|
新西兰Essay范文 Corporate Ownership & Control Essay 指导新西兰essay
LEVELS OF OWNERSHIP STRUCTURE, BOARD COMPOSITION
AND BOARD SIZE SEEM UNIMPORTANT IN NEW ZEALAND
Trevor Chin, Ed Vos* and Quin Casey
Abstract
The relationship between firm performance and board composition, size and equity ownership structure
are investigated in this paper for a sample of 426 annual observations of New Zealand firms
across a five-year period. No statistically significant relationships could be found. These results are
consistent with several previous studies and cast doubt on agency explanations used to relate board
ownership to corporate performance. This may be due to endogenous factors or due to the small size
of the New Zealand pool of corporate directors.
Keywords: firm performance, board composition, ownership structure
* Associate Professor of Finance, Waikato Management School, University of Waikato, Private Bag 3105
Hamilton, New Zealand, Email: evos@waikato.ac.nz
1. Introduction
Finance literature assumes that managers are imperfect
agents for investors (Jensen and Meckling
(1976)). This assumption reflects circumstances in
which managers of firms may attempt to pursue
goals other than shareholder wealth maximization.
As a result, agency costs arise from this divergence
of interests. Several methods for controlling these
agency costs have been advocated, such as the payment
of dividends, the use of private debt and managerial
stock ownership. However, another important
dimension in the reduction of agency costs lies with
the monitoring of managers by the board of directors.
The board of directors is generally regarded as a
crucial aspect of the corporate structure of any organization.
In theory, they provide the link between
those who provide the capital (shareholders) and the
people who use the capital to create value – the managers
(Monks and Minow (1995)). This link infers
that boards are the overlap between the small and
powerful group that runs the company and a large
yet relatively powerless group that wishes to see
company performance maximized.
The board’s primary role is to monitor managers
on behalf of shareholders. Numerous studies have
suggested that the effectiveness of this overseeing
role is affected by the number of independent or
‘outside’ directors included on the board (see for
example Kaplan and Reishus (1990)), the percentage
of outstanding stock held collectively by the board
(e.g. Morck et al. (1988)), and the size of the board
of directors (e.g. Yermack (1996)). These studies
have however primarily focused on firms based in
the United States, which have been found to have a
significant amount of their large, and medium-sized
publicly traded firms being widely controlled (found#p#分页标题#e#
to be at the 80% mark for large firms and 90% for
medium-sized firms in a recent study by Porta et al
(1999)). New Zealand was found however to have a
corporate governance control base that was widely
held of only 30% for large companies and 57% for
medium-sized companies.
This unique situation means that a greater percentage
of these firms are controlled by closely held
groups, such as the family and the state. Under this
setting, we would expect the agency costs of NZ
firms to be lower than that of US firms (as similarly
postulated by Eisenberg et al. (1998) in a study on
Finnish firms). In light of this, we investigate three
variables, being the percentage of outside directors,
the percentage of outstanding stock held collectively
Corporate Ownership & Control / Volume 2, Issue 1, Fall 2004
120
by the board, and board size, and more specifically
investigate the effect that these variables might have
on firm value within the New Zealand context. Specifically,
an attempt is made to determine what levels
of these variables enhance the ability of the board to
effectively monitor the use of shareholder funds.
The paper is organized as follows: Section 2
provides a review of the previous literature that has
focused on the monitoring effectiveness of boards of
directors. The sample data and methodology are presented
in Section 3. Section 4 deals with the data
analysis and hypothesis testing and Section 5 concludes.
2. Literature review
Ownership structure
Since initial work on the subject by Berle and Means
(1932), much research has been carried out in the
financial literature on the relationship between levels
of equity ownership of managers and firm performance.
It has been stated by Berle and Means (1932)
and Jensen and Meckling (1976), that there may be a
potential conflict of interest between managers and
shareholders due to managers having an incentive to
adopt investment and financing policies to benefit
themselves, to the detriment of shareholder wealth
maximization (see also Morck et al. (1988)).
A way to counter this conflict of interest has
been postulated to be by increasing the equity ownership
of managers in the firms they manage. By
doing so, the managers will have a financial stake in
the firm and will thus carry out less self-benefiting
activities and instead work more effectively towards
the job they were hired to do, which is to maximize
shareholder wealth. This is known as the convergence
of interest hypothesis (Berle and Means
(1932), and Jensen and Meckling (1976)).
Whilst some empirical work carried out has reported
that such a relationship is unfounded (see for
instance Demsetz (1983) and Mikkelson et al.
(1997)) much empirical work carried out in this area#p#分页标题#e#
has shown a positive relationship between the level
of equity ownership and firm performance. For instance,
Mehran (1995) in an examination of the executive
compensation structure of 153 randomlyselected
manufacturing firms found that firm performance
was positively related to the percentage of
equity held by managers as well as to the percentage
of their compensation that is equity-based. In another
study carried out by Ang et al. (2000) that related
agency costs to ownership structure, it was reported
that agency costs were found to be inversely related
to the proportion of shares owned by managers.
In addition, there have been many papers that
have indicted that the positive relationship between
the level of equity ownership and firm performance
only goes up to a point, after which the performance
of the firm drops. This drop at high levels of equity
ownership has been said to be due to managers and
directors being free from checks on their control and
they subsequently indulge their preference for nonvalue
maximizing behaviour. This is known as the
entrenchment hypothesis. Many empirical studies
have reported the confirmation of this hypothesis.
For instance, Hermalin and Weisbach (1991) found a
nonmonotonic relationship between Tobin’s Q (an
indicator of firm performance) and the fraction of
stock owned by CEOs still on the board of directors.
More specifically, the relationship was found to be
positive between 0% and 1%, negative between 1%
and 5%, positive between 5% and 20%, and negative
after that. In a subsequent study of 371 Fortune 500
firms for 1980, Morck et al (1988) found that
Tobin’s Q was found to first rise as insider ownership
increased up to 5%, then fell as ownership increases
to 25%, then rose only slightly at higher
ownership levels. McConnell and Servaes (1990)
found a similar curvilinear relation between Tobin’s
Q and the fraction of common stock owned by corporate
insiders, being positive up till ownership
reached 40% to 50%, then it became slightly negative.
A recent study by Rosenstein and Wyatt (1997)
found that stock-market reactions to the announcement
of inside director appointments was found to be
significantly negative when inside directors owned
less than 5% of common stock; significantly positive
when the ownership level was between 5% and 25%;
and insignificantly different from zero when ownership
exceeded 25%. Other work carried out showing
a similar rise-fall relationship between managerial
equity ownership and firm performance include Stulz
(1988) and Hermalin and Weisbach (1991).
It is thus hypothesized that a similar rise-fall relationship
will be observed between board equity
ownership and firm performance in the sample of#p#分页标题#e#
New Zealand listed firms in this study. The null hypothesis
being that the rise-fall relationship will not
be observed.
Board composition
The existence of outside directors on the board of
directors has been stated to be important in order to
provide a monitory role over the board (see Fama
(1980), Fama and Jensen (1983)). Shivdasani and
Yermack (1999), in a study on whether CEO involvement
in the selection of new directors influences
the nature of appointments to the board, found
that fewer independent outside directors were appointed
when the CEO was involved suggesting that
this was a mechanism used by them to reduce active
monitoring pressure. Dahya et al. (2002) investigated
the relationship between CEO turnover and corporate
performance following the Cadbury Committee issuance
of the Code of Best Practice in 1992.
To improve board oversight, the Code recommended
that boards of UK corporations include at
least three outside directors and the positions of
Chairman and CEO be held by different directors.
The study found that there was a significant increase
Corporate Ownership & Control / Volume 2, Issue 1, Fall 2004
121
in the sensitivity of management turnover to corporate
performance following the adoption of the Code
and the increase in sensitivity of turnover to performance
was due to an increase in outside board
members (similar to the finding of Weisbach
(1988)). It has been thus postulated that boards comprising
a majority of independent outsider directors
are more likely to make decisions consistent with
shareholder wealth maximization. Many empirical
studies have reported the postulation to be true. For
instance, Cotter et al. (1997) carried out a study examining
the role of target firm’s independent outside
directors during takeover attempts by tender offer
and found that independent outside directors enhanced
target shareholder gains. In addition, boards
with a higher majority of independent directors were
more likely to use resistance strategies to enhance
shareholder wealth.
In a similar study, Byrd and Hickman (1992)
found in an investigation of 128 tender offer bids
from 1980-1987 that bidding firms on which independent
outside directors held at least 50% of the
seats had significantly higher announcement date
abnormal returns than other bidders. Weisbach
(1988) found that the higher the proportion of outsiders
on a board, the more likely it was that the
board will replace the firm’s CEO after a period of
poor corporate performance. In addition, Rosenstein
and Wyatt (1990) report direct evidence of a positive
stock price reaction at the announcement of the appointment
of an additional outside director.#p#分页标题#e#
A reason for these results has been said to be
that those who are perceived to be better managers
tended to become outside directors (Fama (1980),
Fama and Jensen (1983), Kaplan and Reishus
(1990)). Fama and Jensen (1983) and Ricardo-
Campbell (1983) argue that outside directors who
hold multiple directorships have greater incentives to
monitor corporate decisions on behalf of the shareholders
as they have made a significant investment in
establishing their reputations in the market place for
decision experts.
Some studies have suggested however, that outsiders
may not have any effect over the monitoring
of managerial decisions. In practice, the CEO has a
dominant role in choosing outside directors (see
Mace (1986)), possibly casting doubt about the ability
of outside directors to make independent judgments
on the performance of the firm. Indeed, some
studies have suggested that it is possible to have too
many independent outside directors on a board.
Byrd and Hickman (1992) reported that boards
in their sample with over 60% outsider composition
produced negative shareholder wealth effects. A reason
for this is because corporate boards have a variety
of responsibilities and thus require a diverse set
of talents to carry them out effectively (Baysinger
and Butler (1985)). In addition, Klein (1995) also
found a negative relationship between the presence
of outsiders and firm performance.
Due to the results of the majority of past studies
mentioned earlier, it is hypothesized that firm performance
will have a positive correlation to the percentage
of outside directors on the board of directors.
The null hypothesis being that the positive correlation
between firm performance and the percentage of
outside directors on the board will not be observed. It
is not expected that the decline in firm performance,
as found by Byrd and Hickman (1992) will be observed
with the sample studied in this paper, as New
Zealand firms were found to not be held as widely as
US firms (see Porta et al. (1999)).
Board sizehttp://www.ukassignment.org/daixieEssay/Essayfanwen/
Board size has been argued to have an inverse relationship
with the degree of effective monitoring provided
by the board of directors. This is known as the
board size effect and has been said to be due to problems
that arise in group coordination and the ability
to process problems efficiently as group size increases
(Lipton and Lorsch (1992), Jensen (1993)).
This argument is drawn from organizational behaviour
research that suggests that as work groups grow
larger, total productivity exhibits diminishing returns
(for instance see Steiner (1972) and Hackman
(1990)). Holthausen and Larcker (1993) consider#p#分页标题#e#
board size among a number of variables that might
influence executive compensation and company performance,
but failed to find consistent evidence of a
negative relationship between company performance
and board size.
In contrast however, using a sample of 452 large
US industrial companies from 1984 to 1991, Yermack
(1996) found an inverse relationship between
firm value, as measured by Tobin’s Q, and the size
of the board of directors. Yermack’s findings were
confirmed by similar findings of a board size effect
by Eisenberg et al. (1998) within their sample of
small and midsize Finnish firms. In addition, an empirical
study carried out by Tufano and Sevick
(1997) found that mutual fund boards with smaller
boards and boards with a larger fraction of independent
members tended to negotiate and approve lower
fees (being a proxy for higher efficiency of the board
of directors).
The implications of the board size effect could
be seen to lead to a trend for the average size of
boards to shrink over time. For instance Bacon
(1990) reported that the number of board members at
large companies in the sample studied declined from
a median of 14 in 1972 to a median of 12 in 1989. In
addition, Huson et al. (2001) found in a study examining
CEO turnover at large public firms over a 24
year period from 1971 to 1994 that board size was
relatively constant at 14 directors through to the late
1980s but declined to 12 directors from 1989 to
1994.
From the work carried out previously, it is hypothesized
that a similar inverse relationship between
board size and firm performance will be obCorporate
Ownership & Control / Volume 2, Issue 1, Fall 2004
122
served in the sample of New Zealand listed firms
studied in this paper. The null hypothesis being that
such an inverse relationship will not be observed.
Endogeniety
Whilst it can be helpful to find relationships between
firm performance and levels of equity ownership,
board composition, and board size such conclusions
cannot be said to be econometrically conclusive due
to firm performance being endogenously determined
by exogenous (however only partly observed)
changes in the firm’s contracting environment in
ways consistent with the predictions of principalagent
models (Himmelberg et al. (1999)). There is
even question as to whether any of the three factors
are exogenously determined.
Cho (1998) reported finding that investment affects
corporate value which in turn affects ownership
structure and not the reverse. Indeed, as Denis and
Sarin (1999) suggest, determination of ownership
and board structure (at least) is a more dynamic
process than previously understood with changes#p#分页标题#e#
being part of a process that reallocates assets to different
uses and to different management teams in
response to a change in business conditions. There is
great importance in understanding there may be unobserved
heterogeneity in the contracting environment
across firms that may be excluded unknowingly
by methodology. For instance, if some of the
unobserved determinants of Tobin’s Q are also determinants
of managerial ownership, then managerial
ownership might spuriously appear to be a determinant
of firm performance (as suggested by Himmelberg
et al. (1999)). We shall return to this analysis
following the empirical results.
3. Data and methodology
Datahttp://www.ukassignment.org/daixieEssay/Essayfanwen/
The data sample studied included all firms listed on
the New Zealand Stock Exchange for a five-year
period from 1996 to 2001. Information on director
stock ownership, the percentage of outside directors
on boards, and board size was gathered and collated
from printed annual reports and annual reports available
from firms’ websites. Financial information on
firms in the sample was obtained from Datex, a database
for financial information on New Zealand companies.
In addition, Datastream and annual reports
were used to obtain financial information required
where information was not available on Datex.
Where information was incomplete, the firm would
be excluded from the sample. The final sample included
the following number of firms for each year,
with the number in the brackets representing the total
number of firms listed on the New Zealand Stock
Exchange for that year: 1997 - 73 firms (224), 1998
- 76 firms (229), 1999 - 87 firms (218), 2000 - 97
firms (231), and 2001 - 93 firms (220). This comprises
a total of 426 annual observations over the
five-year study period.
The level of director ownership on each board in
each year was calculated as the total amount of
common stock held collectively by the directors,
divided by total outstanding common stock at fiscal
year end. Stock options were not considered in this
study, as they are very rare in the New Zealand context.
Board size represents the number of members
on the board of directors at the fiscal year end of
their respective organizations. Outside directors were
defined as those who were not current or former employees
of the company. The percentage of outside
directors was calculated by the number of outside
directors divided by the number of members on the
board of directors (board size).
Methodology
Following the methodology of several recent related
studies such as Morck et al. (1988) and Yermack
(1996), the value of the firm was measured by
Tobin’s Q, defined as:#p#分页标题#e#
Tobin’s Q = Market value of assets / Replacement
cost of assets
Market values of assets were calculated as the
year-end value of market equity. This measurement
is limited as no value is included for the market
value of long-term debt for which reliable estimates
could not be obtained. The replacement costs of assets
were assumed to be equal to the book value of
tangible assets. This assumption reflects the lack of
information on company depreciation rates available
for firms in the sample. Although Tobin’s Q is undoubtedly
a noisy proxy of the effectiveness of board
monitoring, it is well suited to the purpose of this
investigation. An alternative approach that could be
used is the event study methodology, for which the
analysis of unexpected changes in levels of firm performance,
board equity ownership, board composition,
and board size could be conducted. However,
the event study methodology is also limited by several
problems such as noise which can contaminate
the experiment. Descriptive statistics were calculated
from the sample of firms studied over the five-year
period, on a yearly and total basis, consisting of the
mean, median and standard deviation.
Relationship between outside directors and performance
Many empirical studies have reported a positive relationship
between the percentage of outside directors
and firm performance (see Cotter et al. (1997), Byrd
and Hickman (1992), Weisbach (1988), and Rosenstein
and Wyatt (1990)). This positive relationship is
believed to be due to the improvement in monitoring
the decisions made by firms’ management teams.
Outside directors have an incentive to ensure that
Corporate Ownership & Control / Volume 2, Issue 1, Fall 2004
123
shareholder wealth-maximizing decisions are made,
due in great part to their reputational capital in the
market for decision experts (Fama and Jensen 1983).
In order to investigate the relationship between
firm performance and levels of outside directors present
on firms’ boards, we compare separately the
mean of Tobin’s Q among subsets of levels of outside
directors. An ordinary least squares regression
analysis is performed to ascertain if any relationship
between the variables exists.
Relationship between board size and performance
The board size effect is an effect found in past studies
by researchers such as Yermack (1996), Eisenberg
et al. (1998), and Tufano and Sevick (1997). It
shows an inverse relationship between board size
and firm performance due to the breakdown in group
dynamics and communication problems that occurs
in increasingly large groups. In this study we try to
ascertain if such a relationship exists in our sample
of New Zealand firms, by averaging the Tobin’s Q#p#分页标题#e#
across different board sizes. Ordinary least squares
regressions are performed to see if any relationship
between the variables exists.
Relationship between board ownership and performance
Prior studies have suggested that board ownership
has both positive and negative effects on the value of
the firm depending on the ranges of board ownership
studied. For example, Rosenstein and Wyatt (1997)
found that stock-market reactions to the announcement
of inside director appointments was found to be
significantly negative when inside directors owned
less than 5% of common stock; significantly positive
when the ownership level was between 5% and 25%;
and insignificantly different from zero when ownership
exceeded 25%. Morck et al. (1988) used similar
ranges and found that Tobin’s Q was found to first
rise as insider ownership increased up to 5%, then
fell as ownership increased to 25%, then rose only
slightly at higher ownership levels. Using these
ranges of board ownership (<5%, 5-25% and >25%),
we try to ascertain if a similar relationship exists
with the New Zealand data sample using regressions
and non-parametric testing. Within these ranges and
the sample as a whole, regressions were calculated
between Tobin’s Q and three variables for each year
and the total sample pooled together. The regression
formula consists of:
Tobins Q = α + β Variable + ε
Where:
Variable is either level of director stock ownership
(DSO), percentage of outside directors (OD) or
board size (BS). The Spearman rank correlation nonparametric
test was also conducted within these
ranges and the sample as a whole, and using Tobin’s
Q and each of the three variables for each year and
the total sample pooled together. The Spearman rank
correlation checks for differences between the ranks
to ascertain if there are any relationships between the
variables at various levels of board ownership.
Where:
di = rank(Xi)-rank(Yi), and Xi and Yi are paired
observations
n = number of observations
5. Results
Descriptive statistics
As Table 1 highlights, the percentage of equity
owned by directors appears to increase from 1997 to
2000 and then decrease slightly in 2001, with a mean
for the period of 7.24% and a median of 0.66%. This
is in contrast to the study by Morck et al. (1988) who
documented mean and median values of 10.60% and
3.40% respectively.
Yermack (1996) also detected slightly higher
percentage values for his sample of US firms, reporting
a mean level of ownership of 9.10% and a median
of 2.80%. Our findings are consistent with the
findings by Porta et al. (1999). In addition, Table 1
highlights the fact that board size seems fairly stable#p#分页标题#e#
over the period of the study obtaining a mean of 6.5
members. Nevertheless, there are indications of a
slight shrinking of board size by small percentages
from 1997 (6.68 members) to 2001 (6.31 members).
This is consistent with the findings of Bacon (1990)
and Huson et al. (2001) who both found a decrease
in the size of boards of directors in their sample of
firms over a longer time period than this study (a 24
year period in Huson et al.’s case). The percentage of
outsiders seems to have decreased over the first four
years of the period studied, and indeed decreased by
approximately 7.5% from 1997 to 2001. This is in
contrast to Huson et al. (2001) who found an increasing
level of outsiders in the sample studied, from
70.6% in the period 1971-1982 to 78.6% in 1983-
1994.
Relationship between outside directors and performance
Table 2 shows the mean Tobin’s Q for different
percentages of outside directors including the correlation
coefficient of the mean Tobin’s Q to percentage
of outsider directors. Figure 1 shows the relationship
of the percentage outsiders to mean Tobin’s
Q.
( 1 )
6
1 2
1
2
−
= −
Σ=
n n
d
r
n
i
i
s
Corporate Ownership & Control / Volume 2, Issue 1, Fall 2004
124
Table 1. Levels of Director Stock Ownership, Board Composition and Board Size for the Period 1997 To
2001http://www.ukassignment.org/daixieEssay/Essayfanwen/
The sample consists of 426 annual observations for the following number of firms for each year, 1997 (73 firms), 1998 (76
firms), 1999 (87 firms), 2000 (97 firms), and 2001 (93 firms). Director stock ownership is total stock owned collectively by
directors divided by total outstanding common stock. Outside directors are those that are independent of the company.
Board size represents the number of directors as outlined in annual reports.
Table 2. Mean Tobin’s Q for Ranges of Percentages of Outside Directors on Firms’ Boards.
N represents the number of observations used to calculate mean Tobin’s Q in each range of percentage outsiders.
Range Mean Tobin's Q N
0 - 10 0.6883 2
10 - 20 0.4896 7
20 - 30 0.5692 20
30 - 40 0.4258 14
40 - 50 0.5307 14
50 - 60 0.5236 36
60 - 70 0.6342 51
70 - 80 0.4870 47
80 - 90 0.4841 122
90 - 100 0.5948 113
Correlation 0.03
0.0000
0.1000
0.2000
0.3000
0.4000
0.5000
0.6000
0.7000
0.8000
0 - 10
10 - 20
20 - 30
30 - 40
40 - 50
50 - 60
60 - 70
70 - 80
80 - 90
90 - 100
Percentage of Outsiders Ranges
Firm Performance
Fig. 1. The Relationship between Firm Performance and the Percentage of Outside Directors#p#分页标题#e#
1997 Mean Median Standard Deviation
Director Stock Ownership (%) 6.18 0.54 12.44
Outside Directors (%) 79.74 83.33 19.14
Board Size 6.68 6.00 2.03
1998 Mean Median Standard Deviation
Director Stock Ownership (%) 5.64 0.43 11.63
Outside Directors (%) 77.39 80.91 20.22
Board Size 6.66 6.00 2.04
1999 Mean Median Standard Deviation
Director Stock Ownership (%) 7.39 0.66 13.61
Outside Directors (%) 72.57 80.00 24.01
Board Size 6.63 6.00 1.99
2000 Mean Median Standard Deviation
Director Stock Ownership (%) 8.32 1.07 14.92
Outside Directors (%) 71.89 80.00 24.74
Board Size 6.30 6.00 1.84
2001 Mean Median Standard Deviation
Director Stock Ownership (%) 8.10 0.68 14.17
Outside Directors (%) 72.23 80.00 26.09
Board Size 6.31 6.00 1.87
1997-2001 Mean Median Standard Deviation
Director Stock Ownership (%) 7.24 0.66 13.51
Outside Directors (%) 74.43 80.00 23.37
Board Size 6.50 6.00 1.95
Corporate Ownership & Control / Volume 2, Issue 1, Fall 2004
125
Overall interpreting the results in Table 2 and
Figure 1 is difficult. Although there were some positive
spikes in the results we cannot reject the null
hypothesis that there is no relationship between firm
performance and an increasing number of outsiders.
A particular level of percentage of outsiders on a
firm’s board of directors cannot be ascertained as no
obvious relationship trends are seen in the results and
thus stating a level of percentage outsiders would
merely be an inconclusive guess. While some studies
suggest there should be a positive relationship and
others a negative one, this study finds very little relationship.
Relationship between board size and performance
The means of Tobin’s Q for each different sized
board of directors are reported in Table 3 and shown
in Figure 2. The performance fluctuates between the
three and nine members and then waivers downward
once the board size reaches ten members. The level
of board size likely to provide effective monitoring
appears to be optimal at around nine members which
is when performance is the highest. This is supported
by Lipton and Lorsch (1992) who believed, based on
their sample of US firms, that a board composed of 8
or 9 members is more likely to provide effective
monitoring.
Table 3. Mean Tobin’s Q based On the Number of Members on the Board of Directors
N represents the number of observations used to calculate mean Tobin’s Q for each board size.
Board Size Mean Tobin's Q N
3 0.5166 17
4 0.5906 49
5 0.5657 62
6 0.5065 111
7 0.5490 74
8 0.5171 42
9 0.6409 38
10 0.4312 17
11 0.4506 14
13 0.2878 2
Correlation -0.0389
0.0000
0.1000#p#分页标题#e#
0.2000
0.3000
0.4000
0.5000
0.6000
0.7000
3 4 5 6 7 8 9 10 11 13
Board Size
Firm Performance
Fig. 2. The Relationship between Firm Performance and the Size of the Board of Directors.
The data yielded a correlation coefficient of –
0.04, indicating a slight inverse relationship between
board size and firm performance. Yet this correlation
coefficient is not only very small, it is also based on
pooled data in the sample, therefore no firm conclusions
can yet be drawn. Therefore a more detailed
analysis follows in the next section.
Relationship between board ownership and performance
Regression and non-parametric correlations relating
Tobin’s Q to director stock ownership (DSO), percentage
of outside directors (OD) or board size (BS)
were calculated by year and first categorized into the
three ranges of stock ownership previously discussed.
Table 4 reports these results.
Very few statistically significant relationships
were found. In fact, Table 3 shows there is little or
no relationship between performance and the percentage
of outside directors or board size in all stock
ownership ranges. There also appears to be no significant
relationships between performance the percentage
of director stock ownership within each levels
of director ownership. To see if this latter relationship,
or indeed a relationship with the percentage
of outside directors or board size, may exist across
all ranges of stock ownership occurs across all levels
of stock ownership, the relationship between performance
and the three variables are tested on a yearby-
year basis with the results shown in Table 5.
Corporate Ownership & Control / Volume 2, Issue 1, Fall 2004
126
Table 4. Regression Coefficients and Spearman Rank Correlations between Variables and Performance based
on Director Ownership Levels
Level of Ownership
1997 <5% 5-25% >25%
Coeff. T Stat rs Coeff. T Stat rs Coeff. T Stat rs
DSO 0.000 0.004 -0.141 0.000 -1.143 -0.207 -0.001 -0.074 0.263
OD -0.003 -0.657 0.195 -0.003 -0.394 0.004 0.001 0.151 -0.528
BS 0.030 0.644 -0.127 0.030 -1.545 -0.206 -0.119 -2.577** -0.749*
1998 <5% 5-25% >25%
Coeff. T Stat rs Coeff. T Stat rs Coeff. T Stat rs
DSO 0.043 1.381 0.015 -0.013 -1.188 -0.042 -0.008 -0.752 0.086
OD 0.000 0.248 0.220 -0.008 -2.405* -0.388 -0.008 -1.392 -0.754*
BS -0.018 -0.853 -0.241 -0.057 -1.608 -0.128 -0.024 -0.601 -0.478
1999 <5% 5-25% >25%
Coeff. T Stat rs Coeff. T Stat rs Coeff. T Stat rs
DSO 0.026 0.997 0.196 -0.030 -0.852 0.209 0.006 2.425* -0.175
OD 0.001 1.159 -0.049 -0.008 -0.740 0.011 0.000 0.057 0.000
BS -0.029 -2.080* -0.144 0.128 1.460 0.003 0.002 0.138 -0.226
2000 <5% 5-25% >25%#p#分页标题#e#
Coeff. T Stat rs Coeff. T Stat rs Coeff. T Stat rs
DSO 0.038 1.242 0.024 0.009 0.531 0.129 0.004 1.922 0.191
OD 0.000 0.015 0.016 -0.001 -0.140 0.027 0.000 0.025 -0.033
BS -0.026 -1.363 -0.158 -0.028 -0.559 -0.064 -0.009 -0.462 -0.288
2001 <5% 5-25% >25%
Coeff. T Stat rs Coeff. T Stat rs Coeff. T Stat rs
DSO 0.022 0.693 -0.003 0.017 0.476 0.112 0.003 0.924 0.242
OD -0.001 -0.404 0.018 0.011 1.207 0.379 -0.002 -0.954 -0.284
BS -0.040 -2.011* -0.238 0.053 0.439 0.096 -0.013 -0.527 -0.096
* Correlation is significant at the .05 level (2-tailed). ** Correlation is significant at the .05 and the .01 level (2-tailed).
Table 5. Regression Coefficients and Spearman Rank Correlations between Variables and Performance by
Yearhttp://www.ukassignment.org/daixieEssay/Essayfanwen/
1997 1998 1999
Coeff. T Stat rs Coeff. T Stat rs Coeff. T Stat rs
DSO -0.003 -0.532 -0.085 0.000 -0.128 -0.016 -0.002 -0.928 0.013
OD -0.002 -0.550 0.112 -0.001 -0.342 0.082 0.001 0.657 -0.039
BS 0.011 0.330 -0.203 -0.020 -1.210 -0.236* -0.007 -0.427 -0.045
2000 2001
Coeff. T Stat rs Coeff. T Stat rs
DSO 0.001 0.633 0.012 0.001 0.439 0.014
OD 0.000 -0.005 0.015 0.001 0.573 0.074
BS -0.025 -1.627 -0.131 -0.008 -0.350 -0.133
* Correlation is significant at the .05 level (2-tailed).
Again we see there are no significant relationships
emerging on a year-by-year basis. Finally, we
test the whole sample (1997-2001) based on the level
of director ownership with the results reported in
Table 6.
Table 6. Regression Coefficients and Spearman Rank Correlations between Variables and Performance by
Year
Total Level of Ownership
Sample <5% 5-25% >25%
Coeff. T Stat rs Coeff. T Stat rs Coeff. T Stat rs
DSO 0.030 1.426 -0.013 -0.001 -0.064 0.014 0.003 0.654 0.128
OD 0.000 0.358 0.080 0.000 0.102 0.057 0.001 0.398 0.000
BS -0.007 -0.534 -0.136* -0.009 -0.253 -0.054 -0.007 -0.310 -0.197
Total
Coeff. T Stat rs
DSO -0.001 -0.502 -0.009
OD 0.001 0.591 0.066
BS -0.005 -0.495 -0.121*
Corporate Ownership & Control / Volume 1, Issue 4, Fall 2004
127
This also yields few significant results. Therefore
while the Figure 2 showed that there appeared to
be a weak relationship between performance and
board size, Tables 4 to 6 statistically show that a
firm’s performance does not seem to be reliant on
the director stock ownership levels, the percentage of
outside directors or the size of the firm’s board. As a
result, we find it difficult to reject any of our three
hypotheses. Namely, there does not seem to be a
rise-fall relationship in performance relating to ownership
structure, nor to the percentage of outside directors,
nor to the board size.
6. Conclusion
This study investigates the effect three variables#p#分页标题#e#
(percentage of outsiders, percentage of stock held
collectively by the board, and board size) have on
firm performance for a sample of firms over a fiveyear
period between 1997 and 2001. Many empirical
studies are based upon US firms which are
mainly widely held and controlled, contrast to New
Zealand’s significantly less proportion of large and
medium-sized publicly traded firms being widelyheld.
This paper therefore tests New Zealand’s
unique situation. As was discussed earlier, the issues
with regard to endogeneity are important to consider.
Cho (1998) reported finding that investment affects
corporate value, which in turn affects ownership
structure and not the reverse. In addition, as
Himmelberg et al. (1999) suggests, if some of the
unobserved determinants of Tobin’s Q are also determinants
of managerial ownership, then managerial
ownership might spuriously appear to be a determinant
of firm performance. This perspective is consistent
with our findings and could indeed be the main
reason for these results. Our results are interesting in
that they seem to support several other studies in the
small market New Zealand environment. Consistent
with Demsetz (19983) and Mikkelson et al. (1997),
we find no relationship between firm performance
and ownership structure. Similar to Mace (1986) and
Byrd and Hickman (1992), we find that the percentage
of outside directors has little impact on overall
firm performance. And we failed to find consistent
evidence of a negative relationship between company
performance and board size. Beyond the endogeneity
issue discussed above, these results may
also be understood in terms of the smallness of the
New Zealand market. This lack of overall size may
in fact contribute to a smaller pool of directors as
well as creating a small ‘community’ of directors
who all sit on multiple boards and consult with each
other. This is a possible area for future research.
References
1. Ang, J. S., Cole, R. A. and Lin, J. W. (2000).
Agency costs and Ownership structure. The
Journal of Finance. 55(1), 81-106.
2. Bacon, J. (1990). Membership and organization
of corporate boards. Research Report No. 940.
The Conference Board, Inc: New York.
3. Baysinger, R. D., Butler, H. N. (1985). Corporate
Governance and the board of directors: Performance
effects of change in board composition.
Journal of Law, Economics and Organization,
1.
4. Berle, A., Means, G. C. (1932). The modern
corporation and private property. Macmillan,
N.Y.
5. Byrd, J. W. and Hickman, K. A. (1992). Do outside
directors monitor managers? Evidence from
tender offer bids. Journal of Financial Economics.
32(2), 195-221.
6. Cho, M. (1998). Ownership structure, investment,#p#分页标题#e#
and the corporate value: an empirical
analysis. Journal of Financial Economics. 47(1),
103-121.
7. Cotter, J. F., Shivdasani, A. and Zenner, M.
(1997). Do independent directors enhance target
shareholder wealth during tender offers? Journal
of Financial Economics. 43(2), 195-218.
8. Dahya, J., McConnell, J. J. and Travlos, N. G.
(2002). The Cadbury Committee, corporate performance,
and top management turnover. The
Journal of Finance. 57(1), 461-483.
9. Demsetz, H. (1983). The monitoring of management.
Business Roundtable. New York.
10. Denis, D. J. and Sarin, A. (1999). Ownership
and board structures in publicly traded corporations.
Journal of Financial Economics. 52(2),
187-223.
11. Eisenberg, T., Sundgren, S. and Wells, M. T.
(1998). Larger board size and decreasing firm
value in small firms. Journal of Financial Economics.
48(1), 35-54.
12. Fama, E. F. (1980). Agency problems and the
theory of the firm. Journal of Political Economy.
88, 288-307.
13. Fama, E. F. and Jensen, M. C. (1983). Separation
of ownership and control. Journal of Law
and Economics. 26, 301-325.
14. Hackman, J. R. (1990). Groups That Work.
Jossey Bass, San Francisco.
15. Hermalin, B.E. and Weisbach, M.S. (1991).
The effects of board composition and direct incentives
on firm performance. Financial Management.
20(4), 101-105
16. Himmelberg, C. P., Hubbard, R. G. and Palia, D.
(1999). Understanding the determinants of
managerial ownership and the link between
ownership and performance. Journal of Financial
Economics. 53(3), 353-384.
17. Holthausen, R. W. and Larcker, D. F. (1993)
Organizational structure and financial performance.
Unpublished manuscript. Wharton School,
University of Pennsylvania, Philadelphia: PA.
18. Huson, M. R., Parrino, R. and Starks, L. T.
(2001). Internal Monitoring Mechanisms and
Corporate Ownership & Control / Volume 2, Issue 1, Fall 2004
128
CEO Turnover: A Long-Term Perspective. The
Journal of Finance. 56(6), 2265-2297.
19. Jensen, M.C. (1993). The modern industrial
revolution, exit, and the failure of internal control
systems. The Journal of Finance. 48(3),
831-881.
20. Jensen, M. and Meckling, W. (1976). Theory of
the firm: Managerial Behaviour, agency costs,
and ownership structure. Journal of Financial
Economics. 3, 305-360.
21. Kaplan, S. and Reishus, D. (1990). Outside directorships
and corporate performance. Journal
of Financial Economics. 27(2), 389-410.
22. Klein, A. (1995). Firm productivity and board
committee structure. Unpublished manuscript.
Stern School of Business, New York Univ.:
N.Y.http://www.ukassignment.org/daixieEssay/Essayfanwen/
23. Lipton, M. and Lorsch, J. W. (1992). A modest#p#分页标题#e#
proposal for improved corporate governance.
Business Lawyer. 48(1), 59-77.
24. Mace, M. (1986). Directors: Myth and reality.
Harvard Business School Press, Boston: MA.
25. McConnell, J. J. and Servaes, H. (1990). Additional
evidence on equity ownership and corporate
value. Journal of Financial Economics.
27(2), 595-612.
26. Mehran, H. (1995). Executive compensation
structure, ownership, and firm performance.
Journal of Financial Economics. 38(2), 161-
184.
27. Mikkelson, W. H., Partch, M. M. and Shah, K.
(1997). Ownership and operating performance
of companies that go public. Journal of Financial
Economics. 44(3), 281-307.
28. Monks, R. A. G. and Minow, N. (1995). Corporate
Governance. Basil Blackwell, Cambridge.
29. Morck, R., Shliefer, A. and Vishny, R. (1988).
Management ownership and market valuation:
An empirical analysis. Journal of Financial
Economics. 20, 293-315.
30. Porta, R. L., Lopez-de-Silanes, F. and Shleifer,
A. (1999). Corporate ownership around the
world. The Journal of Finance. 54(2), 471-517.
31. Ricardo-Campbell, R. (1983). Comments on the
structure of ownership and the theory of the
firm. Journal of Law and Economics. 26, 391-
394.
32. Rosenstein, S., Wyatt, J. G. (1990). Outside directors,
board independence, and shareholder
wealth. Journal of Financial Economics. 26(2),
175-191.
33. Rosenstein, S. and Wyatt, J. G. (1997). Inside
directors, board effectiveness, and shareholder
wealth. Journal of Financial Economics. 44(2),
229-250.
34. Shivdasani, A. and Yermack, D. (1999). CEO
Involvement in the Selection of New Board
Members: An Empirical Analysis. The Journal
of Finance. 54(5), 1827-1853.
35. Steiner, I. D. (1972). Group process and productivity.
Academic Press, New York.
36. Stulz, R. (1988). Managerial control of voting
rights: Financing policies and the market for
corporate control. Journal of Financial Economics.
20, 25-54.
37. Tufano, P., Sevick, M. (1997). Board structure
and fee-setting in the U.S. mutual fund industry.
Journal of Financial Economics. 46(3), 321-
355.
38. Weisbach, M. (1988). Outside directors and
CEO turnover. Journal of Financial Economics.
20, 431-460.
39. Yermack, D. (1996). Higher market valuation of
companies with a small board of directors.
Journal of Financial Economics. 40(2), 185-
211.
|
