THE EFFECTS OF CORPORATE GOVERNANCE ON FIRM

PERFORMANCE

Avash Bhattarai

Himalaya Ban

Kalpana Parajuli

Kushal Shrestha

Venue: Uniglobe College ,Friday June 21, 2013

Presented by

Author Profile

Ming-Cheng WuDepartment of Business Education

Hsin-Chiang LinDepartment of Business Education

I-Cheng LinDepartment of Business Education

Chun-Feng LaiDepartment of Business Education

Introduction Accounting Scandals under big names has brought suspicion

towards financial reporting

Sarbanes-Oxley Act enacted on 2002

Need of CG growing, but is it really vital for developing nations!

The main purpose of this study is to examine the impact of the corporate governance mechanism on firm performance of Taiwanese Firm.

The variables, employed in this study to measure firm performance, include Return on Assets(ROA), Stock Return and Tobin’s Q.

Purpose of the study

The main purpose of this study is to examine the effect of corporate governance mechanism upon firm performance among listed and over-the-counter firms in Taiwan.

Conceptual Framework

Board Structure

a. Board Size

b. Board

independence

c. CEO DualityCorporate

Governance

Ownership Structure

d. Insider ownership

e. Stock pledge ratio

f. Control minus

ownership

Firm

Performance

II. MODEL

III. SAMPLING

This study, excluding banking, finance and insurance industries, examines all the other listed and over-the-counter firms in Taiwan over the period from 2001 to 2008.

Incomplete information disclosure and cross-sectional data are omitted.

A. HYPOTHESIS SETTING

H1

•Board size is negatively related to firm performance.

H2

•Board independence is negatively related to firm performance

H3

•CEO duality is negatively related to firm performance

H4

•Insider ownership is negatively related to firm performance

H5

•Stock pledge ratio is negatively related to firm performance

H5

•Deviation between voting right and cash flow right is negatively related to firm performance

METHODOLOGY

Des

crip

tive

Sta

tistic

sIV. RESULTS

This study takes ROA, stock return and Tobin’s Q as the proxies to measure accounting performance, market performance and firm value, respectively. Table shows that the average of return of assets is 7.451%, the average of annual stock return is 10.214%. The average of Tobin’s Q is 1.298.

Pearson Correlation coefficient matrix

Table demonstrates the variables of the matrix of Pearson correlation coefficient.ROA t−1 and ROA t−2 are significantly related because of the same variable measured in different periods. The absolute value of the correlation coefficient of other variables isbetween 0.001 and 0.414, showing no significant relation.

Relation between governance mechanism and corporateperformance

Board size is significantly and negatively related implying that, in a large size board, the diversity of insiders’ opinion has a negative impact on making decisions, which is detrimental to firm performance.

Board independence is positively and significantly related, suggesting that the more independent the board is, the better firm performance would be.

CEO duality is negatively and significantly related, inferring that, under the condition that CEOs serve as executives, the board would likely fail to be an objective supervisor, correspondingly putting firms at a disadvantage.

Insider ownership has a positive and significant relation, suggesting that higher insider ownership may reconcile authorities’ and outside shareholders’ interests, consequently making firm performance better.

The ratio of stock pledged by directors and supervisors is negative, implying that the higher ratio of pledged stock, the closer relation between directors’ individual finance and stock price would be; therefore, directors could benefit themselves at the sacrifice of small shareholders’ interest, resulting in poor firm performance.

The deviation between voting right and cash flow right is negatively and significantly related, implying that the larger gap between voting rights and cash flow rights, the more incentives controlling shareholders could have; thus they may embezzle firm asset, causing damage to small shareholders’ interest and deteriorating firm performance.

V.CONCLUSION

Implication in Nepalese Perspective