Please cite the respective article reference: Bhagat, S., & Bolton, B. (2013). Director Ownership, Governance, and Performance. Journal of Finance and Quantitative Analysis, 48 (1 - February 2013): 105-135.

1. Director Ownership,
Governance, and
Performance
presented by Renzo Del Giudice (洛洛⼦子謙) DA71G204
Southern Taiwan University of Science and Technology - Ph.D. in Business and Administration - Seminar in Capital Market and Corporate Governance

2. • Article Reference:
Bhagat, S., & Bolton, B. (2013). Director Ownership, Governance,
and Performance. Journal of Finance and Quantitative Analysis, 48
(1 - February 2013): 105-135.
Director Ownership, Governance, and Performance - Renzo del Giudice !2

3. Agenda
1. Introduction
2. Corporate Governance and Board Independence
3. Data Description and Model Specification
4. Corporate Governance and Firm Performance
5. Market Response to Firms’ Announcement of Compliance
6. Corporate Governance and CEO Turnover
7. Corporate Governance and M&A Deals
8. Conclusions
!3Director Ownership, Governance, and Performance - Renzo del Giudice

4. Director Ownership, Governance, and Performance - Renzo del Giudice !4
1. Introduction 2. Board Independence 3. Data Description 4. Firm Performance 5. Market Response 6. CEO Turnover 7. M&A Deals 8. Conclusions
Research’s Relationships Study
Pre SOX (1988 - 2002) Relationships Post SOX (2003 - 2007) Relationships
(-) BI → P¹ (+) BI → P
(+) $DS → OP² (+) $DS → OP
(-) BC-CEO → OP³ (+) BC-CEO → OP
(+) GG → P⁴ (-) GG → P
(+) GG → P⁵ (-) GG ↛ P
1. Board independence and Firm Performance.
2. Dollar Value of Director Stock and Operating Performance
3. CEO as Board Chair and Operation Performance
4. G-Index of Good Governance and Performance
5. E-index of Good Governance and Performance
Academic researches have been using pre SOX data, difficult to distinguish pre and post
SOX relationship findings.
SOX regulations: improvement to corporate governance environment.

5. Director Ownership, Governance, and Performance - Renzo del Giudice !5
1. Introduction 2. Board Independence 3. Data Description 4. Firm Performance 5. Market Response 6. CEO Turnover 7. M&A Deals 8. Conclusions
Research Contributions
Finding Description
G ↛ SMP Governance has no correlation with Stock Market Performance
(+) -P → DMT → SOBM&BI
Poor Firm Performance leads to Disciplinary Manager Turnover,
positively correlated with Stock Ownership and Board
Independence
+SOBM → -A
Firms with greater Stock Ownership of Board Members are less
likely to engage in Acquisitions
+R (if SOX)
No-SoX compliant firms get higher abnormal returns when
complying SOX
$BM Government measure: Dollar Ownership of Board Member
Governance and Performance research methods: 4 factors (Governance, Performance,
Ownership and Capital Structure), and statistical tests (Validity, Strength, Specification
and Robustness)

6. Director Ownership, Governance, and Performance - Renzo del Giudice !6
1. Introduction
2. Board
Independence
3. Data Description 4. Firm Performance 5. Market Response 6. CEO Turnover 7. M&A Deals 8. Conclusions
Corporate Governance → Board Independence
No relationship (Hermalin & Weisbach, 1991), Negative Relationship (Agraval & Knoeber,
1996), +SOX → -Firm Value (Adams & Ferreira, 2007).
CG → BI Measurement Methods
Method Formula Provisions
G-Index +SR → + P* 24
E-Index -G → -FV** 6
Stock Ownership of Directors +SO → +M&O*** N/A
*More Shareholders Rights derive to better firm Performance (Gompers, Ishii & Metrisch, 2003)
**Less Governance derives to poor Firm Value (Bebchuk, Cohen & Ferrell, 2009)
***Board members with appropriate Stock Ownership will monitor and oversight corporate decisions (Bhagad, Bolton & Romano, 2008)
Data: Pre SOX (1997-2002) and Post SOX (2003-2007), not considering market responses,
and using “Dollar Ownership of Board Directors” as government measure.

7. Director Ownership, Governance, and Performance - Renzo del Giudice !7
1. Introduction 2. Board Independence
3. Data
Description
4. Firm Performance 5. Market Response 6. CEO Turnover 7. M&A Deals 8. Conclusions
A. Data Sources: Extensive, with a final sample from 1998-2007 and 13,000 firm
observations.
B. Governance Variables: 5 measures.
C. Performance Variables: 4 measures.
D. Endogenous and Control Variables: Determine and influence Governance, Performance,
Ownership and Capital Structure.
E. Model Specification: to study the effect of Corporate Governance on Firm Performance.
Applies different time periods and subsamples, verifies instrument weakness and bias.
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8. B. Correlation Coefficients
1998-2001 Ind G-index E-index 2003-2007 Ind G-index E-index
Ind - 0.27** 0.28 Ind - 0.18 0.18
G-index 0.27** - 0.74 G-index 0.18 - 0.7*
E-index 0.28 0.74* - E-index 0.18 0.7* -
*High-correlated factors.
**Moderate-correlated factors.
Director Ownership, Governance, and Performance - Renzo del Giudice !8
1. Introduction 2. Board Independence 3. Data Description
4. Firm
Performance
5. Market Response 6. CEO Turnover 7. M&A Deals 8. Conclusions
A. Descriptive Statistics
Variables Results Variation
1998-2007 1998-2001 2003-2007
Board 9.3 9.2 9.3 NS
Independence 67% 61.6% 72.0% +
G-index 9.2 8.9 9.4 +
E-index 2.2 2.0 2.3 +
Director Own USD 887,000 USD 790,000 USD 1,100,000 +
Duality 60% 59% 58% -
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9. Director Ownership, Governance, and Performance - Renzo del Giudice !9
1. Introduction 2. Board Independence 3. Data Description
4. Firm
Performance
5. Market Response 6. CEO Turnover 7. M&A Deals 8. Conclusions
C. Governance and Performance Relationship
Variables Results Variation
1998-2001 2003-2007
Independence Negative Positive +
G-index Negative Positive +
E-index Negative Negative -
Director Own Positive Positive +
Duality Negative Negative -
Dependent Variable: Return on Assets
No significant relation between Governance Variables and Stock Return and Tobin’s Q
(efficient market).
ROA and E-index have positive correlation in 2003-2007’s future firm performance. 7
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10. Director Ownership, Governance, and Performance - Renzo del Giudice !10
1. Introduction 2. Board Independence 3. Data Description
4. Firm
Performance
5. Market Response 6. CEO Turnover 7. M&A Deals 8. Conclusions
D. Board Independence and Operating Performance Relationship
Panels (BI) Results Variation
1998-2001 2003-2007
Panel A Negative Positive +
Panel B Negative Negative -
Dependent Variable: Return on Assets
Positive correlation between Board Independence and Operating Performance seems to be
driven by companies increasing independent directors after SOX regulation.
E. Board Independence, Director Ownership and Operating Performance Relationship
Variables Results Variation
1998-2001 2003-2007
Independence Negative Positive +
Director Own Positive Positive -
Dependent Variable: Return on Assets
Relationship between Board Independence and Operating Performance is independent of
Director Ownership effects on Governance.
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11. Director Ownership, Governance, and Performance - Renzo del Giudice !11
1. Introduction 2. Board Independence 3. Data Description
4. Firm
Performance
5. Market Response 6. CEO Turnover 7. M&A Deals 8. Conclusions
F. Robustness Check
Tests Consistency
Stock & Yogo Strength Yes
Hansen-Sargan Overidentification Yes
Cragg-Donald Model Identification Yes
Fixed Effects Estimator Yes
Clustered Standard Errors Yes
Info Cost Index Yes

12. Director Ownership, Governance, and Performance - Renzo del Giudice !12
1. Introduction 2. Board Independence 3. Data Description 4. Firm Performance
5. Market
Response
6. CEO Turnover 7. M&A Deals 8. Conclusions
Event Study: announcement of SOX compliance, proxy statement as event date.
Event Study Results
Variables Results Variation
1998-2001 2003-2007
Panel1
CAR* Negative Positive +
Market Response Negative Positive +
Panel2
CAR Negative Positive +
Market Response Negative Positive +
Dependent Variable: Not Compliant in Year t-1
*Market-adjusted cumulative abnormal return
Panel1: Compliance adding Independent Directors to the Audit Committee
Panel2: Compliance adding Independent Directors to the Audit Committee or removing them from Audit Committee
There’s a positive stock market reaction when a director with accounting expertise is
appointed to the audit committee. SOX requirement in BI enhances firm performance. Post
SOX returns are higher than pre SOX returns.
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13. Director Ownership, Governance, and Performance - Renzo del Giudice !13
1. Introduction 2. Board Independence 3. Data Description 4. Firm Performance 5. Market Response
6. CEO
Turnover
7. M&A Deals 8. Conclusions
CEO Turnover: i) Non-disciplinary (die, +63yo, transition plan, chairman of board for more
than 1 year), ii) Disciplinary (resigned, terminated, no specific reason given).
Independent Categories: 0 = no turnover, 1 = disciplinary T, 2 = non-disciplinary T
Governance effect on Turnover: variable (Last 2 Years Return x Governance).
CEO Turnover - Governance Relationship
Variables Results Variation
Panel1 (1998-2001) Panel2 (2003-2007)
B. Performance Negative¹ Negative -
Last2yRetxGov Negative² Negative -
G-Index NS Negative³ -
E-Index NS Negative³ -
Dependent Variable: Governance
1. With CEO stock ownership and CEO tenure, before applying Governance factors.
2. Good governance increases the probability of disciplinary turnover for poor results.
3. Good governance firms are less likely to discipline management turnover for poor results.
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14. Director Ownership, Governance, and Performance - Renzo del Giudice !14
1. Introduction 2. Board Independence 3. Data Description 4. Firm Performance 5. Market Response
6. CEO
Turnover
7. M&A Deals 8. Conclusions
Panel C: Post SOX independent directors and directors who own more stock are more likely
to discipline the CEO of a poorly performance firm.
Non-disciplinary CEO Turnover: no relation between good governance and this factor.

15. Director Ownership, Governance, and Performance - Renzo del Giudice !15
1. Introduction 2. Board Independence 3. Data Description 4. Firm Performance 5. Market Response 6. CEO Turnover 7. M&A Deals 8. Conclusions
Making Acquisitions - Governance Relationship
Variables Results Variation
Panel1 (1998-2001) Panel2 (2003-2007)
Independence Negative¹ Negative -
Director Own Negative² Negative -
G-Index Negative³ Negative -
E-Index Negative³ Negative -
Dependent Variable: Governance
1. Firms with great board independence are less likely to make acquisitions.
2. Firms with great director ownership are less likely to make acquisitions.
3. Good governance firms are less likely to make acquisitions.
Board Independence affects corporate making acquisitions.
Logit model: 1 = company makes an acquisition within a year, 0 = otherwise.
Post SOX Board Independence and Director Ownership are associated with a statistically
and economically significant decrease in acquisition probability.
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16. • Post SOX: increases the role of independent board members.
• Pre SOX: negative relationship Board Independence - Operating Performance.
• Post SOX: positive relationship Board Independence - Operating Performance
(SOX compliance).
• Independent directors more engaged with firm’s governance processes.
• Positive relationship Performance-Governance - Director Ownership (measured by
Dollar Ownership of the Board Members).
Director Ownership, Governance, and Performance - Renzo del Giudice !16
1. Introduction 2. Board Independence 3. Data Description 4. Firm Performance 5. Market Response 6. CEO Turnover 7. M&A Deals 8. Conclusions

17. Thanks for your attention!
Director Ownership, Governance, and Performance - Renzo del Giudice !17

18. Data Sources
Sources Data Description Period Sample Size
RiskMetrics Directors and Governance 1990-2007 1500, G-Index
Compustat Industrial Annual Financial Statements N/A N/A
Center for Research in
Security Prices
Stock Market Data N/A N/A
ExecuComp CEO Ownership and Turnover 1992-2007 1500
SEC EDGAR Proxy Statements N/A N/A
Government Variables
Variable Measurement Description Meaning
Independence % Directors not affiliated with sample firm. Given
Director Ownership USD Value of common stock owned by median
director (logarithm).
Given
Duality 1/0 CEO as Board Chair or otherwise 1: Yes, 2: No
G-Index 0-24 Antitakeover provisions by firm’s bylaw. H: weak CG, L: strong CG
E-Index 0-6
Charter provisions consistent with
entrenching management.
H: weak CG, L: strong CG
1

19. Performance Variables
Variable Measurement Formula Meaning
Return of Assets % NI / TA¹
Profit in relation to overall
resources.
Stock Return % (P1 - P0) + D / P0² Profit in stock investment.
Tobin’s Q N A(MV) / A(R)³
Firm assets in relation to firm’s
value.
Industry-adjusted % P - 4DigSICAvg⁴
Return of investment related to
industrial classification
1. Net income divided by total assets
2. Appreciation in price plus Dividend paid , divide by Original stock Price
3. Company assets (MV) / Replacement costs of company assets
4. Firm’s performance measure - Average 4-digit Standard Industrial Classification
Endogenous Variables
Variable Measurement Formula Meaning
CEO Ownership
Percentage
% (100 + SCEO) / S¹ Given.
Leverage % L-T / D-T² Capital structure measure.
Information Costs USD StdDev MSR & StdDev AF³
Determinant for board
independence.
Firm Size USD Log(A) Logarithm of assets of the firm.
R&D Advertisement
Expenses
% R&D + Adv⁴ Given.
Market Book N M / BVE⁵ Given.
Board Size N N/A Number of directors on board.
1. Percentage of stock owned by CEO
2. Long-term asset divide by debt-to asset ratio
3. Standard Deviation of Monthly Stock Returns and Analysis Forecasts
4. Ratio of R&D plus Advertising expenses to assets
5. Ratio of Market to Book Value of Equity
2

20. Control Variables
Variable Measurement Formula Meaning Use
Director Own % % %DSAvg Given.
Independence, Director
Own, Duality, G-index, E-
index
Director % CEO % %DCEOAvg Given
Independence,
DirectorOwn, Duality
Director % 15
years
% %D(15y) Given. G-index, E-index
Treasury Stock % TS / A
Primary instrument for
performance.
Performance Variables
CEO Tenure &
Age
N CEOT / CEOA Given. CEO Ownership
Z-Score N
1.2A + 1.4B + 3.3C +
0.6D + 1.0E
Instrument for
leverage.
Leverage
1. Average percentage of common stock owned by directors.
2. Average percentage of directors as CEOs.
3. Average percentage of directors on board for at least 15 years.
4. Ratio of Treasury Stocks to Assets.
5. Ratio of CEO Tenure to CEO Age.
6. Working Capital/Total Assets + Retained Earnings + Total Assets + EBIT/Total Assets + Market Value of Equity/
Value of total Liabilities + Sales/Total Assets
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21. Research’s 4-equation systems3

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24. 6

25. 6

26. 7

27. 7

28. 8

29. 8

30. 9

31. 10

32. 11

33. Formulas to calculate Governance effect on Turnover 12

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35. 14

36. 15

37. 16

38. 17