contracts and resources (Goostein et al., 1994; Psaros, 2009). However, Forbes and
Milliken (1999), Yawson (2006), Pye (2000), and Mak and Kusnadi (2005) argue that
larger boards suffer from higher agency problems because it is difficult to coordinate
and have difficulty making value maximising strategic decisions.
In New Zealand there is only a small pool of directors available from which
companies may choose and may be difficult to obtain the right balance in terms of
skills, expertise and environmental linkages required in the board room with a smaller
board size. It is argued that to balance skills required in the board room, New Zealand
companies may require a larger board size than might otherwise be the case in larger
economies. Therefore, it is assumed that board size will have a positive effect on firm
financial performances.
H2b.
H3b.
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has been undertaken in the relationship between board sub committees and
performance. However, the international evidence suggests that it is likely that
empirical research in New Zealand will find a positive link between board
sub-committees and company performances.
The seventh and eighth hypotheses are:
H4a.
H4b.
Tobins Q
Where MVE (the market value estimate) is the product of a firms share price and the
common stock outstanding, L/T Debt is the book value of long term liabilities; Net S/T
Debt is the book value of current liabilities less current assets. Demsetz and Villalonga
(2001) argue that although the numerator of Tobins Q partly reflects the value that
investors assign to a companys intangible assets, the denominator does not include the
investment the company has in intangible assets, such as, advertisement and research
and development. These items are simply treated as expenses. This distorts the
performance comparison of firms that rely on the differing degrees of intangible capital
(see Demsetz, 1979; Telser, 1969; Weiss, 1969). To overcome this problem recent studies
use depreciated book value of tangible assets. Tobins Q is estimated in the same way
for this study as well.
The accounting-based performance measure return of assets (ROA) is also used in
this study. The accounting-based profit measure is criticised as being
backward-looking and it only partially estimates future events in the form of
depreciation and amortization. On the other hand, Tobins Q is greatly influenced by a
wide range of unstable factors, such as, investor psychology, and market forecasts.
Considering the above concerns, both measures of performance are used in this study.
The ratio of market value to book value of assets (MB) is also used in this research:
MB
where TE is equal to net assets, that is, assets less debt (TE A 2 L).
3.3 Independent variables
The independent and control variables employed in this study are factors identified in
prior research as influences performance, either positively or negatively. The variables
and the way in which they are determined in this study are:
.
Insider ownership (IOWN) is the proportion of shares held by all members of the
board of directors divided by total ordinary shares outstanding.
.
Blockholding (BOWN) is the proportion of shares held by the 20 largest
shareholders of the company.
.
Non-executive/independent directors (NED) is the proportion of the
non-executive/independent directors on the board.
.
The board size (BDS) is the natural log of the total number of directors on the
board.
.
Leverage (LEV) is the proportion of the debt defined as long term liabilities plus
short-term liabilities divided by the total assets.
.
Firm size (Log (TA)) is the natural log of total assets which is a proxy for size.
.
Dividend (DIV2TA) is the dollar amount of the dividend paid by the company
divided by book value of the total assets.
.
To study the effect these committees have on firms financial performance, two
dummy variables are created. The Audit Committee (ACOM) is the dummy
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In practice, each firm has different corporate governance structures and those
structures are assumed to be similar for companies that are in the same industry.
Previous studies have looked at the industry effect on companies performance. To
study the effect corporate governance practices have on performance industry dummy
variables are created. NZX classifies all listed companies into seven sectors, namely,
primary (agriculture and fishing, mining, forestry, and building), energy, goods (food,
textile and apparel, intermediate and durables), property, service (transport, port,
leisure and tourism, media and communication, finance and other services), investment
and overseas. Using NZX classification, seven industry dummy variables are
introduced. IND1 is the dummy variable equal to 1 if the company belongs to primary
industry, otherwise equal to 0. IND2 is the dummy variable equal to 1 if the company
belongs to energy industry, otherwise equal to 0. IND3 is the dummy variable equal to
1 if the company belongs to goods industry, otherwise equal to 0. IND4 is the dummy
variable equal to 1 if the company belongs to property industry, otherwise equal to 0.
IND5 is the dummy variable equal to 1 if the company belongs to service industry,
otherwise equal to 0. IND6 is the dummy variable equal to 1 if the company belongs to
investment industries, otherwise equal to 0. IND7 is the dummy variable equal to 1 if
the company belongs to overseas, otherwise equal to 0.
There are a number of companies that were in the NZX Top40 list in 1999 that are
not in NZX Top50 list in 2007 raising concerns regarding the effect that non-surviving
firms have on the results. To control the effect of non-survivorship firms on the results,
a dumpy variable SURV is created which is equal to 1 if the firm is continuously
present in all the years of the sampling period from 1999 to 2007, otherwise it is equal
to 0. The variable CSURV measures the effect firms that survived through the
sampling period and also complied with NZSC recommendations on firm performance.
It is calculated by multiplying COMPLIED by SURV.
FP a2 b21 IOWN b22 BOWN b23 NED b24 BDS b25 LEV
b26 DIV2TA b27 logTA b28 ACOM b29 RCOM b30 FMRISK
b31 BUSRISK b32 ComAft b33 SURV b34 RDGP b35 IND1
b36 IND2 b37 IND3 b38 IND4 b39 IND5 b40 IND6 b41 IND7 e 2
FP a3 b31 IOWN b32 LESS1 b33 BET510 b34 BET1020 b35 OVER20
b36 BOWN b37 NED b38 BDS b39 LEV b40 DIV2TA
b41 logTA b42 ACOM b43 RCOM b44 FMRISK b45 BUSRISK
b46 ComAFT b47 CSURV b48 IND1 b49 IND2 b50 IND3
b51 IND4 b52 IND5 b53 IND6 b54 IND7 e
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percent and 20 percent and over 20 percent. Dummy variable LESS1 is equal to 1 if
IOWN is less than 1 otherwise equal to 0. Dummy variable BET15 is equal to 1 if IOWN
is less than 1 otherwise equal to 0. Dummy variable BET510 is equal to 1 if IOWN is less
than 1 otherwise equal to 0. Dummy variable BET1020 is equal to 1 if IOWN is less than
1 otherwise equal to 0. Dummy variable OVER20 is equal to 1 if IOWN is less than 1
otherwise equal to 0.
To study whether the firms that complied with NZSC recommendations after 2003
improved performance compared to the period before 2003, a performance measure
FPdiffAV is created. FPdiffAV is the difference between average firm performance for
the period 2004-2007 and 1999-2003:
FPdiffAV a3 b31 IOWN b32 BOWN b33 NED b34 BDS b35 LEV
b36 DIV2TA b37 logTA b38 ACOM b39 RCOM
b40 FMRISK b41 BUSRISK b42 CSURV e:
4. Empirical results
4.1 Descriptive statistics
Table I provides a summary of the sample descriptive statistics for the pooled data.
The mean Tobins Q ratio is 3.26, with a median of 1.83. A Tobins Q ratio greater than
one is favourable, indicating the firm did create value for shareholders. The mean MB
is 0.50 and median is 0.45 indicating that market value of firms shares is 50 percent
less than the book value of the firms equity. The mean of ROA ratio is 0.07 with a
median of 0.06 indicating that large firms on average have positive performance. The
mean proportion of managerial ownership (IOWN) is 12 per cent but the median is only
1 per cent. The 25th percentile is 0 per cent and 75th percentile is 16 per cent. Hossain
et al. (2001) study 633 firms of different sizes and report mean (median) managerial
ownership for the period 1991/1997 of 6.8 per cent (0.6 per cent) and lower and upper
quartiles of 0.1 per cent and 5 per cent respectively. These indicate that managerial
ownership in large firms is slightly higher in New Zealand. According to Hembry
(2008), the trend is growing as more firms are linking managerial remuneration with
the firms performance.
The mean (median) proportion of stock held by the 20 largest shareholders (BOWN)
is 63 per cent (65 per cent). The inter-quartile range for BOWN is 48 per cent-78 per
cent. Hossain et al. report a mean (median) BOWN of 76.3 per cent (78.3 per cent) and
inter-quartile range of 68.7 per cent-87.3 per cent. Chen et al. (2008) report that 60 per
cent of stocks are held by five largest shareholders which are institutions. Although
block ownership in New Zealand has declined from an average of 76.3 per cent during
1991/1997 period to 63 per cent in 1999/2007, it is still relatively high. A comparison to
economies with similar financial systems where the fraction of shares held by the
non-controlling shareholder is 80 per cent and 90 per cent for the top 20 US and UK
firms, respectively (Kapopoulas and Lazaretou, 2007), New Zealand is very low. This
indicates that New Zealand needs strong protection of minority shareholder rights to
safeguard their interest which may in turn increase liquidity in the stock market
(Healey, 2003). In summary, there is evidence that large New Zealand firms
increasingly use incentive-based mechanisms (such stock ownership) to motivate
Variable
Mean
Median
Min.
Max.
Inter-quartile range
Q-ratio
MB
ROA
IOWN
BOWN
NED
BDS
ACOM
RCOM
LEV
DIV2TA
Log(TA)
FMRISK
BUSRISK
3.26
0.50
2.84
0.12
0.62
0.76
6.98
0.96
0.78
0.47
0.06
5.85
0.68
0.92
1.83
0.45
1.85
0.01
0.65
0.80
7.00
1.00
1.00
0.44
0.04
5.75
0.35
0.48
2 0.21
0.02
0.05
0.00
0.05
0.0
3
0
0
2 2.04
0.000
4.44
0.02
0
40.48
1.43
25.62
1.000
0.95
1.00
13
1
1
0.98
1.00
8.59
5.21
6.746
1.09-3.78
0.33-0.64
1.12-3.34
0.00-0.16
0.47-0.77
0.64-0.88
6-8
Principle-based
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201
0.32-0.63
0.02-0.06
5.26-6.29
0.18-0.79
0.19-1.15
Notes: This table presents the descriptive statistics for the dependent and independent variables. The
measurement of each variable is explained given as follows: Q ratio is Tobins Q approximated by
taking the sum of the market value of common equity, book value of long term liabilities, book value of
net short term debt divided by the net fixed assets. MB is the market to book value of shareholders
equity. ROA is the net income dived by book value of total assets. IOWN is the proportion shares held
by all members of the board of directors, including top officers of the firm who are members of the
board to total shares outstanding. BOWN is the proportion of shares held by 20 largest shareholders of
the firm. NED is the number of independent non-executive directors. BDS is the size of the board of
directors. ACOM is dummy variable set equal to 1 if companies have an audit committee, otherwise it
is set equal to 0. RCOM is dummy variable set equal to 1 if companies have remuneration committee,
otherwise it is set equal to 0. LEV is the proportion of the debt defined as long term liabilities plus short
term liabilities divided by the total assets. DIV2TA is the dividend divided by book value of the total
assets. Log (TA) is the log of total assets is proxy for size. FMRISK is the standard deviation of the
daily stock price of the firms stock for each year from 1999 to 2007. BUSRISK is the standard
deviation of the five year return on assets
managers and directors and therefore, manage agency conflicts. Since BOWN is
relatively high, this suggests IOWN is not a strong mechanism itself to deal with
agency problems in large firms in New Zealand.
The mean (median) proportion of non-executive/independent directors is 76 per cent
(80 per cent) with an inter-quartile range of 64 per cent-88 per cent. The typical
(median) board has seven directors with a fairly narrow inter-quartile range of six to
eight which is similar to Fox (1996) who notes that board size declined in New Zealand
from seven members in 1970 to six members in 1983. The median
non-executive/independent directors and size of the board remains relatively
constant through the periods 1991/1997 and 1999/2007. This indicates that the size
of boards, of large companies in New Zealand is appropriate for its size and the role it
plays in terms of managing agency conflict.
On average, 96 per cent of the firms have an Audit Committee and 78 per cent have a
Remuneration Committee. A high percentage of the large companies have board
committees recognising the important role they play in mitigating agency conflict.
This is supported by the fact that the NZSC recommendations regarding board
committees came into effect after 2003, the results show that large companies have had
Table I.
Pooled cross-section
time-series sample
descriptive statistics for
selected variables
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board committees since 1999. In 1999, (on average) 86 per cent of the companies in the
sample had audit committees and 64 per cent had remuneration committees. In 2006, 95
per cent of the companies had audit committee and 91 per cent have remuneration
committees.
The mean (median) dividend to total assets is 6 per cent (4 per cent) and
inter-quartile range of 2 per cent-6 per cent, indicating that dividend payout is not high
in large companies. This may be attributable to the fact that these larger companies are
not making a high profit and/or the small nature of New Zealand capital market makes
it difficult to raise capital. Accordingly, profit is usually retained for future investment
purposes. The mean (median) leverage is 47 per cent (44 per cent). The leverage
increased from 40.5 per cent in 1991/1997 to 47 per cent in 1999/2007. A simple T-test
shows that the mean of leverage is significantly different for the period 1999/2007
compared to the period 1991/1997. The result is statistically significant at the 1 per cent
significance level. An increase in leverage shows that a proportion of the cash flow is
used to service debt. The mean (median) Log(TA) is 5.85 (5.75). The mean (median)
firm level risk is 0.68 (0.35) and the inter-quartile range of 0.18-0.79. The mean (median)
business level risk is 0.92 (0.48) and the inter-quartile range of 0.19 to 1.15.
On average, 16 per cent of the companies in the sample belong to primary industry,
8 per cent energy, 21 per cent goods, 13 per cent property, 37 per cent service, 3 per cent
investment and 3 per cent overseas. This provides an opportunity to study the
differences in the corporate governance practices in different industries in New
Zealand.
4.2 Correlation analysis
Table II presents a pairwise correlation matrix for the independent variables.
Governance variables are not highly correlated with each other. There is a positive
correlation between BDS and board sub-committees (ACOM and RCOM). This
indicates that larger boards tend to have sub-committees. Block ownership (BOWN) is
positively correlated with IOWN indicating that firms that have block owners also
tends to have higher insider ownership. Company size is positively correlated with
BOWN, NED, BDS and board sub-committees. The highest correlation of the
independent variables is between IND4 and RCOM at 2 0.62. None of the pairwise
correlations between independent variables are above 0.62, indicating that the
likelihood of multicollinearity issues arising in the OLS regressions is low.
4.3 OLS regression of Tobins Q, MB and ROA on ownership, control variables and
compliance variables
Table III presents the OLS regression of equation (2)[4]. Columns 2 and 3, 5 and 6, and 8
and 9 of Table III provide coefficients of independent variables that are used in
equation (2). Table III, columns 2 and 3 provides coefficients of the independent
variables using Tobins Q as a dependent variable. The independent variables BOWN
and DIV2TA have positive coefficients, indicating that these variables have a positive
effect on firms financial performance measured by Tobins Q. Both these variables are
statistically significant at 5 per cent level.
A negative coefficient for Log(TA), which is statistically significant at 1 per cent level,
indicates that size has a negative effect on Tobins Q. This raises questions about the
size of large companies in New Zealand as to whether they increase size to derive
(0.000)
(0.793)
(0.314)
(0.787)
(0.558)
(0.002)
(0.774)
(0.000)
(0.774)
(0.029)
LOWN
0.211**
20.014
0.055
0.015
0.032
20.164**
20.016
20.294**
20.016
0.118*
20.037
0.319**
20.025
20.011
20.028
20.063
0.190**
0.196**
0.175**
(0.497)
(0.000)
(0.646)
(0.842)
(0.609)
(0.250)
(0.000)
(0.000)
(0.001)
BOWN
20.010
0.144**
20.069
0.047
0.068
0.190**
0.172**
0.016
NED
(0.858)
(0.008)
(0.207)
(0.386)
(0.209)
(0.000)
(0.002)
(0.775)
0.209**
0.008
0.134*
0.411**
0.361**
0.313**
0.201**
(0.000)
(0.876)
(0.014)
(0.000)
(0.000)
(0.000)
(0.000)
BDS
20.180**
0.108*
0.276**
0.512**
0.201**
0.113*
LEV
(0.001)
(0.046)
(0.000)
(0.000)
(0.000)
(0.037)
20.044
0.113*
20.243**
0.075
0.108*
(0.420)
(0.037)
(0.000)
(0.170)
(0.046)
DIV2TA
0.264**
(0.144)**
0.057
0.084
(0.000)
(0.000)
(0.298)
(0.124)
ACOM
0.080
0.239**
0.132*
(0.142)
(0.000)
(0.000)
RCOM
Notes: This table reports pairwise correlations between all the independent variables where *indicates significance at the 5 percent level; **indicates significance at 1 percent level
IOWN
BOWN
NED
BDS
LEV
DIV2TA
ACOM
RCOM
Log(TA)
FMRISK
BUSRISK
0.359**
0.133*
(0.000)
(0.014)
Log (TA)
0.369**
(0.000)
FMRISK
BUSRISK
Principle-based
corporate
governance
203
Table II.
Correlation matrix for
independent variables
Table III.
OLS regression estimates
using Tobins Q, MB and
ROA as the dependent
variables
0.49
15.88
Yes
340
(0.52)
(0.000)
0.684 * *
(3.06)
0.028
(0.44)
0.199 * *
(2.81)
2 0.001
(20.20)
0.186
(1.42)
2 0.005
(20.08)
0.165 * *
(3.61)
0.078
(1.42)
0.291 *
(2.01)
2 0.127 * * * (25.68)
0.002
(0.12)
0.032 * *
(2.85)
0.092 * * *
(3.46)
0.107
(1.30)
2 0.913 * *
(2.56)
0.244
0.063
0.071
0.071
0.150
0.063
0.046
0.055
0.145
0.023
0.015
0.011
0.006
0.050
1.39
0.40
11.09
yes
340
(0.44)
(0.000)
0.841 * * *
(3.93)
20.137 *
(22.27)
0.282 * * *
(4.17)
0..009
(0.15)
20.181
(2 1.45)
0.068
(0.13)
0.206 * *
(2.45)
0.252 * *
(4.83)
0.351 *
(2.54)
20.107 * * * (25.04)
0.023
(1.57)
0.020
(1.85)
0.117 * * *
(4.88)
0.126
(1.60)
0.003
(0.00)
0.213
0.060
0.068
0.068
0.125
0.060
0.043
0.052
0.138
0.021
0.015
0.010
0.043
0.047
1.33
0.44
12.90
Yes
340
0.029
2 0.007
0.012 *
2 0.005
2 0.001
0.002
0.023 * *
20.016 * *
0.087 * * *
20.009 * * *
0.002
2 0.001
0.009 * *
0.002 * *
0.147
(0.47)
(0.000)
(1.23)
(21.01)
(1.97)
(20.75)
(20.11)
(0.35)
(2.67)
(2 3.96)
(5.91)
(2 3.92)
(1.14)
(20.71)
(2.90)
(2.71)
(1.04)
ROA
0.023
0.007
0.007
0.007
0.013
0.006
0.005
0.005
0.015
0.002
0.002
0.001
0.005
0.005
0.141
Standard error
after adjusted for
clustering
Notes: This table reports the OLS regression results between the dependent variables and the independent variables. Columns 2 and 3, 5 and 6, and 8 and
9 provide coefficients of the independent variables. The columns 4, 7 and 10 reports standard error for each independent variable after it has been adjusted
for clustering. The significance is indicated by *, * *, and * * * for 10 percent, 5 percent and 1 percent level
Constant
IOWN
BOWN
NED
BDS
ACOM
RCOM
LEV
DIV2TA
Log(TA)
FMRISK
BUSRISK
ComAft
SURV
RGDP
Adjusted R
squared (R
squared)
F ( p-value)
Industry dummy
n
Standard error
after adjusted for
clustering
Equation 2
MB
Standard error
after adjusted for
clustering
204
Independent
variable
IJMF
6,3
personal benefits for the managers. The coefficient of all the industry dummy variables
(not reported)[5] are positive (accept IND6) and statistically significant at 5 per cent
level. This indicates that governance practices in these industries contribute positively
towards Tobins Q. The coefficient of the RGDP (real annual GDP) is negative and
statistically significant at 5 per cent level indicating that growth in the New Zealand
economy during the period contributed negatively towards Tobins Q. This may be the
case because growth in New Zealand economy was largely attributable to agricultural
exports and the same growth was not experienced by the others sectors of the
economy.
Table III, column 4 provides coefficients of independent variables for equation (2)
using MB as a dependent variable. The results are very similar to columns 2 and 3
apart from insider ownership that has a negative coefficient and is statistically
significant at 10 percent level. This shows that insider ownership contributes
negatively towards firm performance measured by MB. The other statistically
significant results are for BOWN, LEV and DIV2TA, each having positive coefficients.
The results indicate that blockholding, leverage and dividend payouts contribute
positively towards firm performance measured by MB. Firm size (log (TA)) also has a
negative coefficient which is significant at 1 per cent level. This confirms earlier
findings that size is optimal for large companies in New Zealand. The coefficient of the
RGDP is negative and is not statistically significant.
Table III, columns 5 and 6 provides coefficients of independent variables for
equation (2) using ROA as the dependent variable. The results are similar to columns 2
and 3, and 4. The coefficients of BOWN and DIV2TA are positive and statistically
significant at 10 per cent and 1 per cent levels, respectively. However, coefficient of
LEV is negative and is statistically significant at 5 per cent level. The coefficient of the
firm size (Log(TA)) is negative and is statistically significant at 1 per cent level. The
coefficient of IND3 (Goods) is positive (not reported) and statistically significant
indicating that governance practices of firms in the Goods industry contribute
positively towards performance measured by ROA.
The effect of the time period after the NZSC corporate governance recommendations
became effective is captured by the dummy variable AFTER2003. Also to capture the
effect of the NZSC recommendation on companies that were always in compliance with
the NZSC recommendations the dummy variable COMPLIED is used. The effect on the
companies that consistently complied with the NZSC recommendations on
performance since 1999 is captured by the variable COMPLIED. The companies that
were continuously present throughout the sampling period are measured by the
dummy variable SURV. The variable ComAft measures the effect of complying with
the NZSC recommendations after 2003 on performance. ComAft is calculated by
multiplying COMPLIED by AFTER2003.
ComAft has a positive coefficient and is statistically significant at the 1 per cent
level providing evidence that performance is positively associated with the NZSC
compliance after 2003. The results for the time period before year 2004 show that
compliance is negatively associated with firm performance and it is statistically
significant at 1 per cent significance level. This suggests that the time period before
2004 had negative effects on performance and the years after 2004 have a positive
effect on performance. This evidence supports the view that the promulgation of the
NZSC recommendations has a positive effect on performance measured by Tobins Q,
Principle-based
corporate
governance
205
IJMF
6,3
206
MB and ROA. The companies that survived as NZX listings from 1999 did not show
significant results. The variable SURV is positive and is statistically significant at 5
per cent percent level. The companies that survived the sampling period were more
adaptive to the NZSC recommendations. In summary, the OLS regression supports the
hypothesis that blockholding, leverage, dividend payouts and complying with the
NZSC recommendations after 2003 have a positive effect on company performance.
The hypotheses regarding blockholding (H1b), leverage (H3) and dividend payout (H4)
are supported. However, the hypotheses regarding insider ownership (H1a), board
independence (H2a) and board size (H2b) are not supported. The Sheffield survey
shows that managers in New Zealand are often rewarded for reasons other than
meeting performance targets which points to insider ownership not being linked to
firm performance in New Zealand (Hembry, 2008). There is evidence of a positive
relationship between governance practices in different industries, such as, IND3
(Goods) and IND7 (Overseas) on performance. This evidence supports the view that the
principle-based governance approach has allowed different industries to develop
industry specific governance structures which have a positive effect on performance.
There is consistent evidence of company size having a negative effect on performance.
OLS results in Table III show that tolerance (1 2 R 2) ranges from 0.46 to 0.60 and
variance inflation factor (VIF) (1/Tolerance) range from 1.67 to 1.96, are within
acceptable range. According to Menard (1995) tolerance below 0.2 and VIF above 10
are worthy of concern, which needs to be investigated.
The next stage of the analysis looks at whether there is any evidence of piecewise
relationship between insider ownership and firm performance, similar to the studies of
Morck et al. (1988) and McConnell and Servaes (1990).
4.5 Piecewise regressions
A survey by Denis and McConnell (2003) show that there is no consensus about the
linearity of the relationship between ownership structure and performance. Table IV
shows results of equation (3). There is no evidence of piece-wise relationship between
insider ownership in large companies in New Zealand and performance. Consideration
of IOWN2, IOWN3 and BOWN2 finds no significant results[6].
4.6 Linear regression of on difference in Tobins Q (between 2003 and 2007) on
ownership and control variables
Tables V show the regression results of equation (4). The dependent variable for 2003
is the average of Tobins Q for the years 1999 to 2003 which is regressed on the firm
data for 2003. The dependent variable for 2007 is the average of the Tobins Q for the
year 2004 to 2007 which is regressed on the firm data for 2007. The dependent variable
DiffAvQ is the difference between AvQ(2007) and AvQ(2003). DiffAvQ measures
whether the companies that comply with NZSC recommendations in 2007 create
positive value compared to the firms in 2003. The AvQ(2003) is 0.95 and AvQ(2007) is
1.09 and DiffAvQ is 1.53. Since DiffAvQ is positive it indicates that companies in 2007,
on average, created more value than in 2003. The results in columns 4 and 5 of Table VI
suggest that only RCOM has a positive coefficient which is statistically significant at
10 per cent level. The results show that an increase in company value in 2007 is
influenced by the establishment of remuneration committees and a positive constant.
0.49
Yes
340
0.653 * *
20.085
0.027
20.043
0.059
0.064
0.088
0.191 * *
0.015
20.231
0.002
0.165 * *
0.061
0.247
20.123 * * *
0.034
0.024 * *
0.076 * * *
0.027
0.821
13.20
(0.53)
(2.63)
(2 0.86)
(0.29)
(2 0.47)
(0.54)
(0.65)
(0.91)
(2.65)
(0.21)
(2 1.74)
(0.03)
(3.57)
(1.11)
(1.69)
(25.23)
(0.14)
(3.03)
(3.50)
(0.54)
(0.59)
(0.000)
0.249
0.090
0.095
0.093
0.108
0.976
0.097
0.072
0.070
0.133
0.063
0.046
0.055
0.146
0.024
0.015
0.011
0.045
0.051
1.39
Standard error
after adjusted for
clustering
0.44
Yes
340
0.845 * * *
20.238 *
0.121
0.047
0.072
0.069
0.167
0.261 * * *
0..012
20.214
20.017
0.166 *
0.234 * * *
0.338 * *
20.115 * * *
0.024
0.025 *
0.121 * * *
0.101
20.288
9.53
(0.55)
(3.50)
(22.53)
(1.36)
(0.53)
(0.70)
(0.74)
(1.81)
(3.81)
(0.18)
(2 1.69)
(2 0.29)
(1.96)
(4.51)
(2.53)
(25.17)
(1.64)
(2.35)
(4.73)
(1.22)
(2 0.22)
(0.000)
0.236
0.094
0.089
0.088
0.103
0.093
0.092
0.068
0.068
0.126
0.060
0.044
0.052
0.139
0.022
0.015
0.011
0.043
0.048
1.32
Equation 3
MB
Standard error
after adjusted for
clustering
0.44
Yes
340
0.068 * *
20.020
20.012
20.017
20.017
20.008
20.005
0.009
20.003
20.001
0.002
0.022 *
20.018 * * *
0.081 * * *
20.009 * * *
0.002
20.001
0.010 * *
0.025 * *
0.142
10.96(0.000
(0.49)
(2.72)
(2 1.77)
(2 1.36)
(2 1.83)
(2 1.59)
(2 0.82)
(2 0.49)
(1.19)
(2 0.45)
(2 0.14)
(0.40)
(2.45)
(23.31)
(5.69)
(23.82)
(1.42)
(20.41)
(3.15)
(2.82)
(1.01)
ROA
0.025
0.010
0.010
0.009
0.011
0.009
0.009
0.007
0.007
0.013
0.006
0.005
0.006
0.015
0.002
0.002
0.001
0.005
0.005
0.141
Standard error
after adjusted for
clustering
Notes: This table reports the piecewise OLS regression results of the between the dependent variables and the independent variables. Columns 2 and 3, 5
and 6, and 8 and 9 provide coefficients of the independent variables. The columns 4, 7 and 10 reports standard error for each independent variable after it
has been adjusted for clustering. The significance is indicated by *, * *, and * * * for 10 percent, 5 percent and 1 percent level
Constant
IOWN
LESS1
BET15
BET510
BET1020
OVER20
BOWN
NED
BDS
ACOM
RCOM
LEV
DIV2TA
Log(TA)
FMRISK
BUSRISK
ComAft
SURV
RGDP
F ( p-value)
Adjusted R
squared (R
squared)
Industry dummy
n
Independent
variable
Principle-based
corporate
governance
207
Table IV.
OLS regression estimates
using Tobins Q, MB and
ROA as the dependent
variables
Table V.
OLS regression estimates
using average Tobins
Q(2003), average Tobins
Q(2007) and DiffAvQ as
the dependent variables
0.64
6.62
38
(0.76)
(0.000)
0.692
(1.42)
0.289
(1.23)
0.346
(1.61)
2 0.099
(2 0.43)
0.097
(0.22)
0.252
(1.41)
0.157
(1.31)
0.158
(0.67)
3.15 * *
(3.30)
2 0.177
(2 1.86)
0.026
(0.48)
2 0.007
(2 0.20)
0.486 * *
(0.44)
0.489
0.234
0.214
0.228
0.449
0.178
0.120
0.233
0.954
0.095
0.055
0.036
0.141
(0.45)
(0.000)
0.185
0.337
0.261
0.081
0.112
0.101
0.113
0.461 * *
(2.49)
0.298
(0.88)
20.278
(21.06)
2 0.209 * * (2 2.58)
20.005
(20.05)
0.105
(1.03)
0.032
(0.29)
0.28
2.73
45
0.538
0.264
0.355
0.357
0.659
(4.21)
2.67 * * *
0.256
(0.97)
0.106
(0.47)
20..011
(20.30)
20.750
(21.14)
0.12
1.55
45
(0.34)
(0.383)
0.128
20.229
(21.78)
0.604
0.289
0.410
0.039
0.738
0.233
0.376
0.286
0.094
0.127
0.113
(2.28)
(21.72)
(20.53)
(20.97)
(20.18)
0.473 *
(2.03)
20.201 (20.53)
20.312 (21.09)
0.092
(0.99)
0.001
(0.01)
20.083 (20.73)
1.378 *
20.498
20.219
20.039
20.130
DiffAvQ
Robust standard
error
Notes: To investigate if the compliance with NZSC recommendations after 2003 has improved firm performance, the following dependent variables were
computed Average Q for 2003 (AvQ2003), Average Q for 2007 (AvQ2007) and DiffAvQ (AvQ2007 AvQ2003) This table reports the OLS regression
results between the dependent variables and the independent variables. Columns 2 and 3, 5 and 6, and 8 and 9 provide coefficients of the independent
variables. The columns 4, 7 and 10 reports standard error for each independent variable after it has been adjusted for clustering. The significance is
indicated by *, * *, and * * * for 10 percent, 5 percent and 1 percent level
Constant
IOWN
BOWN
NED
BDS
ACOM
RCOM
LEV
DIV2TA
Log(TA)
FMRISK
BUSRISK
SURV
CSURV
Adjusted R squared (R
squared)
Chi square ( p value)
n
Equation 4
AvQ(2007)
Robust standard
2007
error
208
Independent variable
AvQ(2003)
Robust standard
2003
error
IJMF
6,3
0.21
Yes
340
(0.23)
0.53
Yes
340
(0.56)
(22.587)
(4.11)
(20.83)
(2.27)
(4.23)
(0.000)
(0.30)
(4.08)
(0.15)
(21.76)
(0.16)
(3.55)
(1.81)
(2.50)
(26.67)
(0.42)
0.02
(5.62)
0.26***
0.08
(1.29)
0.01
0.17
(1.59)
20.22
0.01
0.19***
0.22***
(4.71)
0.09
0.35**
***
20.14
(2 7.54) 20.14***
0.01
(0.50)
0.01
0.03**
20.587***
0.09***
20.03
0.01
(0.11)
0.03*
0.01
(1.03)
0.16**
11.03
(0.000) 17.95
0.34***
(2.98)
0.060***
(using 2SLS)
(using OLS)
(3.55)
0.44***
20.00
(2 0.02)
IOWN
0.062
0.065
0.068
0.125
0.062
0.052
0.050
0.139
0.020
0.015
0.011
1.11
0.023
0.047
0.012
0.037
0.202
Robust
standard
error
(5.25)
(2 1.69)
(3.42)
(3.24)
(2 1.20)
Yes
340
0.24
10.76
(0.27)
(0.000)
20.22*** (2 5.39)
20.16
(2 1.33)
0.10***
(5.62)
0.01
(0.74)
0.01
(1.05)
20.09
0.32**
0.25***
0.13**
20.13
(using OLS)
IOWN
(2.98)
Yes
340
0.50
(0.53)
0.09
(1.58)
0.07
(0.49)
0.00
(0.02)
20.14(21.11)
0.01
(0.19)
0.20***
(3.78)
0.04
(0.70)
0.34**
(2.36)
***
20.12
(2 5.22)
0.01
(0.55)
**
0.03
(2.81)
***
20.657
(3.67)
0.10***
(4.14)
20.05
(2 1.46)
0.020
(1.71)
0.144***
(3.70)
16.59
(0.000)
0.62**
(using 2SLS)
MB
0.059
0.071
0.069
0.126
0.063
0.053
0.052
0.142
0.022
0.015
0.142
1.675
0.023
0.038
0.012
0.038
0.208
Robust
standard
errors
0.21
Yes
340
(0.24)
Yes
340
0.46
(0.43)
(0.47)
(1.26)
(2 0.82)
(2 0.04)
(2 0.29)
(0.91)
(23.46)
(6.13)
(24.20)
(1.12)
(2 0.67)
(2 2.587)
(2.47)
(2 1.51)
(1.69)
(2 1.18)
(0.000)
(5.80)
(1.11)
(1.70)
(2 1.31)
0.01
0.01
0.07
20.01
0.18
20.00
20.00
0.01
0.21***
(4.60) 2 0.02**
0.09***
2 0.15*** (28.51) 2 0.01***
0.01
(0.70)
0.01
20.00
20.587
0.01**
20.01
0.01
(1.13)
0.01
0.00
(0.01)
20.01
11.27
(0.000) 12.51
0.34***
20.61
(3.05)
(4.14)
(using 2SLS)
ROA
0.06**
0.51***
(using OLS)
IOWN
0.006
0.007
0.007
0.010
0.006
0.005
0.005
0.014
0.002
0.001
0.001
1.11
0.002
0.004
0.001
0.004
0.021
Robust
standard
error
Notes: This table reports the 2SLS regression results of the dependent variables (Q, MB, and ROA) and the independent variables. Columns 2 and 3, 7 and 8, and 12 and 13 provide the results of OLS
regression used to determine insider ownership as dependent variable in the first stage of the regression. The OLS result of the dependent variable is used to determine the coefficients of the independent
variables in the 2SLS regression. Columns 4 and 5, 9 and 10, and 14 and 15 provide the results of 2SLS regression. Columns 6, 11 and 16 report the standard errors for the 2SLS regression. The
significance is indicated by *, **, and *** for 10 percent, 5 percent and 1 percent level
Constant
Q
MB
ROA
IOWN
BOWN
NED
BDS
ACOM
RCOM
LEV
DIV2TA
Log(TA)
FMRISK
BUSRISK
RGDP
COMAFT
CSURV
Mktshare
Int2ta
F ( p-value)
Adjusted R
squared (R
squared)
Industry
dummy
n
Independent
variable
Principle-based
corporate
governance
209
Table VI.
Estimates of IOWN using
OLS and estimation of Q
using SSLS
IJMF
6,3
210
BOWN a6 b60 FP b61 IOWN b62 NED b63 BDS b64 LEV
b65 DIV2TA b66 logTA b67 FMRISK b68 BUSRISK
b69 Mktshare b70 Int2ta e
FP a7 b70 IOWN b71 BOWN b72 NED b73 BDS b74 LEV
b75 DIV2TA b76 ACOM b77 RCOM b78 LogTA b79 FMRISK
b80 BUSRISK b81 ComAft b82 CSURV b83 Mktshare b84 Int2ta
b85 RGDP b86 IND1 b87 IND2 b88 IND3 b89 IND4 b90 IND5
b91 IND6 b92 IND7 e
(5.35)
(0.27)
0.25***
0.24
0.62***
Yes
340
Yes
340
0.50
0.09
0.07
20.09
(2 1.69)
0.01
**
0.32
(3.42) 20.14
0.01
0.20***
20.22***
(25.39)
0.04
20.16
(2 1.33)
0.34**
0.10***
(5.62) 2 0.12***
0.01(0.74)
0.01
0.01
(1.05)
0.03**
21.15
0.10***
20.05
(22.65)
0.020
0.03**
20.07*
(22.17)
0.14**
10.76
(0.000) 16.59(0.000)
(2 1.20)
(3.24)
(0.53)
(1.58)
(0.49)
(0.02)
(21.11)
(0.19)
(3.78)
(0.70)
(2.36)
(25.52)
(0.55)
(2.81)
(20.84)
(4.14)
(21.46)
(1.71)
(3.70)
(2.98)
(using 2SLS)
(using OLS)
20.13
0.13**
BOWN
0.059
0.071
0.069
0.126
0.063
0.053
0.052
0.142
0.022
0.015
0.011
1.37
0.023
0.038
0.012
0.038
0.208
Robust
standard
error
0.25
Yes
340
(0.27)
(5.80)
(3.85)
(21.08)
0.88**
0.38
Yes
340
(0.41)
(0.86)
(0.41)
(0.11)
(20.73)
(20.30)
(2.09)
(3.78)
(2.45)
(2 4.43)
(1.68)
(2.26)
(20.22)
(5.21)
(20.99)
(0.86)
(21.82)
(0.000)
(4.27)
(using 2SLS)
MB
20.05
0.03
20.10
(21.88)
0.01
**
0.32
(3.45) 20.09
20.02
0.11**
20.25*** (2 5.87)
0.19***
20.16
(21.39)
0.35**
0.09***
(5.71) 20.10***
0.01
(0.44)
0.03
0.011
(1.27)
0.03*
20.304
0.12***
20.04
20.02** (2 2.44)
0.010
20.04
(21.29) 20.07
10.27
(0.000)
9.93
0.27***
0.16***
20.11
(using OLS)
BOWN
0.059
0.071
0.069
0.125
0.062
0.053
0.051
0.141
0.022
0.015
0.010
1.363
0.023
0.037
0.012
0.037
0.206
Robust
standard
errors
0.17
Yes
340
(0.19)
Yes
340
0.43
(0.46)
0.006
0.007
0.007
0.013
0.006
0.005
0.005
0.015
0.003
0.004
0.001
0.141
0.002
0.004
0.102
0.001
(20.49
(1.27)
(20.89)
(0.47)
(20.53)
(0.67)
(23.37)
(5.83)
(24.12)
(1.31)
(20.48)
(0.99)
(2.58)
(21.21)
(1.64)
(21.31)
(0.000)
(0.19)
(3.78)
20.00
0.01
2 0.06
(21.14) 20.01
***
0.49
(5.29)
0.01
20.00
0.00
20.11** (22.70) 20.02**
2 0.21
(21.61)
0.09***
20.09*** (24.31) 20.01***
(2.14)
0.00
0.03*
0.02
(21.72) 20.01
0.14
0.01**
20.01
2 0.02
(21.49)
0.00
2 0.06
(21.72) 20.01
7.81
(0.000) 12.49
0.08
0.17***
0.021
Robust
standard
error
(3.24)
(3.08)
(using 2SLS)
ROA
0.07***
0.28**
(using OLS)
BOWN
Notes: This table reports the 2SLS regression results of the between the dependent variables (Q, MB, ROA) and the independent variables. Columns 2 and 3, 7 and 8, and 12 and 13 provide the results of
OLS regression used to determine block ownership as dependent variable in the first stage of the regression. The OLS results for the dependent variable are used to determine the coefficients for the
independent variables in the 2SLS regression. Columns 4 and 5, 9 and 10, and 14 and 15 provide the results of 2SLS regression. Columns 6, 11 and 16 report the standard errors for the 2SLS regression.
The significance is indicated by *, **, and *** for 10 percent, 5 percent and 1 percent level
Constant
Q
MB2ROA
ROA
IOWN
BOWN
NED
BDS
ACOM
RCOM
LEV
DIV2TA
Log(TA)
FMRISK
BUSRISK
RGDP
COMAFT
CSURV
Mktshare
Int2ta
F ( p-value)
Adjusted R
squared (R
squared)
Industry
dummy
n
Independent
variable
Principle-based
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Table VII.
Estimates of BOWN
using OLS and estimation
of Q using SSLS
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212
Principle-based
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213
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performance measures. This finding is consistent with the studies conducted in the
USA, which follows a rule-based governance system. Further, the findings are
consistent with the analyses of Agrawal and Knoeber (1996); Bhagat and Black (1998);
Yermack (1996); Klein (1998); Baxter (2006) and Reddy et al. (2008a).
The results categorically support the view that compliance with NZSC requirements
has improved firm financial performance. The presence of a remuneration committee
has a positive effect of firm performance measured by Q, MB and ROA. The coefficient
of audit committee (ACOM) is mixed and not statistically significant indicating that
audit committees do not enhance performance.
The empirical results do indicate that other governance mechanisms, namely,
dividend payout, can be utilised to minimise agency problems in an efficient manner.
Dividend payouts have also contributed positively towards firm financial performance.
Business risk seems to be positively associated with firm performance.
Block ownership is quite high in New Zealand companies, when compared to other
countries, and the OLS regression shows that blockholding is contributing positively
towards creation of shareholder value. However, when endogeneity is considered, the
effect of blockholding on performance disappears. The size of the company is inversely
related to financial performance indicating managers have increased company size for
personal benefits rather than to increase shareholder value. Also leverage is inversely
related to performance indicating that the cost of servicing debt outweighs any
monitoring benefit that is provided.
The question of whether NZSC guidelines cause firms to be more compliance
focused or more strategically focused is dependent on the effect of the governance
factors on performance. The findings strongly support the view that the company
performance is strongly associated with the time period after 2003, indicating
performance does improve after the new mandatory requirements are introduced. This
supports the view that the NZSC recommendations have a positive influence on
company performance measured by Tobins Q, MB and ROA.
The evidence also provides support to the view that principle-based governance
approach has allowed different industries to develop industry specific governance
structures. The empirical results reported in Table III show that IND3 (goods) and
IND7 (Overseas) have a positive effect on performance.
The question left unanswered is why the empirical results for the NZSC
recommendations of having non-executive/independent directors do not appear to be
statistically significantly related to performance. The reason could be that the
companies already have good governance structures in place and having
non-executive independent directors does not result in any significant improvement
in performance. Alternatively, non-executive/independent directors are appointed to
fulfil the NZSC recommendations and they lack knowledge about the firm/industry
and therefore, add no value to the company.
Lastly, jurisdictions around the world are adopting the International Financial
Reporting Standards (IFRS). In New Zealand, the Accounting Standard Review Board
(ASRB) in December 2002 determined that entities required to comply with NZ GAAP
under the Financial Reporting Act 1993 would be required to apply NZ IFRS in the
preparation of their financial statements for periods commencing on or after January
2007, with the option to apply from reporting periods beginning on or after 1 January
2005. NZSC (2008) provides evidence that for companies with balance dates from 31
March 2006 to 30 September 2006 a number have complied with the NZ IFRS. The
compliance with NZ IFRS will have an impact on the way financial data are collated
and reported. The effect of the change in reporting requirements from NZ GAAP to NZ
IRFS have had on data collected for companies that has reported under NZ IRFS is
difficult to identify. Therefore, the readers should apply discretion when trying to
duplicate or extend this study cognisant of the discontinuity in the data series relating
to IFRS introduction.
Notes
1. Is also referred as Codes of Best Practice in some countries. These are soft law (see
Morth, 2004) or soft regulation (see Sahlin-Andersson, 2004) that are non-binding and are
issued by a collective body relating to the internal governance of corporations (Weil, Gotshal
and Manges, LLP, 2004). The first serious Code of Best Practice was the Cadbury Report
1992 that issued by a Committee that was set up by the London Stock Exchange and the
Financial Reporting Council. The precursors of the Cadbury Report were the code issued in
the USA in 1978 and Hong Kong in 1989. However, these codes were relatively general and
did not receive much attention (Seidl, 2006).
2. The New Zealand Securities Commission (NZSC), New Zealand Institute of Directors (IOD)
and the New Zealand Stock Exchange (NZX) in 2002 jointly promulgated the
recommendations for the corporate governance practices in New Zealand. On 29 October
2003, NZX adopted those recommendations for the listed companies and on March 2004,
NZSC released those recommendations as a guideline for all New Zealand entities.
3. A non-executive director is classified independent only when he or she does not represent a
substantial shareholder and where the board is satisfied that he or she has no other direct or
indirect interest or relationship that could reasonably influence their judgement and decision
making as a director.
4. Results for equation (1) can be obtained from the authors if required.
5. Can be obtained from the authors if required.
6. Results can be obtained from the authors if required.
7. Test iown_res 0, F(1,317) 0.09, Prob . F 0.7636.
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Corresponding author
Krishna Reddy can be contacted at: krishna@waikato.ac.nz
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