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The Impact of Controllable Corporate Governance Factors on Firm Performance

2021-06-16 来源: 51Due教员组 类别: Essay范文

健全的公司治理和适当的内部控制制度,治理企业财务健康,实现企业整体绩效和价值最大化。学者们考察了公司董事会结构对内部控制有效性的影响等方面。以往对美国企业的研究得出的结论是,较小的董事会规模和较大比例的外部董事会董事会表现得更好(Hermalin和Weisbach, 2003),其他研究发现较小的董事会规模会导致更低的CEO流转率和更好的企业绩效(Yermack, 1996)。此外,研究还证明了董事会内部的代理问题、沟通成本和信息过滤等理论,并证明了董事会规模越大,有效性越低(Hermalin and Weisbach, 2003;Yermack, 1996;詹森,1993)。Jensen(1993)的研究发现,最有效的董事会规模组合在7 - 8人之间,董事会规模消除了搭便车效应,提高了董事会的有效性。大多数现有的研究使用的是基于美国的数据或在美国进行的,然而,在美国以外进行的研究或使用的不是美国。基于数据也显示出类似的结果,公司董事会独立性与公司绩效之间存在正相关关系(La Porta et al.,2004)。

1. Introduction

Sound corporate governance and proper internal control system govern the enterprise financial healthiness, maximize enterprises overall performance and value.  Scholars have examined the impact made by corporate board structure on the effectiveness of internal control and other aspects. Previous studies made on U.S. enterprises come to conclusions that smaller board sizes composite larger percentage of outside board directors will perform better (Hermalin and Weisbach, 2003), other studies found that smaller board size will result in lower CEO turnover rate and better enterprises performance (Yermack, 1996). Moreover, studies also proved theories on agency issues, cost of communication and information filters within corporate board and proved that as board size grow larger the effectiveness will decrease (Hermalin and Weisbach, 2003; Yermack, 1996; Jensen, 1993). Jensen (1993) research found the most effective board sizes would composite between 7 to 8 members, the size of board had eliminate free rider effects and improved effectiveness of the board. Majority of existed studies used U.S. based data or conducted in United States, however for studies conducted outside United States or used non-U.S. based data also showed similar result, where positive correlation existed between independencies of corporate board and corporate performances (La Porta et al.,2004).

Many existing studies have demonstrated that firm performance can be influenced by various factors. Certain factors can be managed and adjusted by the decisions made by the board whereas there are also some systematic factors which are out of firm’s control. Moreover, Bhagat and Bolton (2008) and Bonazzi and Islam (2007) conclude that corporate governance mechanisms help align managers’ behaviors with shareholders’ interests to mitigate agency problems thereby maximizing firm performance. Among the factors we just discussed, only corporate governance can be considered to be a controllable factor as it can be influenced by the decisions made by the board. In this paper, we will mainly examine how corporate governance influences company performance by analyzing the effect of five important CG factors, namely, board size, board independence, CEO characteristic, enterprise complexity, and manager compensation on firm performance measured using firm’s net income or ROA. One goal of this paper is to reveal which CG variable has the most powerful impact on firm value.

 

2. Literature Review and Hypothesis Development

2.1. Corporate Governance

Bhagat and Bolton (2008) and Bonazzi and Islam (2007) believe that CG mechanisms are introduced to help discipline the behaviors of managers to be consistent with the shareholder interests in order to reduce agency costs and thus maximize shareholder value. It is irrefutable that there is a strong relevance between corporate governance and firm performance. In this paper, we will analyze the effect of five important CG variables, namely, board size, board independence, CEO characteristics, enterprise complexity and manager compensation on firm performance.

2.1.1. Board Size

Numerous studies demonstrate that the number of board members will negatively influence company performance. Nguyen et al. (2015) find that firms maintaining large boards tend to result in low operating profits and high operating costs. They explain that since large boards design CEO compensation based on firm size instead of firm performance, CEOs are therefore motivated to acquire assets without taking account of their potential to generate profits, which will exacerbate shareholder value. In addition, Jensen (1993) believe that large boards will lead to inefficient monitoring and decision-making due to free-rider and coordination problems. Firstenberg and Malkiel (1994) believe that fewer board directors bring about better focus, involvement, communication, and interaction. Judge and Zeithaml (1992) find that small boards can reach consensus more easily due to greater cohesiveness. Moreover, Yermack (1996) confirms that the number of board members negatively influence firm value for large US firms. Investors tend to have positive reaction to a board size decrease as it will potentially increase firm value (Yermack 1996).

2.1.2. Board Independence

Several studies confirm that board independence is positively related to firm value. Liu et al. (2015) discover that the percentage of outside directors increases with company performance in China and that this positive impact tend to be more pronounced in firms controlled by government and in firms with higher information transparency. Moreover, they find that firms tend to achieve better performance if they have independent directors before the mandate or appoint more independent directors than the minimum requirement. In addition, Dahya et al. (2008) contend that increasing fraction of outside directors leads to firm value improvements in countries with lower investor protections.

 

2.1.3. CEO characteristics

CEO characteristics can further divide into four sub sets, including age, tenure, compensation and leadership style. Sanders and Hambrick (2007) suggest that the percentage of shares owned by the CEO is significantly related to firm performance. They discover that high CEO stock-option compensation increases investment expenditures and result in extreme firm performance, suggesting that stock options motivate CEOs to make risky investment decisions. They also find that CEOs with high stock-option pay deliver more huge losses than gains. Griffith (1999) justifies the hypothesis that CEO ownership has a predominant effect on firm value.

H1: There is a negative relationship between CEO age and firm ROA

H2: There is a positive relationship between CEO strong leadership style and firm ROA.

H3: There is a positive/negative relationship between CEO tenure and firm ROA.

H4: CEO shareholding will strengthen /weaken the relationship between CEO age/leadership style/tenure and firm ROA.

 

 

 

2.1.4. Enterprise complexity 

Most firms started as smaller business focus in one area of production and as firm grow in sizes, a larger board might required for growing advisory needs and balance the demand for external relation (Pfeffer, 1972, Klein, 1998). Firms are more likely grow into unrelated area of business in order to mitigate risk, therefore, firms would grow to a bigger scope and enter uncertain or volatile market environment (Boone et al., 2007; Coles et al., 2008). For above reasons, the size of board will increase as the enterprises grows, and the composition of the board would became more complex as well.

H5.There is a positive relationship between size of board in complex firm and firm ROA

H6: The is a positive relationship between board independence in complex firm and firm ROA

 - Complexity will be measured by number of product lines and number of employees, thus

ROA = α + β1Log (Sizes of board) + β2Log (Sizes of Board) * Enterprise complexity (dummy)+ β3 control  + ε

ROA = α + β1Log (insider) + β2Log (insider) * Enterprise complexity (dummy)+ β3 control  + ε 

 

2.1.5. Manager compensation

Classical agency theory suggests that compensation is a partial remedy for agency problems, as it links executive incentives to firm performance and encourages managers to maximize shareholders' wealth (Core et al., 2003;Murphy, 1999). Management compensation contracts reflect the agency issues that arise from the ownership and governance structures of firms (Miller et al., 2012). Managers with controlling power would have greater interest in business performance and likely to have an incentive-based compensation (Mehran, 1995).

Finally, although the five corporate governance-related factors we just discussed are all related to firm performance, each factor should influence firm value differently. One aim of this paper is to determine which factor has the strongest impact on firm performance.

Q1: Which corporate governance variable has the most powerful impact on firm performance?

2.2. The Moderating Effect of Board Size, independence and management compensation

Shareholder monitoring and executive compensation are considered to be the most crucial CG mechanisms to help mitigate agency problem. Our study will mainly concentrate on the monitoring role of shareholders by recognizing board size independence and management compensation as three key determinants of firm performance. Nguyen et al. (2016) demonstrate an increase in the number of board members will give rise to lower company performance. They find that firms maintaining large board tend to have substantially lower market value and they are more likely to result in poor operating performance and high operating costs.

 

In this paper, we will examine whether shareholder monitoring can be viewed as a substitute for executive compensation to influence firm performance, in other words, whether a high level of shareholder monitoring will reduce the impact of executive compensation on firm performance.

Q2: Whether a high level of shareholder monitoring will moderate the relationship between executive compensation and firm performance?

H7: Board independence moderates the relationship between executive compensation and company performance.

H8: Board size moderates the relationship between executive compensation and company performance.

H9: CEO shareholding moderates the relationship between Board size/ independence and firm ROA.

H10: CEO shareholding moderates the relationship between executive compensation and firm ROA.

 

 

3. Research Design

3.1. Data & Sample

The data used to perform the empirical analysis is primarily collected from Compustat, CRSP, Manifest, and Execucomp. Financial data can be obtained from Compustat and CRSP. Corporate governance data can be extracted from Manifest and Execucomp. Our sample includes 200 US firms randomly selected from S&P 500 index. We choose the sample period from 2009 to 2017 to exclude any abnormal effect from the financial crisis in 2008.

3.2. Methodology

After all data were collected, measurements will be categorized into several different groups, the first group contains general information of board, including sizes of the board, number of insider and outside directors; second group reflects CEO age, CEO tenure, CEO leadership style, CEO compensation, and CEO as chairman (dummy).

OLS regression model is adopted using STATA. Q1 can be tested by comparing the statistically significant coefficients of different independent variables to determine which one has the strongest impact on the dependent variable. In addition, subsample regressions for Q2 will be performed to separate samples into two groups based on the median of moderators. Moreover, year and industry dummies will be included to control time-series and cross-sectional issues. Finally, we employ firm-fixed effect model to mitigate endogeneity problem.

3.3. Variable Construction

Dependent variables: Firm performance (ROA)

Independent variables:

Board size (the number of board members);

Board independence (the percentage of independent directors on the board);

CEO characteristics (age, tenure, leadership style, and compensation).

Possible control variables: leverage, R&D expenditures, prior year performance, year dummies, industry dummies, and firm-fixed effect.


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