Ownership concentration, corporate governance and the firm's financial performance.

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This contains the pre submission seminar presentation made by me in respect of my Ph D dissertation. Those interested in more details are welcome to email me at : spande@nihilent.com.

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Ownership concentration, corporate governance and the firm's financial performance.

  1. 1. Ownership Concentration, Corporate Governance and Firm’s Financial Performance. presentation by SANTOSH PANDE Pre submission Seminar Research Guide: Dr Valeed Ahmad Ansari, AMU, Aligarh. External Guide: Dr A K Vij, ITM University, Gurgaon. 22nd May 2013 Department of Business Administration, Aligarh Muslim University, Aligarh.
  2. 2. Serial No. Heading Chapter 1 The theoretical foundation of corporate governance and differences in corporate governance frameworks across the world. Chapter 2 The link between corporate governance and firm performance – a survey of the literature and identification of the key issues in governance research. Chapter 3 Corporate governance in India –evolution, special features and the current state of empirical research. Chapter 4 Methodology 4.1 Developing a holistic framework for research on corporate governance in the Indian context. 4.2 Data description and selection of the sample. 4.3 Research Steps and hypotheses to be tested Chapter 5 Analysis of Data Chapter 6 Findings & Conclusions Structure of the Thesis
  3. 3. Corporate Governance –a definition Corporate Governance has been defined as; “… how to assure financiers that they get a return on their investment”. Shleifer, Andrei and Vishny, Robert W., (1997); A Survey of Corporate Governance, The Journal of Finance, Volume 52, Number 2 (June 1997). Traditionally deals with the agency problem CHAPTER 1
  4. 4. Essence of the Corporate Governance issue What is required: A theoretical framework to clearly guide the Board of Directors (BoD) in an organization so that they can take the ‘right’ decisions. Needs a clear answer to the following questions; On what basis should key decisions be taken in an organization? In an organization, ‘whose’ interests are paramount and should guide decision making? CHAPTER 1
  5. 5. Alternative Frameworks for Corporate Governance Serial No. Theoretical Framework Basic Discipline Year of Origin 1 Agency Theory Economics from 1930’s onwards 2 Stakeholder Theory Management from 1970’s onwards 3 Stewardship Theory Psychology & Sociology from 1990’s onwards CHAPTER 1
  6. 6. Limitations of the existing theoretical frameworks. • With the lines between agent(s) and principal(s) getting blurred the governance model based on the Agency Theory runs into severe limitations. • However, the Agency Theory does help the Board of Directors in finding solutions to a narrower problem of corporate governance of how to keep managers from diverting corporate funds for private purposes. • Stakeholder Theory fails in determining the difference between means and ends – when everything (the objectives of all the stakeholders) is a goal then nothing really is the goal ! • Under Stewardship Theory, directors see their roles as being stewards of particular interest groups only; for example when a major shareholder secures a seat on the board, its appointed director will understandably be tied to that shareholder's aims, whatever company law might say. • These frameworks address the ‘why’ of Corporate Governance but do not provide an answer to the ‘what’ ( to do) of Corporate Governance and provide limited guidance to the BoD in taking key decisions. We lack an encompassing and unifying theory of corporate governance that would guide the Board of Directors in taking key decisions. CHAPTER 1
  7. 7. Research across different countries has shown that differing ownership characteristics of firms across the world have led to the creation of different Governance structures and there is no “one size fits all” kind of governance structure that has universal applicability; •La Porta, Rafel , Lopez-de-Silanes, Florencio & Shleifer, Andrei (1998); •Klapper and Love (2002); • Claessens and Fan (2003); • Berglof and Claessens (2004); • Singh and Zammit (2006); • Jiang (2005); • Maher and Andersson ( 1999) The divergence in corporate governance practices across different countries in the world and the key role played by block holder groups, especially in emerging markets, points to the need to develop a unifying theory for corporate governance and the focus of any robust theoretical basis for corporate governance needs to shift from one that aims to balance between the interests of the various stakeholders to one that focuses on the organization and in creating enduring benefit for the organization. Corporate Governance…across the world! CHAPTER 1
  8. 8. Needed…. a new theoretical framework for CG • The framework of de Geus (1997) helps to create the framework that would guide the independent board members in making the right choice. • Instead of aiming for creating/enhancing shareholder or stakeholder value, the BoD Members need to only look at improving the longevity of the organization which should become the guiding force for their decisions. Since creating strategic value in an organization leads to increasing its longevity, all strategic decisions must aim to increase an organization’s strategic value. • The concept of strategic value incorporates the aims of all socially responsible investors and the stakeholders as well as the collective aims of all interest groups who are not stakeholders. • It follows as a natural corollary, that any stakeholder objective that is not consistent with growth and longevity of the organization would not add to the strategic value of the organization and the BoD would REJECT the same while taking its decision. CHAPTER 1
  9. 9. Why focus on good governance? The movement towards good corporate governance has been motivated by the presumed existence of the following intuitive linkages; •Good corporate governance would protect the interest of the owners (shareholders) and harmonize the interests of the owners and managers •Good corporate governance would result in better organizational performance and make it easy for firms to access external funds and investors, CHAPTER 2
  10. 10. Governance and Firm Performance Good Governance has been the focus of research by Consultants, Fund Managers, Rating Agencies, Donor organizations. Key Studies: – Coombes, Paul and Watson, Mark, (2000); Three Surveys on Corporate Governance, The McKinsey Quarterly, 2000, No. 4. – Beyond the Numbers-Corporate Governance: Implication for Investors; Deutsche Bank –submitted by Deutsche Bank A.G., in 2004 to the Asset Management Working Group (AMWG) of the United Nations Environment Program Finance Initiative (UNEP FI). – ICRA CORPORATE GOVERNANCE SURVEY, February 2004 – CORPORATE GOVERNANCE IN ASIA, Recent Evidence from Indonesia, Republic of Korea, Malaysia, and Thailand –an ADB Report CHAPTER 2
  11. 11. Governance and Firm Performance..contd. • The broad conclusion of the survey based research efforts have been near unanimous – Good Governance pays! • To put these findings into perspective, reforming the Corporate Governance practices by a Firm could significantly improve its valuation at considerably lesser effort than that required to boost sales, cost cutting exercise or improving margins! CHAPTER 2
  12. 12. Governance and Firm Performance…contd. Key Empirical Studies: • Gompers, Paul A., Ishii, Joy L. and Metrick, Andrew; (2003),Corporate Governance & Equity Prices • Lucian Bebchuk, Alma Cohen, and Allen Ferrel ; (2004) , What Matters in Corporate Governance? • Lawrence D. Brown and Marcus L. Caylor; (2004), Corporate Governance and Firm Performance • Kenneth Lehn, Sukesh Patro, and Mengxin Zha; (2007), Governance Indexes and Valuation: Which causes Which? • David Larcker, Scott Richardson, and Irem Tuna; (2005), How Important is Corporate Governance? • Carol Padgett & Amama Shabbi; The UK Code of Corporate Governance: (2005),Link between Compliance and Firm Performance • Balasubramanian, N., Black, Bernard S., and Khanna, Vikramaidtya,; (2008),Firm Level Corporate Governance in Emerging Markets – A case study of India CHAPTER 2
  13. 13. Conclusions from Empirical Research Despite the intuitive appeal of the proposition that ‘Good Governance (of the Firm) would lead to Good Performance (by the Firm)’ conclusive evidence linking good governance to good performance has been lacking with the results obtained from empirical research having been mixed. …………………yet, country after country has gone in for governance reforms around introducing ‘model’ codes for good governance in the belief that good governance would lead to good performance! CHAPTER 2
  14. 14. Key Challenges in C G research • The first challenge of defining and measuring corporate governance in a manner that it captures its essence – assessment of good governance requires measuring ‘soft issues’! • The second challenge in establishing a universal standard of good corporate governance and to examine if it is indeed possible to develop such a standard - can a policy of ‘one size fits all’ hold for good governance? • The third challenge of establishing causality from empirical data - have researchers who have inferred causality between corporate governance and corporate performance drawn conclusions which are beyond the empirical evidence? CHAPTER 2
  15. 15. Corporate Governance -a recent journey in India • Focus on Corporate Governance (CG) started in the late 1990s. • Major Milestones – CII Code on Corporate Governance,1998. – Kumaramangalam Birla Committee report,2000. – Naresh Chandra Committee report,2002. – Narayana Murthy Committee report, 2003. – Final Adoption of Clause 49 of the Listing Agreement,2004. – JJ Irani Committee on the New Companies Law, 2005. – Voluntary Guidelines for Corporate Governance, 2009. – Proposed Companies Bill, 2012. CHAPTER 3
  16. 16. C G in India - some Distinguishing Features • The Indian Corporate structure is characterized by the presence of the Dominant Shareholder where the traditional Anglo Saxon Model of Corporate Governance has limited applicability. • The Dominant Shareholder, in India, is not restricted to only Family ownership and other forms of Dominant Shareholders such as State Ownership and Multi National Corporations (MNCs) also exist. • The primary objective of Corporate Governance, in India, is the protection of the interest of the Minority Shareholder(s) as opposed to harmonizing the interest of the Owners (Shareholders) and Managers in the Firm. • Instances of Corporate mis-governance are usually highlighted/exposed when disputes arise within the Dominant Shareholder Group. • Corporate Governance initiatives relying on self governance have failed in India as they have focused more on ‘form’ than on ‘content’. CHAPTER 3
  17. 17. Corporate Governance in India… “The governance issue in the US or the UK is essentially that of disciplining the management who have ceased to be effectively accountable to the owners. The problem in the Indian corporate sector (be it the public sector, the multinationals or the Indian private sector) is that of disciplining the dominant shareholder and protecting the minority shareholders. Clearly, the problem of corporate governance abuses by the dominant shareholder can be solved only by forces outside the company itself.” ……………………………………..Varma, Jayanth Rama, (1997); Corporate Governance in India: Disciplining the Dominant Shareholder, IIMB Management Review Dec 1997, 9(4), 5-18. CHAPTER 3
  18. 18. Corporate Governance in India… “The problem of the dominant shareholder arises in three large categories of Indian companies. First are the public sector units (PSUs) where the government is the dominant (in fact, majority) shareholder and the general public holds a minority stake (often as little as 20%). Second are the multi national companies (MNCs) where the foreign parent is the dominant (in most cases, majority) shareholder. Third are the Indian business groups where the promoters (together with their friends and relatives) are the dominant shareholders with large minority stakes, government owned financial institutions hold a comparable stake, and the balance is held by the general public”. …………….Varma, Jayanth Rama, (1997); Corporate Governance in India: Disciplining the Dominant Shareholder, IIMB Management Review Dec 1997, 9(4), 5-18. CHAPTER 3
  19. 19. Corporate Governance in India… “It would augur well if the Indian corporate governance debate were to transcend beyond conventional wisdom to take into account the distinctive factors that are characteristic to the agency problems between controlling shareholders and minority shareholders, rather than to continue to operate under concepts that relate to the agency problems between shareholders and managers that are inappropriate to Indian corporate law and governance ”. ………..Umakanth Varottil, A CAUTIONARY TALE OF THE TRANSPLANT EFFECT ON INDIAN CORPORATE GOVERNANCE , electronic copy available at: http://ssrn.com/abstract=1331581. CHAPTER 3
  20. 20. Corporate Governance in India... “It becomes clear that even with attentive crafting of detailed governance rules by a group of elites with a deep understanding of corporate governance standards around the world, the reform process is useless if an effective infrastructure for enforcement and implementation is not in place”. ………………Afra Afsharipour; THE PROMISE AND CHALLENGES OF INDIA’S CORPORATE GOVERNANCE REFORMS; electronic copy available at: http://ssrn.com/abstract=1640249 CHAPTER 3
  21. 21. CG in India…empirical studies • Balasubramanian, Black and Khanna (2008), • Mohanty (2002), • Sarkar, Sarkar and Sen (2012), • Selarka (2005), • Mohanty (2002), • Gupta & Parua (2006), • Samantroy(2010), • Khanna and Palepu (2004), • Mukherjee and Ghosh (2004), • Pant and Pattanayak (2007), • Kumar (2003), • Sarkar and Sarkar (2000) ……and others.
  22. 22. Independent Variables -Corp Governance parameters Independent Variables – Ownership concentration, defined qualitatively & quantitatively Dependent Variable –Firm Performance •Board Structure & Process. •Index of Auditor’s Independence •Quantum of Related Party Transactions Independent Variables –from prior studies. 1. Nature of dominant shareholder -; •Government dominated •Indian Group dominated. •Foreign Group dominated. •No dominant Group. 2. Promoter shareholding percentage • Firm Size • Firm Age • Leverage • Export Intensity • Advertising Intensity •Tobin’s Q •Return on Assets (ROA) Notes: •For ease of interpretation, all the independent variable are grouped into three groups •Interaction effects (moderation) between Ownership concentration and CG variables are also examined. •This is NOT a structural model. Holistic Corporate Governance Framework for Indian Firms CHAPTER 4
  23. 23. 1 Board Structure & Process(BSP) Measured as = BOARD INDEPENDENCE* BOARD DILIGENCE =(No. of Independent Directors on the Board divided by Total No of Directors on the Board)X ( Actual Attendance of Independent Directors in Board Meetings divided by No of Board Meetings held) 2 Index of Auditor’s Independence(AUD_IND) Auditor’s Independence is measured as = Amount Paid to Auditors as Audit Fees for the year/ Amount paid to Auditors for non Audit Services for the year. A higher value indicates greater independence for the Auditor. 3 Index of Related Party Transactions(RPT_IND) Related Party Transaction is measured by constructing the following index for Related Party transactions; = (Sales To Related Parties +Purchases From Related Parties)/ (Total Sales + Total Purchases). A higher value for this Index indicates a higher level of Related Party transactions for the company. Variables: CORPORATE GOVERNANCE PARAMETERS CHAPTER 4
  24. 24. 1 Qualitative Dimension: Nature of organizational ownership (OWNSHP_NAT) The will be measured as a dummy variable depending on which of the following four categories the organization falls into: Organizations where the dominating shareholder is the Government of India- Public Sector Undertakings (PSUs). Organizations where the dominating shareholder is an Indian group. Organizations where the dominating shareholder is a foreign group. Organizations with no dominant shareholder –which does not fall into any of the above groups. 2 Quantitative Dimension: Ownership Concentration (OWNSP_CONC) Ownership Concentration is measured by the % of Promoter Group shareholding. Variables: OWNERSHIP CONCENTRATION CHAPTER 4
  25. 25. 1 Firm Size (LN_MKTCAP). Several past CG studies have used total assets as a proxy for firm size; however in the current business environment where intellectual capital has become an important component of the firm’s assets a more appropriate measure of the firm’s size may be market capitalization. This study uses the natural logarithm function of market capitalization (LN_MKTCAP) as the indicator of firm size. 2 Firm Age (LN_AGE). The age of the company has an effect on the performance of the firm. Older companies, having gone through many business cycles could have a more stable and better performance. This study uses the natural log of the age of listing (LN_AGE) as a proxy for company’s age to control for firm maturity. 3 Leverage (TL_NW). Leverage is a control variable to proxy for the level of Indebtedness. Debt plays an important role in limiting managerial discretion over the use of free cash; hence, leverage influences firm value through monitoring activities by debt holders, this study measures it as total debt divided by total assets to proxy for financial leverage (TL_NW). 4 Export Intensity (EXP_INT) EXP_INT is the total revenue earned from exports of goods and services, income earned in foreign currency by ways of interest, dividend, royalties, and consultancy fees divided by gross sales. This accounts for the behavior of firms that are subject to international competition. 5 Advertising Intensity (ADVTG_INT) ADVTG_INT controls for the expenditure in intangible assets like brand building. It is also a proxy for an entry barrier in firm’s product market Other Variables : taken from prior studies CHAPTER 4
  26. 26. FY09-10 FY10-11 FY11-12 No of Companies in S&P CNX 500 500 500 500 LESS , Companies listed after FY 2010-11 - 7 - -Companies listed after FY 2009-2010 21 - - ‘Universe of companies’ in the S&P CNX 500 479 493 500 LESS, Missing Data -Details not available of either classification of Directors (independent/non independent) or of their attendance in board meetings 20 13 22 -Related Party Transactions details not available 5 4 2 -Other Details not available 4 1 1 -Data sets eliminated because of illogical values 3 2 5 Data sets eliminated 32 20 30 No. of Cos In the sample 447 473 470 Market Capitalization of the Sample as % of the Market Capitalization of S&P CNX 500. 90.6% 96.7% 92.5% SAMPLE of COMPANIES CHAPTER 4
  27. 27. 1 H1 There is no significance difference in corporate governance characteristics (Board Structure & Process, Index of Auditor Independence and Index of Related Party Transactions) across the four groups of companies categorized based on the nature of the Dominant Shareholder 2 H2 There is no significant difference in Firm performance across the four groups of companies categorized based on the nature of the Dominant Shareholder. 3 H3 The nature of the Dominant Shareholder does not have a significant impact on firm performance. 4 H4 Ownership concentration does not significantly influence firm performance. 5 H5 Corporate governance variables (proxied by Board Structure & Process, Index of Auditor Independence and Index of Related Party Transactions) do not significantly influence firm performance. 6 H6 The nature of the Dominant Shareholder does not significantly influence (moderate) the impact of corporate governance variables (proxied by Board Structure & Process, Index of Auditor Independence and Index of Related Party Transactions) on firm performance 7 H7 Ownership concentration does not significantly influence (moderate) the impact of corporate governance variables (proxied by Board Structure & Process, Index of Auditor Independence and Index of Related Party Transactions) on firm performance. 8 H8 Other Variables from prior studies(Size, Age, Debt Intensity, Export Intensity and Advertising Intensity) do not significantly influence firm performance. Hypotheses Tested CHAPTER 4
  28. 28. FIRST STEP- Investigation into whether there are significant differences in the three corporate governance parameters (Board Structure and Process, Index of Auditor Independence and Index of Related Party Transactions) and in firm performance (as measured by Tobin’s Q and ROA) across the four categories of firms differentiated based classified based on the nature of dominant shareholding. SECOND STEP- Examine the strength of relationship between the various independent variables in the holistic framework and between Tobin’s Q and ROA. THIRD STEP - Develop and test multiple regression models, with firm performance (Tobin’s Q and ROA) as the dependent variable and the various independent predictor variables, as defined in the holistic framework – a total of 12 IVs. FOURTH STEP- Extend the enquiry, of the third step, by incorporating and examining the interaction effect of the independent moderating variables and the corporate governance variables -a total of 24 IVs. FIFTH STEP - Carry out post hoc analysis by developing a regression model by bootstrapping to benchmark and compare and test the findings. Also, for each of the four groups of companies under study, regress to test the relationship between the corporate governance variables and firm performance. RESEARCH PROCESS – five steps CHAPTER 4
  29. 29. Serial No. Nature of Dominant Shareholding FY 09-10 FY 10-11 FY11-12 Nos % Nos % Nos % 1 Government 41 9.2% 48 10.1% 42 8.9% 2 Indian Business Groups 337 74.7% 351 74.3% 358 76.2% 3 Foreign Business Groups 58 13% 62 13.1% 58 12.3% 4 No Dominating Group 11 2.5% 12 2.5% 12 2.6% TOTAL 447 100% 473 100% 470 100% Serial No. Nature of Dominant Shareholding FY 09-10 FY 10-11 Fy11-12 Market Cap % Market Cap % Market Cap % 1 Government 11,979,618.41 24.45% 15,904,095.79 27.1% 12,601,368.45 25.72% 2 Indian Business Groups 27,932,830.69 57.00% 31,014,346.65 53.00% 27,819,776.42 56.77% 3 Foreign Business Groups 4,833,900.26 9.86% 5,419,524.46 9.3% 5,637,634.04 11.51% 4 No Dominating Group 4,255,161.30 8.68% 6,190,177.65 10.6% 5,261,162.85 10.74% TOTAL 44,746,349.36 100% 58,528,144.55 100% 51,319,941.76 100% Company Groupings- based on nature of dominant shareholder(s) CHAPTER 5
  30. 30. Serial No. Parameter under investigation FY 09-10 FY10-11 FY 111-12 1 Board Structure& Process .000* .000* .000* 2 Index of Auditor Independence .083 .365 .115 3 Index of Related Party Transactions .000* .000* .000* 4 Tobin’s Q .000* .000* .000* 5 ROA .000* .000* .000* CG and Firm performance parameters compared across groups -KW Test * Significant at p< 0.5 level. Findings, that firm performance varies significantly across business groups, is consistent with those of Gunduz and Tataoglu (2001), Priya and Shanmughan(2011). CHAPTER 5
  31. 31. Year Bi-variate correlation between Tobin’s Q and ROA 2009-2010 .350* 2010-2011 .552* 2011-2012 .354* Bi-variate correlation between Tobin’s Q and ROA FY 2009-2012 This result corroborates the earlier findings of Gupta et al (2006) who, in a study of 250 + Canadian companies over 2002 -2004, reported significant (at p<.001 level) but low correlation between Tobin’s Q and ROA ranging between .223 and .280 ;a study conducted across select East Asian countries by Asian Development Bank, ADB (2004) that found low to moderate correlations between ROA and Tobin’s Q across Indonesia (.23), Malaysia (.43), Korea (.09) and Thailand (.25) and an Indian study of 1005 firms, listed on the Bombay Stock Exchange, over 1999-2000 that reported a significant but low correlation (.13) between Tobin’s Q and ROA, Douma et al (2003). . * Significant at 0.01 level (2 tailed test). CHAPTER 5
  32. 32. The asymptotic regression model (comprising of one DV and 12 IVs) is tested in a four step hierarchical regression process and the variables are entered in the following sequence; 1. In the first step the independent variables from previous research studies, the following ‘control’ variables, are regressed with the DV ( Tobin’s Q or ROA); • Firm Size, (LN_MKTCAP), • Firm Age, (LN_AGE), • Leverage, (TL_NW), • Export Intensity, (EXP_INT) and, • Advertising Intensity, (ADVTG_INT). 2. In the second step, the corporate governance variables are added in the regression model, • Board Structure & Process, (BSP), • Index of Auditor’s Independence, ( AUD_IND) and, • Index of Related Party Transactions, (RPT_IND). 3. In the third step the 3 dummy variables( representing the 4 category of dominating shareholders) are introduced, • Organizations where the dominating shareholder is an Indian group, (Indian_Dom_Group). • Organizations where the dominating shareholder is a foreign group, (Foreign_Dom_Group). • Organizations with no dominant shareholder –which does not fall into any of the above groups, (No_Dom_Group). 4. In the final fourth step, promoter holding is added as an independent variable, (Ownership_Conc). 5. In the moderated regression models (used to test for the interaction effect between the 4 moderating variables and the 3 corporate governance variables) a fifth step, is added to the above four steps, in which the interaction terms are added to the regression equation Hierarchical Regression steps CHAPTER 5
  33. 33. Regression Model Where: • β0 is the intercept, • Tobin’s Qi is the measure of the outcome, • BSP is a measure of Board Structure and processes, • AUD_IND is a measure of auditor independence, • RPT_IND is a measure of the intensity of the related party transactions, • OWNSHP_CONC is a measure of ownership concentration in the company measured by the promoter group holding, • OWNSHP_DUM is a dummy variable that indicates whether the dominant group in the company is a Indian group, a Foreign group, Government or whether there is no dominant owner group. • CTRL are control variables of firm size, firm age, leverage, profitability and industry sectors, export intensity and advertisement intensity, and • εi is the error term. CHAPTER 5
  34. 34. Moderated Regression Model CHAPTER 5
  35. 35. REGRESSION*– carried out for both Tobin’s Q and ROA as DV 1 Model 1.1-Regression with all data with heteroscedasticity-consistent standard error estimates.** 2 Model 2.1 -Regression after removal of outliers -with heteroscedasticity-consistent standard error estimates. 3 Model 3.1 –Regression with Interaction effect from Indian origin dominating groups only-with heteroscedasticity-consistent standard error estimates. 4 Model 4.1 –Regression with Interaction effect from Foreign origin dominating groups only -with heteroscedasticity-consistent standard error estimates. 5 Model5.1-Regression with Interaction effect from Groups having no dominating shareholders only -with heteroscedasticity-consistent standard error estimates. 6 Model 6.1-Regression with Interaction effect from promoters holding only. Post hoc analysis (carried out for both Tobin’s Q and ROA as DV) 1 Model 7.1/7.2-Regression for only companies with Indian origin groups as dominating shareholders-with heteroscedasticity-consistent standard error estimates. 2 Model 8.1/8.2 -Regression with BOOTSTRAPPING. *A total of48 (8*2*3) regression models are tested in this study for the three year period **Heteroscedasticity-consistent standard error estimates are determined using the method suggested by Hayes and Cai (2007). Summary of Regression Models tested CHAPTER 5
  36. 36. Initial checks Run initial regression Check Residuals Linearity & unusual causes Save Diagnostics Transform Data Linearity Homoscedasticity Independence Normality Assumptions met and no bias Heteroscedasticty No normality Lack of Independence Lack of Linearity Graphs: Scatterplot Graphs: ZPRED vs ZRESD Graphs: Histogram Model can be generalized Rerun analysis: WLS Regression Rerun Analysis: Bootstrap CIs, Transform data. transform data Use a multilevel model CHAPTER 5 Analysis of Residuals
  37. 37. Conclusions from the analysis of Residuals. • No Multicollineraity. • No Autocorrelation. • Hetreoscadesticity – standard errors are corrected using the macro developed by Hayes and Cai (2007). • Residuals are non normal – transformation of data not attempted because of limitations on interpretability of results, instead bootstrapping regression method used to validate results. CHAPTER 5
  38. 38. FY 2009-10 CHAPTER 5
  39. 39. CHAPTER 5 FY 2010-11
  40. 40. FY 2011-12 CHAPTER 5
  41. 41. Absence of any significant interaction effect between ownership concentration (measured by the nature of dominant shareholder and promoters holding) and the three corporate governance variables. • A total of 72 interaction terms were tested, over three years for two DVs (3*2*12), and only one interaction term was found to be marginally significant - in model 3.2 in FY 09-10 with ROA as the DV - with a p value of 0.0469. • The model wise, step wise changes in R2 in the 36 (3*2*6) regression models tested above corroborates the absence of any significant interaction effect. Of the 18 regressions models tested with Tobin’s Q as the DV, not one had any significant R2 change at step 5 when the interaction terms were introduced in the regression model; while of the 18 regression models tested with ROA as the DV, only one, model 3.2 in FY 09-10 with ROA as the DV, had significant R2 change at step 5 when interaction terms were introduced in the regression model. Interaction Effect between ownership concentration and corporate governance variables CHAPTER 6
  42. 42. Sl No Description of the variable Un standardized β coefficient Base Model- 2.1 Bootstrapping Model - 8.1 FY09-10 FY10-11 FY11-12 FY09-10 FY10-11 FY11-12 I. Independent Variables- from previous studies 1 Total Term Liabilities to Net Worth -.2541* -.0855 -.0084 -.254* -.096* -.016 2 Export Intensity .0045 .0023 .0031 .004 .006 .004 3 Advertising Intensity .1112* .1450* .1526* .111* .145* .155* 4 Natural Log of the Age of the Firm -.1677* -.0916 -.0051 -.168* -.227* -.196 5 Natural Log of the Market Cap of the Firm .3168* .3120* .3322* .317* .338* .352* II. Independent Variables- Corporate Governance Variables 1 Board Structure & Process .5415 .1490 .2163 .542 .719 .222 2 Index of Auditor Independence -.0030 .0021 .0005 -.003 .001 .001 3 Index of Related Party Transactions .0128* -.0019 .0060 .013* .000 .003 III Independent Variables- Ownership concentration 1 Foreign_Dom_Group .9889* .9830* 1.0223* .989* 1.094* 1.515* 2 Indian_Dom_Group .5549* .6437* .4160* .555* .540* .548* 3 No_Dom_Group .5372 .7128 .4847 .537 .851 .769 4 Ownership_Concentration .0122* .0096* .0041 .012* .015* .009* Adjusted R2 .457 .389 .429 .297 .256 Sample Size 467 463 2000 2000 2000 Post Hoc analysis - comparing base model and the bootstrapping model Tobin’s Q as DV-FY 09-10 to 11-12 CHAPTER 6
  43. 43. Sl No Description of the variable Un standardized β coefficient Base Model- 2.2 Bootstrapping Model - 8.2 FY09-10 FY10-11 FY11-12 FY09-10 FY10-11 FY11-12 I. Independent Variables- from previous studies 1 Total Term Liabilities to Net Worth - 1.6459* - 1.0479* -.0096 -1.705* 1.070* .026 2 Export Intensity .0503* .0384* .0020 .047* .039* .034 3 Advertising Intensity .1912* .2666* .1580* .188* .300* .411* 4 Natural Log of the Age of the Firm .5551 .3337 -.0771 .499 .150 .950 5 Natural Log of the Market Cap of the Firm .6396* .9751* .3660* .646 .893* 1.455* II. Independent Variables- Corporate Governance Variables 1 Board Structure & Process 4.0593 3.7558 .1064 2.948 3.239 4.761 2 Index of Auditor Independence -.0218 -.0022 .0022 -.017 .001 -.008 3 Index of Related Party Transactions -.0245 -.0568* .0037 -.005 -.046* .014 III Independent Variables- Ownership Concentration 1 Foreign_Dom_Group 5.1713* 5.6851* 1.5978* 4.871* 6.166* 2.825 2 Indian_Dom_Group 2.5327* 3.0699* .5740* 2.719* 2.711* .991 3 No_Dom_Group 1.7152 2.3364 .6649 1.871 2.287 -1.342 4 Ownership_Concentration .0479* .0623* .0071 .049* .061* .014 Adjusted R2 .249 .264 .193 .219 .223 .131 Sample Size 440 467 465 2000 2000 2000 Post Hoc analysis - comparing base model and the bootstrapping model ROA as DV-FY 09-10 to 11-12 CHAPTER 6
  44. 44. Sl No Description of the variable Un standardized β coefficients –Model2.1 Un standardized β coefficients –Model 8.1 FY09-10 FY10-11 FY11-12 FY09-10 FY10-11 FY11-12 1 Indian_Group_Dominating .555* .663* .416* .555* 2.514* .416* 2 Foreign_ Group_ Dominating .989* 1.003* 1.022* .989* 5.324* 1.022* Sl No Description of the variable Un standardized β coefficients –Model2.2 Un standardized β coefficients-Model 8.2 FY09-10 FY10-11 FY11-12 FY09-10 FY10-11 FY11-12 1 Indian_Group_Dominating 2.533* 3.059* .849* 2.533* 3.059* .849 2 Foreign_ Group_ Dominating 5.171* 5.079* 4.367* 5.171* 5.079* 4.367 Test of significance for un standardized β coefficients Indian origin and foreign origin dominating groups Tobin’s Q as the DV ROA as the DV CHAPTER 6
  45. 45. Corroboration of findings • Finding that foreign group dominated firms have the best firm performance (because of higher un standardized β value which is also consistently statistically significant over three years) among all the four group of dominating shareholders are in line with the earlier results obtained by Chibber & Mazumdar (1999), Balasubramanian et al (2008), Khanna and Palepu (2004), Douma , Rejie and Rezaul, (2003) for foreign group affiliated companies. • The relative difference between the firm value for foreign group dominated companies vis a vis India group dominated companies is also in line with the findings in Balasubramanian et al ( 2008) who had taken foreign group and Indian group affiliations as control variables in their regression model where Natural log ( Tobin’s Q) was the dependent variable • Similar absence of significant relationship between the DV and Age and Export Intensity had been reported by Balasubramanian et al (2008), who had used Natural Log (Tobin’s Q) as the DV, while Selarka (2011) had found significant relationship between Market Value to Book Value (DV) and Export Intensity. Both Balasubramanian et al (2008) and Selarka (2011) had reported significant relationship between the Leverage indicator used by them as the IV and the DV. however, the research finding, in this study, that Age of the Firm and Leverage indicator were not significantly related to the DV was corroborated in a study reported by Sarvanan (2009). CHAPTER 6
  46. 46. Serial No.not Hyp. Conclusion Basis for arriving at the conclusion 1 H1 REJECT the Null hypothesis that there is no significance difference in corporate governance characteristics (Board Structure & Process, Index of Auditor Independence and Index of Related Party Transactions) across the four groups of firms categorized based on the nature of the Dominant Shareholder. Section 7.2 of this chapter- Group wise comparison; Kruskal Wallis Test – refer Tables 7.10 and 7.11 2 H2 REJECT the Null Hypothesis that there is no significant difference in Firm performance (measured by Tobin’s Q and ROA) across the four groups of companies categorized based on the nature of the Dominant Shareholder. Section 7.2 of this chapter- Group wise comparison; Kruskal Wallis Test – refer Tables 7.10 and 7.11 3 H3 REJECT the Null Hypothesis that the nature of the Dominant Shareholder does not have a significant impact on firm performance Section 7.4 of this chapter; Regression Models –refer Tables 7.35, 7.36, 7.37, 7.38, 7.39 and 7.40. 4 H4 REJECT the Null Hypothesis that Ownership concentration (Promoters Holding) does not significantly influence firm performance. Section 7.4 of this chapter; Regression Models – refer Tables 7.35, 7.36, 7.37and 7.38. 5 H5 ACCEPT The Null Hypothesis that corporate governance variables (proxied by Board Structure & Process, Index of Auditor Independence and Index of Related Party Transactions) do not significantly influence firm performance Section 7.4 of this chapter; Regression Models –refer Tables 7.35, 7.36, 7.37and 7.38. 6 H6 ACCEPT the Null Hypothesis that the nature of the Dominant Shareholder does not significantly influence (moderate) the impact of corporate governance variables (proxied by Board Structure & Process, Index of Auditor Independence and Index of Related Party Transactions) on firm performance Section 7.4 of this chapter; Regression Models – refer Tables 7.18, 7.21, 7.24, 7.27,7,30 and 7.33. 7 H7 ACCEPT the Null Hypothesis that ownership concentration does not significantly influence (moderate) the impact of corporate governance variables (proxied by Board Structure & Process, Index of Auditor Independence and Index of Related Party Transactions) on firm performance. Section 7.4 of this chapter; Regression Models – refer Tables 7.18, 7.21, 7.24, 7.27,7,30 and 7.33. 8 H8 ACCEPT the Null Hypothesis that some of the other Variables from prior studies( Age, Export Intensity) do not significantly influence firm performance and REJECT the null hypothesis that some of the other variables (Market Capitalization, Advertising Intensity, Leverage) do not impact firm performance. Section 7.4 of this chapter; Regression Models –refer Tables 7.35, 7.36, 7.37and 7.38. Hypotheses Tested CHAPTER 6
  47. 47. Contributions from this study The study has the following unique and distinctive features; • This study provides a comprehensive definition to the concept of ownership concentration that covers not only the quantitative measure of ownership concentration i.e. promoters holding but also incorporates a qualitative dimension as well i.e. the nature of the dominant shareholder. • While the role of the dominant shareholder has been well recognized in literature as a distinguishing feature of the Indian business environment, a comprehensive empirical study that focuses on the impact of the nature of the dominant shareholder is missing. Chibber & Mazumdar (1999), Balasubramanian et al (2008), Khanna and Palepu (2004), Douma , Rejie and Rezaul, (2003), have looked at foreign group affiliated companies and/or domestic group affiliated companies, by treating group affiliation as a control variable, in the regression model. This is the first comprehensive study that looks at all the four categories of firms classified, on the basis of the nature of the dominant shareholder, as a variable of interest in the study. • The widespread prevalence of dominant shareholders in Indian organizations makes related party transactions a commonly used mechanism for the dominant shareholder to expropriate benefits for themselves, often at the cost of minority shareholders. This study develops, for the first time, an index for Related Party Transactions (as a proxy measure for corporate governance) and examines its relationship with firm performance. • This study is based on a holistic model for corporate governance in Indian firms and presents an integrated view of the impact of corporate governance on firm performance. The possible moderating impact of ownership concentration on the relationship between proxy corporate governance variables (Board Structure & Process, Auditor’s Independence and Related Party Transactions) and firm performance is examined, for the first time, in an Indian empirical study. CHAPTER 6
  48. 48. Studies using better methodology for data analysis; •Principal Component Regression method for carrying out the regression exercise, Maddala (2007). •Structural Equation Modeling (SEM) as a preferred alternative over regression, Peyrot (1996). •This study is essentially a cross sectional study that examines a phenomenon at a particular point in time & may not give a complete picture of the phenomenon studied. For instance, the FY 11-12 results, which appear to be different from the other two years, may be temporary and not a continued occurrence. •A longitudinal study would have better captured the changes in the investigated phenomena over a longer period of time and in this light, future studies should be conducted on a longitudinal basis. Using a panel data approach can also capture other omitted variables that matter POSSIBLE EXTENSIONS TO THIS STUDY CHAPTER 6
  49. 49. But…..more importantly needed……. a more robust theoretical framework for corporate governance • Currently Corp Gov researchers are measuring variables in respect of “structural independence,” rather than board and individual director effectiveness, per se. Levrau and Van den Berghe (2007). •Researchers neglect the broader systemic area like organizational strategy that affect organizational performance, Heracleous (2001) . •There is no analysis of how boards perform as boards, how they make decisions, and of the impact of the behavioral characteristics of various directors on the decision making process, Lebalanc, and Gilies (2003). once it is possible to measure variables such as “board effectiveness” and “director effectiveness”, together with their interaction, there is a greater likelihood of distilling a more definitive relationship between corporate governance and corporate financial performance. …………………….need for greater use of qualitative research methods – including observing boards in real time and interviewing directors – for advancing research in this field. CHAPTER 6
  50. 50. THANK YOU If you are interested in corporate governance related research then please visit my SSRN Author page: http://ssrn.com/author=1714442. feedback welcome at spande@nihilent,com

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