PhD 2009 CG LISTED COMPANIES.pdf

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<ul><li><p>7/23/2019 PhD 2009 CG LISTED COMPANIES.pdf</p><p> 1/107</p><p>Corporate Governance and Financial Performance</p><p>(A Study of Malaysian Listed Companies)</p><p>Amir Ranjbar</p><p>CGA070054</p><p>Supervisor:</p><p>Dr. Cyril Hilaris Ponnu</p><p>University Malaya</p><p>03/05/2009</p><p>Submitted to the Graduate School of Business Faculty of Business</p><p>and Accountancy University of Malaya, in partial fulfillment of the</p><p>requirements for the degree of Master of Business Administration</p></li><li><p>7/23/2019 PhD 2009 CG LISTED COMPANIES.pdf</p><p> 2/107</p><p>Acknowledgement</p><p>To my best friend and wife who always was, is, and would</p><p>be my best support.</p><p>To my parents who always encourage and influence me in</p><p>all aspects of my life.</p><p>I am also very grateful to my supervisor and lecturer who</p><p>have provided clues, reviews as well as critical comments</p><p>and suggestions to improve my work.</p></li><li><p>7/23/2019 PhD 2009 CG LISTED COMPANIES.pdf</p><p> 3/107</p><p>Table of Contents</p><p>Acknowledgement............................................................................................................. 2</p><p>List of Tables .................................................................................................................... 6</p><p>List of Figures ................................................................................................................... 7</p><p>Abstract ............................................................................................................................. 8</p><p>1. Introduction................................................................................................................. 10</p><p>1.1. Background of the Problem ................................................................................. 11</p><p>1.2. Problem Statement ............................................................................................... 13</p><p>1.3. Objectives of the Study ........................................................................................ 13</p><p>1.4. Summary and Organization of the Remaining Chapters ..................................... 15</p><p>2. Literature Review ....................................................................................................... 18</p><p>2.1. Corporate Governance in Malaysia ..................................................................... 18</p><p>2.2. The Malaysian Legal, Regulatory and Institutional Structure ............................. 18</p><p>2.3. Formation of New Governing Bodies .................................................................. 25</p><p>2.4. Corporate Governance, Ownership and Performance ......................................... 26</p><p>2.5. Corporate Ownership and Control in Malaysia ................................................... 28</p></li><li><p>7/23/2019 PhD 2009 CG LISTED COMPANIES.pdf</p><p> 4/107</p><p>2.8. Does Firm Performance Affect Board Composition? ......................................... 34</p><p>2.9. Why Board Composition Has Become a Hot Issue in Malaysia? ....................... 35</p><p>2.10. CEOChairman Duality ..................................................................................... 37</p><p>3. Methodology ............................................................................................................... 38</p><p>3.1. Determinants of Financial Status of Companies ................................................. 38</p><p>3.2. Determinants of Corporate Governance .............................................................. 40</p><p>3.2.1. TDI Board Sub-Indexs Notes ...................................................................... 43</p><p>3.2.2. TDI Disclosure Sub-Indexs Notes ............................................................... 44</p><p>3.2.3. TDI Shareholder Sub-Indexs Notes ............................................................ 49</p><p>3.3. Controlling Variables ........................................................................................... 51</p><p>3.4. Sources of Data .................................................................................................... 53</p><p>3.5. Theoretical Framework and Main Research Hypotheses .................................... 55</p><p>3.6. Scope of the Study ............................................................................................... 57</p><p>4. Data Analysis and Results .......................................................................................... 59</p><p>4.1. Descriptive Analysis ............................................................................................ 59</p><p>4.2. Correlation between Independent Variables ........................................................ 62</p></li><li><p>7/23/2019 PhD 2009 CG LISTED COMPANIES.pdf</p><p> 5/107</p><p>6. References................................................................................................................... 78</p><p>Appendix A: Financial Status of Companies (Dependent Variables) ............................ 81</p><p>Appendix B: Financial Status of Company (Independent Variables) ............................ 87</p><p>Appendix C: Management and Ownership of Company ................................................ 93</p><p>Appendix D: TDI, TDI-Board, TDI-Disclosure, and TDI-Shareholders ..................... 100</p></li><li><p>7/23/2019 PhD 2009 CG LISTED COMPANIES.pdf</p><p> 6/107</p><p>List of Tables</p><p>Table 1: Descriptions of La Porta's Factors .................................................................... 20</p><p>Table 2: Comparison of Legal Protection and Accounting Standards in various</p><p>Countries. ........................................................................................................................ 24</p><p>Table 3: Structure of the Transparency and Disclosure Index (TDI). ............................ 41</p><p>Table 4: Estimation of effect of Independent Variables on Dependent Variables ......... 57</p><p>Table 5: Descriptive Data for Management and Ownership Data .................................. 59</p><p>Table 6: Dependent Variables Descriptive Analysis ...................................................... 61</p><p>Table 7: Corporate Governance and Ownership Correlation Matrix ............................. 62</p><p>Table 8: ROA as Dependent Variable ............................................................................ 63</p><p>Table 9: Tobins as Dependent Variable ........................................................................ 64</p><p>Table 10: Dividend/Earning as Dependent Variable ...................................................... 65</p><p>Table 11: Dividend/Sales as Dependent Variable .......................................................... 66</p><p>Table 12: Altman's Z-Score as Dependent Variable....................................................... 67</p><p>Table 13: Dept/Assets as Dependent Variable ............................................................... 68</p><p>Table 14: Debt/Equity as Dependent Variable ............................................................... 68</p><p>Table 15: ROA as Dependent Variable .......................................................................... 70</p><p>Table 16: Tobin's Q as Dependent Variable ................................................................... 71</p><p>Table 17: Dividend /Earning as Dependent Variable ..................................................... 71 </p></li><li><p>7/23/2019 PhD 2009 CG LISTED COMPANIES.pdf</p><p> 7/107</p><p>Table 21: Debt / Equity as Dependent Variable ............................................................. 73</p><p>Table 22: Regression Summary ...................................................................................... 74</p><p>List of Figures</p><p>Figure 1: Theoretical Framework ................................................................................... 56</p></li><li><p>7/23/2019 PhD 2009 CG LISTED COMPANIES.pdf</p><p> 8/107</p><p>Abstract</p><p>The existing studies often find statistically controversial effects of corporate</p><p>governance and ownership on firm financial performance in developed countries.</p><p>Unfortunately, there are rare empirical studies on emerging markets while they often</p><p>show wider variations in corporate governance practices, which may have an impact</p><p>on firm performance and dividend policy.</p><p>A good example in this field is Malaysia. After independence in 1957, Malaysia has</p><p>faced many challenges such as riots in 1969 and financial crises in 1997. These</p><p>factors caused many reforms in corporate ownership and governance rules in this</p><p>country. This study wants to find out how corporate governance and ownership can</p><p>affect performance of Malaysian listed companies. This study is important and new in</p><p>two ways. First, Malaysia is a fast developing country and in order to accelerate their</p><p>progress and avoid any interruption, they tried to accept best practices in corporate</p><p>governance during last decade. We want to examine the effect of these changes on</p><p>reality and on the performance of Malaysian listed companies. Second, there is no</p><p>similar research in Malaysia in this area. The result of this research can help to see the</p><p>real effect of Bursa Malaysia policies to regulate market and since this research is</p><p>quantitative, its results can illustrate to what degree corporate governance rules and </p></li><li><p>7/23/2019 PhD 2009 CG LISTED COMPANIES.pdf</p><p> 9/107</p><p>The data used in this research are secondary data gathered from listed companies in</p><p>main and second Bursa Malaysia boards. By regression analysis, we tried to find out</p><p>to what extent corporate governance is acting successfully.</p><p>The results of this study reveal that corporate governance has a positive effect on</p><p>Tobins Q, Dividend/Sales, Debt/Assets, and Debt/Equity of company. Also a</p><p>narrower bound of corporate governance like TDI Disclosure or Shareholders have</p><p>positive effect on Return on Assets (ROA) or TDI disclosure can increase Altmans</p><p>Z-Score which means by increasing the transparency of board activities, firms can</p><p>reduce their risks.</p><p>Keywords: Corporate Governance, Financial Performance, Board Independence, CEO</p><p>duality, Board Balance, and Ownership.</p></li><li><p>7/23/2019 PhD 2009 CG LISTED COMPANIES.pdf</p><p> 10/107</p><p>1. Introduction</p><p>Among Asian companies, corporate governance is often regarded as a weak link to</p><p>performance. The board of directors is amongst the internal governance mechanisms</p><p>intended to ensure that the interests of managers are in line with shareholders interest,</p><p>and to discipline or remove ineffective management teams. Most studies have tackled</p><p>the issues of corporate governance separately. There are many researches which</p><p>targeted the effect of CEO duality, Board Size, Board Balance, Ownership, and Board</p><p>Dedication on Firms Performance. Unfortunately, most empirical researches on these</p><p>issues have been restricted to US data. The generalizability of such findings may not</p><p>extend across national boundaries due to different regulatory and economic</p><p>environments, cultural differences, the size of capital markets and the effectiveness of</p><p>governance mechanisms.</p><p>This study tries to observe the effect of corporate governance and ownership of 100</p><p>Malaysian listed companies on their financial performance in 2007. Malaysia has one</p><p>of the most developed stock markets in the ASEAN region. This study includes 100</p><p>public listed companies in Bursa Malaysia from FTSE BM 30, FTSE BM 70, FTSE</p><p>BM Small Cap Index, FTSE BM Second Board, and FTSE BM MESDAQ which</p><p>almost covers one seventh of all listed companies in Bursa Malaysia. The extracted </p></li><li><p>7/23/2019 PhD 2009 CG LISTED COMPANIES.pdf</p><p> 11/107</p><p>This study hypothesizes that well-defined policies and regulations which is defined as</p><p>listing requirement in Bursa Malaysia can increase the performance of companies.</p><p>The results of this study support the above hypothesis and illustrate that there is a</p><p>positive relationship between well-management and transparency on one hand, and</p><p>high financial performance on the other hand.</p><p>1.1. Background of the Problem</p><p>The failure of organizations which were previously thought to be infallible such as</p><p>Enron and WorldCom in the USA, Ansett, OneTel and HIH in Australia have had</p><p>investors and other stakeholders demanding better corporate governance, especially</p><p>by means of cleaning up the boardroom (Cheng, 2003; Houle, 1990; Park and Shin,</p><p>2003). Malaysian Code of Corporate Governance stipulates that at least one third of</p><p>the board of directors must consist of independent directors. The code was adopted in</p><p>response to the East Asian financial crisis, calling for among others, greater</p><p>transparency and good governance.</p><p>The positive effect of the crisis then, in improving corporate governance practices was</p><p>also seen by the Second Finance Minister, Mustapa Mohamad. In his own words:</p></li><li><p>7/23/2019 PhD 2009 CG LISTED COMPANIES.pdf</p><p> 12/107</p><p>process in place. This process includes sound regulation of markets, including good</p><p>corporate governance practices which will aid to bring about greater depth and</p><p>resilience to the Malaysian economy. What I would classify as a positive feature of</p><p>the crisis, is the sense of urgency with which issues of corporate governance are</p><p>being addressed. Throughout the world, corporate governance reforms have arisen</p><p>from local crises. East Asia is no different (Treasury, 199).</p><p>Mustapa was also quick not to conclude that better corporate governance practices as</p><p>the silver bullet, while at the same acknowledged its importance.</p><p>Malaysia passed many reforms in corporate ownership and governance rules.</p><p>Financial Sector Master Plan (FSMP) which provided by ministry of Finance in 2001,</p><p>Capital Market Master Plan by securities commissions in 2001, or recommendations</p><p>by Finance Committee on Good Governance (FCGG) which are the reaction to 1997</p><p>crises are just some samples of these reforms.</p><p>Now, it is important to quantitatively inspecting the results of all these reforms on the</p><p>performance of firms. By this mean, it is possible to make sure that the efforts in this</p><p>field were necessary and they have done in the correct way.</p></li><li><p>7/23/2019 PhD 2009 CG LISTED COMPANIES.pdf</p><p> 13/107</p><p>1.2. Problem Statement</p><p>Although Ministry of Finance, securities commissions and all other related</p><p>organizations have tried to adopt best practices of corporate governance and</p><p>ownership in Malaysia, there is no practical study to observe the real relationship</p><p>between these two items. Each country has its own specific culture and it is difficult</p><p>to say that best practices in other countries, which have proven, will result in the same</p><p>way in other countries. The result of a quantitative study can reveal that to what extent</p><p>these efforts were successful or on the other hand were unnecessary or unrelated. It</p><p>also can show the required changes or improvements in policies and regulations.</p><p>1.3. Objectives of the Study</p><p>The goal of this research is twofold. First, it gathers, for the first time, quantitative</p><p>measures of the quality of the corporate governance and the ownership structure of</p><p>100 non-financial listed companies in Malaysia with information for 2007. A wide</p><p>array of official and private sources was used for this research. In a nutshell,</p><p>companies seem to be following international practices and code of corporate</p><p>governance. In turn, ownership appears to be quite concentrated at the level of the</p><p>largest ultimate shareholder, with pyramiding being the main mechanism for creating</p><p>such a wedge Second we test the predictions of recen...</p></li></ul>