Ownership and Performance: Evidence from an emerging market

Transcription

1 Ownership and Performance: Evidence from an emerging market Subba Reddy Yarram* New England Business School University of New England Armidale NSW 2350 Australia Tel: Fax: subbareddy.yarram@une.edu.au Balasingham Balachandran Department of Accounting and Finance Monash University 900 Dandenong Rd, Caulfield East, Vic, 3145 Australia Tel: Fax: Bala.Balachandran@BusEco.monash.edu.au G. Sivalingam School of Business Monash University Malaysia NO 2 Jalan Kolej, Bandar Sunway Selangor Malaysia Tel: , Ext Fax: sivalingam.vglingam@buseco.monash.edu.my *Corresponding author 1

2 Ownership and Performance: Evidence from an emerging market Subba Reddy Yarram, Balasingham Balachandran and G. Sivalingam The present study analyzes the causal relationship between managerial ownership and corporate performance in an emerging market setting. We analyze 606 non-financial firms listed on the Bursa Malaysia (formerly Kuala Lumpur Stock Exchange) for the year financial year We find that total directors percentage shareholding on boards of Malaysia (of 32%) is substantially higher than that is reported in case of US and UK. Further analysis shows that managerial ownership as measured by total percentage shareholding of directors has no influence on corporate performance. We analyze the endogeneity of directors total ownership, corporate value and investment using simultaneous equations analysis. Market capitalization as expected has a negative impact on managerial ownership. The finding implies that as firm size increases risk-averse managers may not want to concentrate their personal wealth in a single firm thus leading to diffusion of ownership. The present study also finds that Tobin s Q has no significant influence on managerial ownership. In summary, managerial ownership has no significant impact on corporate value and investment and in turn corporate performance has no influence on managerial ownership. Perhaps political connections may have a pervasive influence on corporate decisions in Malaysia as suggested by Johnson and Mitton (2005). Key Words: Ownership structure, Government policy and regulation, asymmetric and private information JEL Classification: G32, G38, D82 The classic work of Berle and Means (1932) has kindled interest in the area of ownership of corporate firms. A number of studies have examined and questioned Berle- Means-hypothesis that suggested an inverse correlation between widespread shareholding and firm performance. The theoretical propositions of Jensen and Meckling (1976) brought to the fore the agency issues and the behavior of managers in corporate firms giving impetus to further research in to the working of corporate firms. Broadly two streams of studies have emerged in recent research in the area. One stream identifies the factors determining corporate ownership in the light of emergence of compensation plans that include equity ownership. The second stream of research examines the influence of corporate ownership structure on corporate performance and valuation. A few studies try to unearth the simultaneity of ownership and performance as they contend that ownership and performance are co-determined. Most of the existing literature focuses on developed markets such as US and UK. Malaysia differs in many respects with other economies in terms of its institutions and policy framework. Though high levels of economic growth and a relatively high per capita income were seen even before independence, the nature of corporate ownership in Malaysia was significantly different from that of developed countries. At the time of independence in 1957, foreign ownership was substantial in major sectors such as plantations and mining (Gomez and Jomo (1999)). The ownership of enterprises was further skewed as virtually very little Bumiputera ownership existed at the time of independence and in the ensuing years. Introduction of New Economic Policy (NEP) after 1969 with guidelines for equity participation and employment for Bumiputera, the situation has gradually changed over years. However, the changes that occurred subsequently have distorted incentive structures as political connections appeared to play 2

3 a greater role (Johnson and Mitton (2005)) in determining corporate ownership rather than exchange considerations of existing and potential owners. Given the domineering effects of political factors and government policies, Malaysia may offer new insights into the working of corporate firms. Given the emerging market setting institutional features are different from that of the US and UK the present study may throw interesting insights on the relationship between managerial ownership and corporate performance. The present study therefore analyzes the extent of equity holding by directors on boards of Malaysian firms and the relationship between managerial equity holding and corporate performance. Further, the study also examines the issue of causality between performance and ownership by examining the issue of endogeneity. Finally, the study attempts to examine the role played by political connections of directors on the performance of firms. In the following, we review relevant literature on managerial ownership and performance followed by a brief discussion highlighting the important changes in Malaysian economy since its independence. Next we review earlier evidence on equity ownership in Malaysia followed by a discussion of issues specific to Malaysia and possible hypotheses examined in present study. We then present our database and methodology followed by a discussion of our empirical analysis. Review of Literature Broadly two streams of studies have examined the issues relating to ownership and corporate performance. The first theme as pioneered by Demsetz (1983) and Demsetz and Leh (1985) posit that corporate ownership is determined by a number of factors such as size of firm, control potential, and systematic regulation. Promoters of companies may want to diversify their personal portfolios and as such may not want to invest increasing amounts of wealth in a firm whose size is increasing. This risk-averse behavior may lead to dilution of their stake and less concentration of ownership of the firm as a whole. However, equity investors may be concerned with shirking behavior of managers that may result in as their control of firm decreases. Equity investors therefore need to balance their portfolio consideration with cost of potential loss due to shirking or conflict of interests with managers. As value maximizing size of firm increases, ownership gets widely distributed leading perhaps to an increase in managerial ownership due to changes in compensation plans that include employee stock options. Thus increase in managerial ownership may align the interests of investors and managers leading to maximization of value of firm. Control potential that owners may derive may also influence the structure of equity ownership. Firms that are characterized by higher degree of uncertainty in operating environment may have higher control potential for equity owners compared to firms where more stable conditions prevail. In general corporate control market and labor market may also determine equity ownership. In economies where these two markets are perfectly competitive, equity ownership may not matter much, but in markets where there are significant information and transaction costs, equity ownership may well matter. Corporate control market and labor market are competitive to a certain degree in developed markets however, they are less competitive in others economies. Therefore 3

4 firms that operate under circumstances of uncertainty may have higher concentration of ownership due to control potential that owners could derive by influencing the behavior of managers. Regulation may also influence ownership structure of corporate firms. While regulation restricts the owners actions in terms of controlling managers, it may also reduce the owners need for regulating managers as regulators themselves may undertake the monitoring and regulating role. Thus we may see less concentrated ownership structure in regulated industries than in firms that operate in unregulated industries. Demsetz and Lehn find no relation between management ownership and corporate performance for US firms. The second theme of research relates management ownership with performance of firms. Morck, Shleifer and Vishny (1988), and McConnell and Sarvaes (1990) provide evidence of a non-linear relationship between managerial ownership and performance of US firms. Similarly Short and Keasey (1999) provide evidence of non-linear relationship between managerial ownership and corporate performance for firms in UK where institutional mechanisms and corporate control market are different from that of the US. More recently, Davies, Hiller and McColgan (2005) provide evidence of managerial ownership and corporate performance being co-deterministic in the case of firms in UK. The non-linear relationship arises because of the operation of alignment and entrench effects in varying degrees across managerial ownership levels. At low levels of managerial ownership, managers are subject to considerable control by outside investors and this would lead to an alignment of interests of managers with shareholders. However, as managerial ownership increases there is a possibility that they may get entrenched in their position and at this point outside investors may only have limited control on the managers. Under these circumstances managers may try to maximize their personal benefits even at the expense of reducing firm value. This entrenchment effect is subject to absence of an effective labor market and market for corporate control. As managerial ownership increases further, managers may have to weigh their personal gains from entrenchment with value reduction on their considerable shareholding thus inducing them to work towards value maximization of rim. Thus while the alignment effect may work through all levels of managerial ownership, the entrenchment effect may dominate at intermediate levels of managerial ownership. Short and Keasey (1999) find entrenchment effect operating at higher levels of managerial ownership in UK compared to that of the levels of ownership in US. Stulz (1988) supports the contention that managerial ownership and corporate value are related. He also highlights the importance of managerial voting rights in influencing corporate value. According to him wealth changes are dependent on changes in managerial voting rights that are a consequence of changes in their ownership. He also identifies changes in financing policies, and amendment of corporate charter or articles of association. Himmelberg, Hubbard and Palia (1999) extend the Demsetz and Lehn framework to include other determinants of ownership such as capital intensity, R&D intensity, advertising intensity, cash flow and investment rate apart from firm size and variability in stock prices. Their results show that considerable variation in managerial ownership is 4

5 explained by unobserved firm heterogeneity and that the unobserved heterogeneity generates spurious correlation between managerial ownership and firm performance. They find no relationship between firm performance and managerial ownership after controlling for firm fixed effects and observed firm factors. Their findings imply that managerial ownership and corporate performance are determined by some common factors. Zhou (2001) questions the use of panel data to analyze the effects of ownership on performance. He cites evidence of slow changes in managerial ownership from year to year with in a company. Therefore fixed effects estimators may not capture the effect of ownership on performance. Demsetz and Villalonga (2001) reexamine the issues surrounding ownership structure and corporate performance. Ownership structure is considered in more detail to include not just managerial ownership but also ownership by outside shareholders. Similarly two performance measures accounting profit rate and Tobin s Q have been compared and contrasted. The use of book value of tangible assets in the denominator of Tobin s Q estimation instead of replacement cost of tangible assets according to them has brought the two measures more closely. The use of accounting information by market participants to arrive at market values has also been highlighted. Their findings show that for a sample of US firms ownership structure is endogenous and that ownership has no influence on corporate performance. There are a few studies that deal with markets other than US and UK. Craswell, Taylor and Saywell (1997) find weak evidence of curvilinear relationship between ownership structure and corporate performance for 349 Australian firms in 1986 and Further they find that the relationship is unstable across time and across industries. Severin (2001) provides evidence of a curvilinear relationship between ownership structure and corporate performance for a sample of 199 firms in France for the sample period of Kumar (2004) find evidence of non-linear relationship between managerial ownership and corporate performance for a large sample of Indian firms. Rose (2005) provides evidence of firm performance influencing corporate ownership for a sample of 425 Danish firms for the sample period of Morck et al (2000), and Chen, Guo and Mande (2003) find linear relationship between ownership structure and corporate performance for a sample of Japanese firms. Unlike the evidence in US, they also find positive relationship between corporate performance and managerial ownership in Japanese firms. Ownership structure in Malaysia and the Political Context Malaysian economy grew rapidly over the last 30 years. During this period, Malaysia transformed itself into a manufacturing and services base from that of a predominantly agricultural based economy. Though there were a few economic downturns during this period sustained high level of growth rates have been witnessed until Following the East Asian economic crisis, to the surprise of many, the economy revived earlier than anticipated. Much of the growth has been attributed to the economic initiatives undertaken in Malaysia under the New Economic Policy (NEP) which was introduced in Malaysia in the aftermath of 1969 racial disturbances. During the entire period since independence from British in 1957 to date - one political party UMNO and its coalition National Barisan - remained at the centre of government formation and Mohathir 5

6 Mohamad served for 22 years as Prime Minister of Malaysia. Government has taken a number of policy initiatives and actions to increase the equity ownership of Bumiputera under the NEP (Gomez and Jomo (1999)). During this period a number of investment holding companies are created with a view to holding corporate investments on behalf of Malaysian investors in general and Bumiputera investors in particular. Several corporate firms were required to transfer ownership of investments at cost or at nominal value to these holding companies. Further, the boundaries are often blurred between political leadership and business ownership. In the aftermath of recent east Asian economic crisis a number of initiatives are undertaken with a view to improve corporate governance practices and competitiveness in the economy. A Capital Market Masterplan has been drawn to improve functioning of capital markets and consolidate the banking sector. The erstwhile Kula Lumpur Stock Exchange has been demutualized and renamed as Bursa Malaysia. There has been a change in political leadership and the new government has promised to combat corruption and improve its economic management. The corporate control market in Malaysia is highly regulated by the government and its agencies. Takeovers do not happen on a competitive basis and that government policies have often contributed to change of management rather free market forces. Conditions in managerial labor market are also influenced by policies aimed at increasing Bumiputera participation in corporate sector. Pyramidal and family ownership structure are widespread in east Asian economies as shown by La Porta, Lopez-de-Silanes, and Shleifer (1999), Claessens, Djankov and Lang (2000) and Lins (2003). The situation in Malaysia is expected to be similar. Existence of these structures imply that even with relatively less control of ownership rights, insiders may exercise higher degree of control. Absence of effective corporate control market and labor market may afford more opportunities for expropriation. Lemmon and Lins (2003) report two cases that were reported in earlier literature. Moore (1998) reports an incident involving United Engineers Malaysia and Renong Corporation. These two firms were owned by the same family before the crisis. At the time of crisis, United Engineers Malaysia bought the shares held by a family Renong Corporation at inflated prices. The consequence was that the minority shareholders of both firms suffered and the benefits of the actions accrued to a few insiders. Similarly Backman (1999) reports another incident involving Ting Pek Khing of Ekram Group. Ekram which had raised money before the crisis for the purpose of acquiring shares in the holding company of Bakun Hydro- Electric Corporation had instead bought the shares held by Ting in various group companies thus expropriating wealth of outside investors. Another dimension of nature of equity ownership in Malaysia, political nexus of insiders with highly influential politicians is highlighted by Johnson and Mitton (2005). Firms that are connected politically manage favors from government and may in general show higher degree of performance compared to firms that lack these connections. However, it is to be seen whether such firms expropriate outside investors more leading to entrenchment effect or exhibit alignment of interests as more equity ownership is held by mangers or dominant shareholders. In the Malaysian context, firms that are politically connected experienced more volatile performance as government subsidies dried up 6

7 during the time of crisis and only reappeared when the government imposed capital controls (Johnson and Mitton, 2003). In emerging markets, firms that afford more cash flow rights than the control rights held by management exhibit lower performance (Lins (2003)). This is particularly the case in countries where investor protection is perceived to be lower. Presence of large non-managerial owners may alleviate the agency problems considerably. Lins (2003) finds that firms with large non-management block holdings have positive performance. Theoretical Framework and Hypotheses Major institutional investors in the Malaysian market are predominantly government owned agencies such as Kumpulan Wang Simpanan Pekerja (KWSP) or Employee Provident Fund (EPF), Perbadanan Nasional Bhd (formerly known as Pernas), and Permodalan Nasional Bhd (PNB). Investment policies of EPF may often be directed by government. However, the institutional investors similar to that of UK can have informal arrangements to safeguard their investments in corporate firms. Corporate control market is highly regulated as takeovers and anti-takeover defenses can not be easily determined by markets and corporate insiders. Though no statistics are readily available on the extent of participation of retail shareholders in Malaysia capital markets, equity holding is in general pyramidal or family in nature. At low levels of equity ownership by directors, managers may try to align their interests with that of outside shareholders in Malaysia as presence of institutional investments may bring about the necessary discipline. However, as their shareholding increases, they may get entrenched because of absence of effective corporate control market as well as inefficient managerial labor market. Further increase in shareholding by directors may align their interests with outside shareholders. Given the emphasis of government policy in terms of target ownership based on racial lines, it may be hard to expect performance influencing ownership structure or ownership structure influencing corporate performance. Governments may encourage actively restructuring equity ownership in firms that are doing well. Realignment of interests or entrenchment by specific owner groups may in turn influence positively or adversely the performance of a firm. It is plausible that government policies influence not only ownership structure but also corporate performance. The nature of polity and economy where close nexus between politics and business exists, both ownership structure and corporate performance may be determined by government policies or political favors rather than aligned or entrenched interests of insiders and outside shareholders. Empirical analysis and results The sample of firms for the present study is drawn from stocks listed on Bursa Malaysia (formerly Kuala Lumpur Stock Exchange). We exclude all financial firms from the study as their ownership as well as other financial policies is subject to higher degree of regulation. Similarly we also exclude 4 firms in hotels sector and 1 mining firm given the small number of firms in these industries. We categorize technology firms and 7

8 Mesdaq firms together given similar nature of firms in these two Bursa Malaysia classifications. We consider accounting year a normal period - for our analysis. Lemmon and Lins (2003) consider only crisis period and find that extent of expropriation by insiders is more during the crisis as the firms face a scenario of decreasing investment opportunities. Firms flushed with increased free cash flow offer more opportunities for expropriation. We consider a more stable period when the economy has returned to normalcy as depressed values during the crisis period may not be a reflection of ownership structure. Further, we examine Malaysia given its emerging market context. Examination of emerging markets may be more appropriate given the degree of information asymmetry, incompleteness of markets in unearthing possible effects of ownership on corporate performance. Agency problems are more severe in emerging markets such as Malaysia compared to developed markets such as US and UK. Corporate performance is measured using Tobin s Q and we also use accounting profit rate to see whether our results hold true. Tobin s Q is measured as a ratio of market value of the firm to the total assets employed by the firm. Market value of a firm is sum of market value of equity, book value of debt and book value of preferred equity. There is no active debt market in Malaysia for debt issued by corporate firms. Similarly, there is no active secondary market for preference shares. Total assets employed by the firm is measured as the total assets minus current liabilities. This definition of Tobin s Q is similar to Davies et al. (2005). Tobin s Q which incorporates market expectations may be considered forward looking where as accounting profit rate which relies on accounting treatment of assets may be historical. Given that we use book value of total assets employed by a firm in the denominator rather than replacement value of assets, the two measures may be expected to have high degree of positive correlation. Replacement values are hard to estimate and their estimation is all the more difficult in emerging markets. We source all financial and market information from DataStream. We use data relating to financial year 2004 for all the variables employed in the study. Managerial ownership is measured by the percentage of ownership held by the board of directors. This definition is similar to the Morck, Shleifer and Vishny (1988). However, the measure varies from the definition of McConnell and Servaes (1995) and Short and Keasey (1999). McConnell and Servaes use a broad definition to include ownership by corporate officers while Short and Keasey include families of directors. We consider recent ownership and the data is culled out from the company data section of the KLSE-RIS Trader website during October November Most of the ownership data pertains to the financial year For the purpose of present study all non-financial firms traded on the main board, the second board and the Mesdaq segment of Bursa Malaysia are initially considered. We exclude those firms for which we have no information on directors shareholding for the year We further eliminate those companies that do not have financial information for the year 2004 for variables included in calculation of Tobin s Q. All financial data is sourced from Datastream. We trim the sample further by excluding firms that have 10 largest and 10 smallest Tobin s Q values. 8

9 The final sample consists of 606 firms. Of these 446 companies trade on the main board, 116 companies trade on the second board and the remaining 44 technology firms trade on the Mesdaq which is fashioned on the lines of NASDAQ. Sample companies are in various sectors - industrial products (195 companies), trade and services (131), consumer products (84), properties (69), construction (45), technology (44), plantations (32) and infrastructure (6). Directors percentage shareholding in Malaysia is higher than average managerial ownership stake of all board members in other countries such as US and UK. Average managerial ownership in Malaysia is percent (Table 1) while Davies et al. (2005) and Short and Keasey (1999) report a value of around 13% for the UK. Morck et al. (1988) and McConnell and Servaes (1990) report slightly lower levels of managerial ownership for US firms compared to UK levels. The latter studies use ownership data pertaining to 1980s and use more broader definition of managerial ownership to include ownership held by corporate officers in addition to members of boards (McConnel and Servaes, 1990). Average Tobin s Q in Malaysia is lower compared to the values reported for the US and the UK. Mean Tobin s Q of is lower than 1.96 reported by Davies et, al (2005). As expected the mean market capitalization of companies in Malaysia is much smaller than that of the US and UK companies. Average market capitalization for 2004 is RM 702 million while the largest company has a size of RM 32 billion. It is also to be noted that information on R&D is sparse as only 64 out of 606 companies in the sample have reported R&D. Hence R&D is not used for analysis in this study. Distribution of managerial ownership shows that 64 companies have no managerial ownership while 29% of the sample firms have managerial ownership in the range of 50% to 75% (Table 2). Another 28% of companies have managerial ownership in the range of 25% to 50%. The ownership pattern in Malaysia is markedly different from that of the UK as Davies et al. (2005) report that only 11% of companies had managerial ownership in excess of 40%. Average Tobin s Q is higher for firms with managerial ownership in the range of 0 to 10% and 50% to 75% while it is lower in the intermediate range. The apparent curvilinear relationship is consistent with earlier studies of Morck et al. (1988), McConnell and Servaes (1990), Short and Keasey (1999) and Davies et al. (2005). Average size of firms is higher when managerial ownership is lower than 5%, however, increasing ownership levels further has not led to substantial declines in size. Demsetz and Lehn (1985) and Davies et al. (2005) report size declining with increased managerial shareholding. Perhaps concentrated ownership is still persisting in Malaysia unlike the developed markets where ownership gets diffused as firm size increases. Influence of ownership on performance and the Issue of Endogeneity Various specifications have been used by earlier researchers to test the effect of ownership on corporate performance. Morck, Shleifer and Vishny (1988) employ piecewise linear regression to analyze the influence of ownership on performance. They pre-specify turning points at 5% and 25% of ownership. At ownership levels below 5% 9

10 and above 25%, ownership is expected to have positive influence on performance as interests of insiders and outsiders are aligned. While in the intermediate range of above 5% but below 25%, ownership is expected to have negative influence as managers entrench their position. Morck, Shleifer and Vishny suggest that there is no theoretical basis for the chosen levels of turning points. McConnell and Servaes (1995) regress Tobin s Q on insider ownership and insider ownership squared. They also expect a curvilinear relationship between ownership and performance. Short and Keasey (1999) use cubic form to analyze the influence of ownership on performance. They use ownership of directors, ownership of directors squared and ownership of directors cubed as independent variables. The expectations are similar to Morck et, al. Ownership and ownership cubed are expected to have positive sign indicating alignment of interests between insiders and outsiders, while ownership squared is expected to have negative sign implying entrenchment by existing managers. Davies et, al (2005) use a quintic function to analyze the influence of ownership on performance. They expect ownership, ownership cubed and ownership raised to five to have positive signs implying alignment of interests, whereas ownership squared and ownership raised to four to have negative sign implying entrenchment effect. Following Davies et al., we use a quintic function to analyze the alignment and entrenchment effects. Performance proxied by Tobin s Q is regressed on total ownership of directors (DO) total directors ownership to quintic total directors ownership. Tobin Q = α 0 + α 1 DO + α 2 DO 2 + α 3 DO 3 + α 4 DO 4 + α 5 DO 5 + ε (1) It is expected that α 1, α 3, and α 5 are expected to have positive sign indicating alignment effect. On the other hand, α 2 and α 4 are expected to have a negative sign indicating entrenchment effect. Empirical results from the present study show that managerial ownership as measured by total percentage shareholding of directors has no influence on corporate performance (Table 3). Though α 1 and α 3 as expected have positive sign and α 2 and α 4 have negative sign, none of them are statistically significant. Further α 5 has a negative sign while Davies et al. (2005) report a positive sign. As a robustness check we use profit rate as a proxy for corporate performance instead of Tobin s Q and find that our earlier results are validated (Table 4). These results are consistent with Demsetz and Lehn (1985) and Demsetz and Villalonga (2003) while they contradict the findings of Morck, Shleifer and Vishny (1988), McConnel and Servaes (1995), Short and Keasey (1999), Chen, Guo and Mande (2003) and Davies et al. (2005). To analyze the issue of endogeneity, we follow Cho (1998) and Davies et al. (2005). Similar to the earlier studies, we analyze the endogeneity of directors total ownership, corporate value and investment using a simultaneous equations analysis. DO = α 0 + α 1 MVFEQ + α 2 Tobin s Q + α 3 Investment + α 4 Volatility + α 5 Liquidity + α 6 Investment + γid + ε (2) Tobin Q = α 0 + α 1 DO + α 2 Investment + α 3 Leverage + α 4 Asset Size + γid + ε.(3) Investment = α 0 + α 1 DO + α 2 Tobin s Q + α 3 Volatility + α 4 Liquidity + γid + ε (4) We first attempt to capture the determinants of managerial ownership and find that the adjusted R2 to be very low (Table 4). The value is comparable to adjusted R2 obtained in previous studies. Market capitalization as expected has a negative impact on managerial 10

11 ownership. The finding implies that as firm size increases risk-averse managers may not want to concentrate their personal wealth in a single firm thus leading to diffusion of ownership. This is consistent with Demsetz and Lehn (1985) who propose size as a factor influencing the structure of equity ownership. The results are also consistent with Davies et al. (2005). The present study also finds that Tobin s Q has no significant influence on managerial ownership. This contrasts Chen et al. (2003) and Davies et al. (2005) who find that managerial ownership and corporate performance are co-deterministic. These findings are similar to Demsetz and Lehn (1985), and Demsetz and Villalonga (2001) who find no relationship between managerial ownership and corporate performance. Earnings volatility is found to have a significant negative effect on managerial ownership implying that firms that have higher degree of volatility of earnings see more diffused ownership compared to stable firms. This contradicts the proposition of Demsetz and Lehn (1985) that managers tend keep higher degree of shareholding when the firm is faced with uncertainty. The concentrated ownership may give control potential for managers as (t)he noisier a firm s environment, the greater the payoff to ownership in maintaining tighter control. Hence, noisier environments should give rise to more concentrated ownership structures. (Demsetz and Lehn, 1985 p. 1159). One possible explanation for our finding could be that managers in Malaysia probably do not believe that they can derive higher payoff in unstable environment by holding higher degree of shareholding. Unlike Davies et al. (2005), we find liquidity and investment to show any significant influence on managerial ownership. Cho (1988) also find that liquidity has no significant influence on level of managerial ownership. Cho (1988), Davies et al. (2005) find negative coefficient for investment indicating apparent underinvestment where as Himmelberg et al. (1999) find overinvestment when managers own higher degree of shareholding. We further analyze the determinants of investment and if managerial ownership has any influence on it. Analysis of determinants of corporate value suggests that investment surprisingly has no significant influence on corporate value (Table 5). This finding contradicts Davies et al. (2005). One possible explanation for this could be that corporate value in Malaysia is derived from political patronage than sound investments as suggested by Johnson and Mitton (2005). Leverage and size have positive and significant positive influence on corporate value. Positive impact of leverage on corporate value could be on account of benefit in the form of tax savings as suggested by Modigliani and Miller (1963), disciplinary benefits that debt may bring about as suggested by Jensen (1986), or on account of positive signals that debt issues send to markets and investors. Similarly positive impact of size could be on account of the ability of firms to withstand difficult times given the emerging market context where small firms may not be able to survive bad times such as the East Asian crisis. These results are consistent with Davies et al. (2005). Consistent with our earlier results, managerial ownership has no significant influence on corporate value. This result is consistent with earlier findings of Demsetz and Lehn (1985) and is inconsistent with the findings of Morck et al. (1988), McConnell and 11

12 Servaes (1990), Short and Keasey (1999), Chen et al. (2003) and Davies et al. (2005). We also find that managerial ownership has no significant influence on investment. This finding is similar to Davies et al. (2005). In summary, managerial ownership has no significant impact on corporate value and investment and in turn corporate performance has no influence on managerial ownership. 12

13 References Backman, M. (1999), Asian eclipse: exposing the darks side of business in Asia, Singapore, John Wiley and Sons, Singapore. Berle, A. and G. Means (1932), The Modern Corporation and Private Property, McMillan, New York, 2 nd ed, Chen, C.R., W. Guo, and V. Mande, Managerial ownership and firm valuation: evidence from Japanese firms, Pacific-Basin Finance Journal, Vol. 11, Cho, M.H. (1998), Ownership structure, investment, and the corporate value: an empirical analysis, Journal of Financial Economics, Vol. 47, pp Claessens, S., S. Djankov, and H.P. Lang (1999), The separation of ownership and control in East Asian corporations, Journal of Financial Economics, 58, Craswell, A.T., S.L. Taylor and R.A. Saywell (1997), Ownership structure and corporate performance: Australian evidence, Pacific-Basin Finance Journal, 5, Davies, J.R., D. Hillier, and P. McColgan (2005), Ownership structure, managerial behavior and corporate value, Journal of Corporate Finance, 11, Demsetz, H. (1983), The structure of ownership and the theory of the firm, Journal of Law and Economics, 26, Demsetz, H., and B. Villalonga (2001), Ownership structure and corporate performance, Journal of Corporate Finance, 7, Demsetz, H., and K. Lehn (1985), The structure of corporate ownership: causes and consequences, Journal of Political Economy, 93, Gomez, E.T., and K.S. Jomo (1999), Malaysia s political economy: politics, patronage and profits, Cambridge University Press, Cambridge, UK. Himmelberg, C.P., R.G. Hubbard, and D. Palia (1999), Understanding the determinants of managerial ownership and the link between ownership and performance, Journal of Financial Economics, 53, Jensen, M.C., and W.H. Meckling (1976), Theory of the firm: managerial behavior, agency costs and ownership structure, Journal of Financial Economics, 3, Johnson, S., and T. Mitton (2003), Cronyism and capital controls: evidence from Malaysia, Journal of Financial Economics, 67, Kumar, J (2004), Does Ownership Structure Influence Firm Value? Evidence from India, Working Paper, Indira Gandhi Institute of Development Research, Mumbai, India. La Porta, R., F. Lopez-de-Silanes, and A. Shleifer (1999), Corporate ownership around the world, Journal of Finance, 54, Lemmon, M. and K.V. Lins (2003), Ownership structure, corporate governance, and firm value: evidence from the East Asian financial crisis, Journal of Finance, 58, Lins, K.V. (2003), Equity ownership and firm value in emerging markets, Journal of Financial and Quantitative Analysis, 38,

14 McConnell, J.J., and H. Servaes (1990), Additional evidence on equity ownership and corporate value, Journal of financial economics, 27, Morck, R., and M. Nakamura, and A. Shivdasani (2000), Banks, ownership structure, and firm value in Japan, Journal of Business, 73, Morck, R., A. Shleifer, and R.W. Vishny (1988), Management ownership and market valuation: an empirical analysis, Journal of Financial Economics, 8, Rose, C (2005), Managerial Ownership and Firm Performance in Listed Danish Firms: In Search of the Missing Link, European Management Journal, October, 23, Severin, E (2001), Ownership structure and the performance of firms: Evidence from France, European Journal of Economic and Social Systems, 15, Short, H., and K. Keasey (1999), managerial ownership and the performance of firms: evidence from the UK, Journal of Corporate Finance, 5, Stulz, R.E. (1988), Managerial control of voting rights: financing policies and the market for corporate control, Journal of Financial Economics, 20, Zhou, H. (2001), Understanding the determinants of managerial ownership and the link between ownership and performance: comment, Journal of Financial Economics, 62,

15 Table 1 Summary statistics for variables Number of companies Number of companies for which data is missing Mean Median Std. Deviation Minimum Maximum Tobin's Q Profit rate (in %) Total % shareholding of directors Top 1 directors % shareholding Number of directors Liquidity (in %) Leverage (in %) Earnings volatility ,646 9, , ,006, Market capitalization (in RM 000s) , ,326 2,542,889 5,974 32,388, R&D (in RM 000s) , , ,193 Profit after tax 2004 (in RM 000s) ,361 10, , ,426 2,294,705 EBITDA 2004 (in RM 000s) ,047 23, , ,447 5,503,700 Total debt 2004 (in RM 000s) ,542 44,313 1,111, ,736,320 Total intangibles 2004 (in RM 000s) , , ,072,700 Total investments 2004 (in RM 000s) , , ,291,918 Total assets employed 2004 (in RM 000s) , ,291 2,057,824 4,142 27,858,100 Tobin s Q is measured as a ratio of market value of the firm to the total assets employed by the firm. Market value of a firm is sum of market value of equity, book value of debt and book value of preferred equity. Liquidity is measured as a ratio of cash flow divided total assets employed. Leverage is measured as a ratio of total debt divided total assets employed. Profit rate is calculated as EBITDA divided total assets employed. Earnings volatility is standard deviation of EBITDA for the period for each firm. All financial information is taken from Datastream for the year Total % shareholding of directors is proxy for management ownership. Directors ownership information is culled out from the KLSE-RIS Trader website for the year The sample includes non-financial firms traded on the Bursa Malaysia. 15

16 Table 2 Distribution of companies by managerial ownership Level of shareholding held Number of Companies Tobin's Q Profit Rate (%) Total assets employed (in RM 000s) Liquidity (%) Leverage (%) by Directors Mean Median Mean Median Mean Median Mean Median Mean Median ,405, , to ,784, , to , , to , , to , , to , , > , , Shareholding held by directors is proxy for management ownership it includes percentage shareholding of all directors on board in Directors ownership information is culled out from the KLSE-RIS Trader website for the year The sample includes non-financial firms traded on the Bursa Malaysia. Tobin s Q is measured as a ratio of market value of the firm to the total assets employed by the firm. Market value of a firm is sum of market value of equity, book value of debt and book value of preferred equity. Liquidity is measured as a ratio of cash flow divided total capital employed. All financial information is taken from Datastream for the year

17 Table 3 Influence of managerial ownership on corporate performance Intercept MO MO 2 MO 3 MO 4 MO 5 Coefficient X10-9 t-statistic Adj.R F Corporate performance is regressed on managerial ownership. Corporate performance is measured using Tobin s Q. Managerial ownership accounts for total ownership held by all directors on a board. Information on directors shareholding is gathered from KLSE-RIS Trader Website for the year Financial information is collected from Datastream for the year The sample consisting of 606 nonfinancial firms are chosen from companies traded on Bursa Malaysia for the year Table 4 Influence of managerial ownership on corporate performance Intercept MO MO 2 MO 3 MO 4 MO 5 Coefficient X10-8 t-statistic Adj.R F Corporate performance is regressed on managerial ownership. Corporate performance is measured using profit rate. Profit rate is measured as EBITDA divided total capital employed. Managerial ownership accounts for total ownership held by all directors on a board. Information on directors shareholding is gathered from KLSE-RIS Trader Website for the year Financial information is collected from Datastream for the year The sample consisting of 606 non-financial firms are chosen from companies traded on Bursa Malaysia for the year

18 Table 5 Endogeneity of managerial ownership, corporate value and investment Managerial ownership Corporate value Investment Market Capitalization -1.05X10-6 (-2.031) (-1.018) Tobin's Q -3.35X10-2 (-0.174) (11.059) Earnings Volatility -4.23X10-5 (-3.152) (-0.048) Liquidity -1.14X10-2 (-0.692) Investment 2.05X10-5 (1.698) 0.38 (0.64) Leverage (1.762) Total Capital Employed (50.458) MO (0.178) (0.204) MO (-0.505) (-0.088) MO (0.585) (0.133) MO (-0.665) (-0.646) MO X10-4 (-0.607) -1.42X10-5 (-0.257) Industry Dummies Yes Yes Yes Adj. R F Managerial ownership accounts for total ownership held by all directors on a board. Information on directors shareholding is gathered from KLSE-RIS Trader Website for the year Information on market capitalization, investments, total capital employed is collected from Datastream for the year Tobin s Q is measured as a ratio of market value of the firm to the total assets employed by the firm. Market value of a firm is sum of market value of equity, book value of debt and book value of preferred equity. Liquidity is measured as a ratio of cash flow divided total capital employed. Volatility is measured as a ratio of total debt divided total capital employed. Profit rate is calculated as EBITDA divided total capital employed. Earnings volatility is standard deviation of EBITDA for the period for each firm. All financial information is taken from Datastream for the year The sample includes 606 nonfinancial firms traded on the Bursa Malaysia. Managerial ownership is regression on market capitalization, Tobin s Q, earnings volatility, liquidity, investment, and industry dummy. Corporate value is regressed on investment, total capital employed, managerial ownership and industry dummy. Investment is regressed on market capitalization, Tobin s Q, earnings volatility, managerial ownership and industry dummies. 18