Embed Size (px)
Citation preview
Impact of Founding Family Influence on
Firm Value and Corporate Governance: Evidence from the Banking Sector of Bangladesh
Impact of Founding Family Influence on Firm Value and Corporate Governance: Evidence from the Banking Sector of Bangladesh
Submitted To
Department of Finance
University of Dhaka
Supervised By
Ms. Nusrat Khan
Assistant Professor
Department of Finance
University of Dhaka
Submitted By
Md. Shamsuddin
Section-A, Roll: 16-055
B.B.A 16th Batch
Department of Finance
University of Dhaka
Date of Submission: May 15, 2014
Letter of Transmittal
May 15, 2014
Chairman
Exam Committee
16th batch
Department of Finance
University of Dhaka
Subject: Submission of Intern Report on Impact of Founding Family Influence on Firm
Value and Corporate Governance: Evidence from the Banking Sector of
Bangladesh.
Dear Sir,
It is a great pleasure to submit my intern report on “Impact of Founding Family Influence on
Firm Value and Corporate Governance: Evidence from the Banking Sector of
Bangladesh”. It has been a great opportunity for me to get familiar with the real world scenario.
In preparation of the report I applied all the knowledge I gathered during my academic life at this
department. I was fully sincere, honest and devoted to the accomplishment of all the research
objectives I adopted.
I have tried my best to make the report a perfect one. I hope you will appreciate all my efforts
and accept my submission.
Sincerely yours,
Md. Shamsuddin
Section-A, Roll: 16-055
B.B.A 16th Batch
Department of Finance
University of Dhaka
Supervisor’s Certification
This is to certify that Md. Shamsuddin, Roll: 16-055, has done an internship Report titled
Impact of Founding Family Influence on Firm Value and Corporate Governance: Evidence
from the Banking Sector of Bangladesh under my supervision.
The student is found to be intelligent, sincere and hardworking. The student has put in lot of
work and has also brought forth his views and ideas which are being studied for implementation
at appropriate time.
I wish him every success in his future endeavor.
Supervisor
Ms. Nusrat Khan
Assistant Professor
Department of Finance
University of Dhaka
ACKNOWLEDGEMENT
By the grace of Almighty Allah, I have successfully completed my intern report. In preparation
of the report, I got immense help from some people. I am grateful to all the department officials
of Banking Regulation and Policy Department (BRPD) of Bangladesh Bank, especially Md.
Saiful Islam, Joint Director, Banking Regulation and Policy Department, Bangladesh Bank, for
their coordination. I want to thank Md. Enamul Karim Khan, Joint Director, BRPD, Bangladesh
Bank for his valuable advice and instructions. Without his cordial help it would be impossible to
understand the different issues of corporate governance. Rashida Khanam, Deputy Director,
BRPD, Bangladesh Bank helped me a lot with valuable data and information. Finally, it would
totally be impossible to prepare this report without detail and continuous guidelines and advices
of my supervisor Ms. Nusrat Khan, Assistant Professor, Department of Finance, University of
Dhaka. I am grateful to her for assisting me in the course of preparing this report.
Sincerely yours,
Md. Shamsuddin
Section-A, Roll: 16-055
B.B.A 16th Batch
Department of Finance
University of Dhaka
Executive Summary
This report tries to explore the impact founding family influence along with other corporate
governance factors has on the firm value in the banking sector. All the listed commercial banks
of Bangladesh are selected as sample for conducting research. Three alternate measures –
founding family directorship, founding family ownership and founding family composite – are
used for the study. As firm value widely used Tobin Q-value has been included. Four corporate
governance variables and six firm specific variables are included to formulate the models.
It has been observed from the study that firms having founding family influence are younger
than firms having no such influence. In all other aspects, founding family firms depict same sort
of characteristics like non-founding family firms. Findings of the study also suggest, there is
negative relationship between founding family influence and firm value. More significantly,
presence of founding family members in the board of directors causes lower firm value.
Improper use of directorial power by the founding family members is considered as one of the
reasons.
Among the corporate governance factors, board stock ownership is found to be the most
significant predictor and it positively affects the firm value. Board size on the other hand has
negative impact on firm value. Presence of independent director or longer CEO tenure none has
been found to be a significant predictor.
Higher financial leverage and tangible assets are found to be associated with higher firm value.
Performance, size factor and growth prospect none has significant impact on the firm value
because ROA, Firm size and Interest income growth have not found to be the predictor of firm
value in banking sector.
Table of Contents 1. Introduction .............................................................................................................................1
2. Corporate Governance in Bangladesh ......................................................................................2
3. Literature Review ....................................................................................................................4
4. Methodology ...........................................................................................................................7
4.1 Data and Data sources .......................................................................................................7
4.2 Variables ...........................................................................................................................7
4.3 Model Specification...........................................................................................................9
5. Empirical Tests ..................................................................................................................... 10
5.1 Founding family companies and Non-founding family companies ................................... 10
5.2 Correlation ...................................................................................................................... 12
5.3 Regression Analysis ........................................................................................................ 14
5.4 Adjustment for Multicollinearity ..................................................................................... 17
6. Findings and Conclusion ....................................................................................................... 18
References ................................................................................................................................ 21
1
1. Introduction
More than 70% of the non-bank firms in Bangladesh are having founding family members in
their boards of directors. These firms are highly controlled by those founders or founders’
families. Banking firms are also having a great influence from the founders and their families
(Sobhan and Werner, 2003). So, it naturally raises the question, “Is this founding family
influence has any impact on the firm’s performance or value?”
For banking sector corporate governance is a very important issue. As banks have to deal with
the money of both shareholders and depositors, they need to earn the confidence of both the
parties. This is why bank companies are highly regulated and rigorous supervision is done in this
sector. But without sound corporate governance practice, proper supervision is not possible
(Heidi and Marleen, 2003). Founding family influence is also a corporate governance issue and it
helps establish better governance practice within a firm. As founding family members can
monitor the firms better and they have better understanding among themselves, firm experience
quick decision making and better management. (Fama and Jensen, 1983)
This report will thus try to explore the impact of founding family influence on firm value in the
banking sector of Bangladesh and at the same time will examine the impact other corporate
governance factors has on firm value. This report will also explore whether it is possible to
differentiate founding family firms from non-founding family firms. Some firm specific factors
are also considered to capture detail picture of the true predictor of firm value for the banking
companies. With these purposes in mind, a sample of listed commercial banks have been
selected and analyzed.
In the next section, practice of corporate governance in banking sector of Bangladesh will be
discussed in brief. Then previous research works will be reviewed to outline the ground of the
study. Then the method applied in this report will be discussed in details along the list of data
source, variables and models that are used for the report. After that empirical results are to be
outlined with detail discussion. Final part of the report will summarize the findings and will
provide recommendation for further studies.
2
2. Corporate Governance in Bangladesh
As the report is on the issue of corporate governance it is worthwhile to discuss about the
corporate governance related regulations and practices. The report is prepared on the Banking
sector of Bangladesh and thus the discussion will focus on the regulation and practices relevant
to that sector. Further, as within the report only few issues of corporate governance – board of
directors, its size, stock ownership, CEO, CEO tenure, founding family director and ownership –
are used, following discussion of this part of the report will focus those issues only.
In Bangladesh, practices of corporate governance in banking companies are governed by
Company Act 1994, Bank Company Act 1991 and Code of Corporate Governance 2006 of
Bangladesh Securities and Exchange Commission (BSEC). Besides, The International Finance
Corporation (IFC) and Bangladesh Enterprise Institute (BEI) work a lot to provide guideline,
training, recommendation and advices to improve better corporate governance.
After the recent amendment of the Bank Company Act, it is not necessary for the bank to keep
any depositor director. So bank can have only three type of directors now – regular director,
alternate director and independent director. Bangladesh Bank (BB) and BSEC monitor the
corporate governance practices by the Banks. Each bank has to take approval before appointing
or removing directors. In appointing alternate director banks also need to take approval. In case
of appointing independent directors, banks need the approval of BSEC. Information about the
directors should be reported to the BB on a regular basis.
Maximum 20 members including independent directors are allowed in the board of directors of a
bank. Number of independent director should be 3 if there are to be 20 members in total. But if
the board has less than 20 members it must have at least 2 independent directors. The maximum
term of a director is 3 years and can be re-elected for 2 terms consecutively. After that he or she
cannot be a director for next 3 years but after the end of this 3 years period he or she can again be
a director. In every Annual General Meeting (AGM) of the bank, one-tenth of board should be
replaced with new directors (Company Act).
In the law, maximum 2 members from the same family are allowed to be the directors (This
limitation should be complied within July 2013. As this report is prepared on the information
prevailed on December 2012, many banks have more than 2 directors from founding family.) and
3
a family can own maximum 10% of the total share of the bank (Bank Company Act). As the
definition of the family it includes father, mother, son and daughter, brother, sister and other
dependent on them.
Directorship cannot be assigned to someone else but alternate director can be appointed in
certain circumstances like if the original director needs to go outside the country for a period of 3
months or more. This alternate director will work for the original director but as he is in the
position on a temporary basis, alternate director cannot be the member of any committee of the
bank (Company Act). Any director cannot hold any position in the bank of which he or she is a
director that fetch income or salary to him or her (Bank Company Act).
Banks cannot appoint any managing agent and so banks require CEO or Managing Directors.
Chairman of the Board is not allowed to be the CEO of the bank in Bangladesh. Besides, CEO of
any bank cannot be the CEO of any other bank or financial institutions. CEO can hold his or her
position for maximum 5 years in each term but can be reappointed multiple times consecutively
(Bank Company Act).
Banks also need to take approval before appointing CEO. BB holds the power to remove any of
the director, chairman or CEO if thinks necessary for the welfare of the depositors. If anyone
wants to hold more than 5% of total share, he or she has to have the approval from the BB (Bank
Company Act).
Among the 30 listed banks average board size is 13 and there are 2 independent directors on an
average in every bank (on a percentage basis which is 15% of the board). This is an exact
compliance with the existing law and guidelines. Board directors owns on an average around
27% of the total shares of the bank. Around 15% of the directors are from the founding family
within the firms those have directors from founding family (in number which is around 2
directors on an average). These founding families hold around 3% of the total shares on an
average. Finally there is no CEO from the founding family and average tenure of the current
CEO is around 3 years. (See Table 2)
4
3. Literature Review
The focus of this report is on two issues – firstly whether finding family influence can describe
the variability in firm value and secondly how the other corporate governance and firm specific
factors affects the firm value at the presence of finding family influence. So, this section will
discuss about the previous research works that had observed the same or related issues.
Different researchers defined finding family influence differently. Some of them considered the
presence of CEO from finding family as the influence of finding family. McConaughy et al.
(1998) have used the same measure. Hamberg et al. (2013) have used different measure. They
define the ownership of the finding family members as finding family influence. Number of seats
occupied by the family members in the board of directors is another measure for finding family
influence which has been used by Villalonga and Amit (2009). Finally, Mishra et al. (2001)
include all these measures along with a composite variable combining all three measures.
US firms having finding family influence are found to be more valuable than the firms not
having finding family influence (McConaughy et al., 1998). These firms are managed more
efficiently and utilize lower debt and ultimately enjoy higher valuation (McConaughy et al.,
2001). Pindado et al. (2008) also observe that family ownership has a positive impact on the firm
value. Hamberg et al. (2013) in their study on all the listed Swedish firms find the same sort of
result and also observe non-finding family firms are having lower value and performance. In an
extensive study on 675 firms of 11 countries, Barontini and Caprio (2006) find that both the firm
value and performance are higher for the firms that are controlled by the finder. Mishra et al.
(2001) in their study on Norwegian firms observe finding family influenced firms are having 19
to 40 percent higher value than firms having no founding family influence and these firms are
governed differently than the firms having no such influence. But Lauterbach et al. (1999) find
completely opposite result in Israel. According to their finding, non-founding family fimrs
outperform founding family firms.
Yizheng (2011) finds that finding family firms enjoyed lower cost of equity compared to the
non-finding family firms. On the other hand, Yizheng and Yueping (2013) find cost of debt for
finding family controlled firms is lower. Both of these studies have mentioned the reduced
agency cost and better monitoring as a reason. Fama and Jensen (1983) conclude the same and
have explained that the reduced agency cost became possible due to the long term and
5
multidimensional nature of the relationships in finding family. Kang (1998) and DeAngelo and
DeAngelo (1985) focus on the monitoring advantage of finding family. So, these studies further
emphasis that finding family influence can minimize the cost of capital and can improve the firm
value and at the same time ensure better management and performance.
Next part of the literature review will explore the studies related to the corporate governance and
firm specific variables. Chong and López-de-Silanes (2006) find that better the corporate
governance, higher the firm value and better the performance. Same conclusion has been drawn
by Ammann et al. (2011) in their study on 6,663 firms of 22 countries. They conclude that
corporate governance is an opportunity for the firms to maximize value rather than a cost factor.
Better corporate governance helps establish effective monitoring, ensure higher cash flow and
enjoy a low cost of capital. Drobetz et al. (2004) find the same relation between corporate
governance and firm value in Germany and Beiner et al. (2006) in Switzerland.
Firms having finding family influence are younger than the firms without such influence. Lane
and Jameson (1993) conclude this after studying small US firms having CEO from finding
family. Fan et al. (1999) find completely different result in exploring East Asian countries. They
also observe that being older; these finding family influenced firms are performing badly
compared to the firms having no such influence. Findings of Morck et al. (1988) clarifies the fact
that lower the firm age higher will be the firm value having finding family influence and vice-
versa.
Yermack (1996) concludes smaller the board size higher will be the firm value. He observes that
firms having small board enjoy high value in the market. He also finds that finding family
influence is much higher in firms having small board of directors. Mishra et al. (2001) find the
same result and provide a possible explanation that small board helps the firm taking quick
decision and to manage more efficiently. So, these firms experience higher value. In studying the
banking sector of Nigeria, Ayorinde et al. (2012) observe better performance in the firms which
have small board.
Conflicting results have been gathered about the impact of independent directors on firm value.
Baysinger and Butler (1985), Cotter et al. (1997), Rosenstein and Wyatt (1990) and Weisbach
(1988) have found positive association between firm value and board independence. While
6
Booth and Deli (1996), Subrahmanyam et al. (1997), Mishra et al. (2001) and Agrawal and
Knoeber (1996) find exactly opposite relation between the two, Hermalin and Weisbach (1991)
finds no relation at all. Further study is thus required on this field to understand how board
independence influence firm value.
While Jensen and Meckling (1976) finds a positive association between firm value and board
ownership, Stulz (1988) concludes such ownership is detrimental if it exceeds 50% level.
Ayorinde et al. (2012) conclude higher equity interest of the directors is associated with better
firm performance and better corporate governance. Study by McConnell and Servaes (1990)
clarifies the issue which concludes that up to 50% level of ownership by the board firm value
continues to rise and falls afterward. Mishra et al. (2001) observe the limit is 25% in case of
Norwegian firms.
Henderson et al. (2006) observe that CEO tenure has positive impact on firm performance but
performance starts to decline as tenure increases mostly over 10 years. Mishra et al. (2001) on
other hand find tenure has no significant impact on the firm value. House and Benefield (1995)
and Chong and López-de-Silanes (2006) find there is a positive relationship between income
growth and firm value. This finding is contradictory with the conclusion of Hestinoviana (2013)
and Mishra et al. (2001). So, further study is required on this ground.
Rizqia et al. (2013) on their study over manufacturing companies of Indonesia find financial
leverage has positive impact on firm value. Cheng and Tzeng (2011) also find that financial
leverage increases the firm value but only if the leverage has not exceed optimal level and
financial quality of the firm is better. Mishra et al. (2001) on the other hand find no significant
relationship between financial leverage and firm value. Rizqia et al. (2013) observe a positive
relation between firm size and firm value. Chong and López-de-Silanes (2006) also observe
higher firm value in larger firms. In contrast, Mishra et al. (2001) find significant negative
impact of firm size on firm value. So, more extensive research work is required on both of these
issues. They also find that asset tangibility has significant negative impact on the firm value
while ROA has no significant impact at all.
7
4. Methodology
4.1 Data and Data sources
In Bangladesh there were 30 banks listed on the stock exchange (DSE) up to 2012. So, for the
purpose of this report, all of those 30 banks are selected. Among the selected 30 banks, 13 banks
have founding family influences and remaining 17 banks have no founding family influences. As
the sources of data the followings are used:
1. Annual Reports of the respective banks for the year 2012
2. Newspaper articles
3. Stock Exchange related News Sources e.g. LankaBangla Financial Portal
(lankabangla.duinvest.com) and Stock Bangladesh Limited (stockbangladesh.com)
4. Particulars of Board of Directors of respective banks
4.2 Variables
To determine the presence of founding family influence, four measures are planned to use, which
include:
1. Founding Family Directorship – percentage of the board occupied by founding family
members i.e.
,
2. Founding Family Ownership – percentage of total shares owned by founding family
members i.e.
,
3. Founding Family CEO – dummy variable which takes 1 if the CEO is from founding
family and 0 otherwise; and
4. Founding Family Composite – dummy variable which takes 1 if any of the other three
measures is having non-zero value and 0 otherwise.
Same set of measures were used by Mishra et al. (2001). None of the selected 30 banks has any
CEO from the founding family and so, Founding Family CEO is dropped out from the list for
this report and other three measures are included.
8
In the report ten more variables are used to formulate the regression model in order to determine
the impact of founding family influence on the firm value along with the impact of other firm
specific and corporate governance variables. There are six firm specific variables which are:
1. Firm Age: Years after the commencement of business by the bank.
2. Interest Income Growth: Average growth in Interest income (Investment income for
Islamic banks) of the bank for last 3 years (2009 to 2012).
3. Firm Size: Log of Interest income (or Investment income) of 2012.
4. Financial Leverage: Ratio of Total Liabilities to Total Assets of the Bank for 2012.
5. Return on Assets: Ratio of Net Profit After Tax to Total Assets for 2012.
6. Asset Tangibility: Ratio of Land, Property, Plant and Equipment to Total Assets at the
end of 2012.
Besides, there are four corporate governance variables which are:
1. Board Size: Number of directors in the board of the company.
2. Board Independence: The percentage of the total number of directors occupied by
independent director.
3. Board Stock Ownership: Percentage of total outstanding shares held by the board
members.
4. CEO Tenure: Number of years after the appointment of present CEO.
All these variables are used as independent variable and Firm Value is used as dependent
variable. As a proxy of firm value, Q-value is used. This proxy is adopted from the study of
Mishra et al. (2001) where,
This Q-value is calculated for each bank and it has been observed that no heteroskedasticity is
present. So, while Mishra et al. (2001) used a log of this Q-value, in this report Q-value is
directly used in the model. McConnell and Servaes (1990), Yermack (1996), Morck et al. (1988),
McConaughy et al. (1998), and others had used the same measure to determine firm value in
their studies related to similar topic.
9
4.3 Model Specification
To fulfill the objectives of this report, multiple regressions will be used. In the report, the
regression equation will take the following form:
( ) ( )
( ) ( )
( ) ( )
( ) ( )
( ) ( ) ( )
Three measures mentioned above will be incorporated in the equation separately as founding
family influence. So, there will be three regression models one for each measure. The models
will take the following forms:
Table 1: Regression models to be used
Model 1
( ) ( ) ( ) ( )
( ) ( ) ( ) ( ) ( )
( ) ( )
Model 2
( ) ( ) ( ) ( )
( ) ( ) ( ) ( ) ( )
( ) ( )
Model 3
( ) ( ) ( ) ( )
( ) ( ) ( ) ( ) ( )
( ) ( )
Where, α = Intercept
β1…. Β11 = Coefficients for respective variables
FFD = Founding Family Directorship
FFO = Founding Family Ownership
10
FFC = Founding Family Composite
FA = Firm's age
BS = Board size
BI = Board independence
BO = Board stock ownership
CT = CEO Tenure
IIG = Interest Income growth
FS = Firm Size
FL = Financial Leverage
ROA = Return on Assets
AT = Asset Tangibility
εi = Error Term
5. Empirical Tests
5.1 Founding family companies and Non-founding family companies
Descriptive statistics of the variables are shown in Table 2. The statistics are shown in three
groups – full data set, founding family companies (FFCs) and non-founding family companies
(NFFCs). Along with the statistics, p-values are shown for corresponding variables in order to
test whether there is significant difference between the means of founding family company group
and non-founding family company group.
From the table it is clear that except firm age and Return on Assets (ROA) other variables are
having somewhat same mean values for the two groups. These results are inconsistent with the
findings of Mishra et al. (2001). They found all the variables different for FFCs and NFFCs
except interest income growth, ROA and Asset Tangibility. Between these two exceptions, only
11
Firm age has significantly different values for founding family companies and non-founding
family companies. There is a large difference between the ROAs of the two groups but that is not
statistically different which is consistent with Mishra et al. (2001).
So, from this test it can be inferred that founding family companies are not significantly different
group from non-founding family companies. Only difference is that founding family companies
are younger than the non-founding family companies. This is due to the reason that most of the
non-founding family companies are established by the government and other institutions just
after the independence of Bangladesh to fulfill the need of banking institutions at that time. Other
points can be noticed that NFFCs have higher Q-values than FFCs and overall banking sector
while FFCs have higher ROA than NFFCs and overall banking sector though these are not
statistically significant.
Table 2: Descriptive Statistics for the variables
Variables Full Data Set (N=30)
Founding Family
Companies (N=13)
Non-founding Family
Companies (N=17) p-values
for
difference Mean Std.
Deviation Mean
Std.
Deviation Mean
Std.
Deviation
Founding Family
Directorship 5.93% 0.0986 13.68% 0.1095 0 0
Founding Family Ownership 3.01% 0.0602 6.94% 0.0762 0 0
Founding Family Composite 0.43 0.5040 1.00 0.0000 0 0
Firm's Age 20.93 9.3364 16.08 4.8898 24.65 10.3074 0.006*
Board Size 13.07 3.6001 13.46 3.7775 12.76 3.5449 0.612
Board Independence 13.78% 0.0862 13.39% 0.0768 14.08% 0.0949 0.827
Board Stock Ownership 26.49% 0.1570 28.87% 0.1435 24.67% 0.1686 0.468
CEO Tenure 3.13 2.2550 2.92 1.7541 3.29 2.6164 0.646
Interest Income Growth 32.22% 0.1003 31.26% 0.0942 32.95% 0.1070 0.649
Firm Size 10.0937 0.2667 10.1062 0.1375 10.0842 0.3383 0.828
Financial Leverage 0.9376 0.1215 0.9158 0.0213 0.9543 0.1604 0.343
Return on Assets 0.65% 0.0149 0.91% 0.0039 0.45% 0.0196 0.367
Asset Tangibility 0.0241 0.0156 0.0238 0.0109 0.0243 0.0188 0.927
Q Value 1.0493 0.1625 1.0187 0.0258 1.0728 0.2145 0.318
* Difference is significant at the 0.05 level.
12
5.2 Correlation
Table 3 shows the correlation matrix for all the variables along with the indication of their
significance. All the three measures of founding family influence are positively correlated with
each other at a significant level. As they are not all included in the model at a time, this
correlation is not a problem for the model. Each variable of founding family influence is having
negative correlation coefficient but none of these measures are significantly correlated with firm
value. So, founding family influence does not have any relation to the firm value.
Firm size, financial leverage and ROA have significant and high correlation with firm value.
Firm size (-0.780) is negatively correlated to firm value indicating larger firms are having lower
value than the smaller firms. This finding is consistent with the findings of Mishra et al. (2001).
While ROA (-0.952) has negative correlation, financial leverage has highly positive correlation
(0.983) with firm value which is inconsistent with Mishra et al. (2001). This means these three
variables can better explain the variability in the firm value than other variables. But firm size,
financial leverage and ROA have significant and high correlation between each other also which
is an indication that there exists multicollinearity. So, in the following section of the report we
will adjust the multicollinearity by dropping these variables from the regression models.
Firm age has negative correlation (-0.463) with founding family composite. This means as the
age of the firm increases founding family influence diminishes. Board size has positive
correlation (0.515) with board ownership indicating higher the board size higher will be the
ownership preserved by the board members. Board size also has significant correlations with
firm size (0.551), financial leverage (-0.382) and ROA (0.424) indicating higher firm size higher
will be the board size and higher the board size lower will be the financial leverage and higher
will be the ROA. Firm size has significant positive correlation with ROA and negative
correlation with financial leverage, asset tangibility and firm value. So, higher the firm size,
higher will be the ROA and lower will be the use of financial leverage, presence of tangible
assets and firm value. Financial leverage has significant positive correlation with asset tangibility
and firm value, and negative correlation with ROA. So, higher the financial leverage, higher will
be the presence of tangible assets and firm value and lower will be the bank performance or
ROA. Finally, ROA has significant negative correlation with asset tangibility and firm value. So,
higher the ROA, lower will be the presence of tangible assets and firm value.
13
Table 3: Correlation Matrix
FFD FFO FFC FA BS BI BO CT IIG FS FL ROA AT Q- Value
Founding Family
Directorship 1
Founding Family
Ownership .723
** 1
Founding Family
Composite .699
** .581
** 1
Firm's Age -.296 -.216 -.463* 1
Board Size -.023 -.062 .098 .093 1
Board
Independence .005 .095 -.040 -.146 -.277 1
Board Stock
Ownership .160 .084 .135 -.152 .515
** -.213 1
CEO Tenure -.069 -.054 -.083 .164 -.005 -.150 .034 1
Interest Income
Growth -.261 -.149 -.085 -.082 .138 -.106 .107 -.133 1
Firm Size -.004 .015 .038 .094 .551** .014 -.060 .035 .178 1
Financial
Leverage -.143 -.104 -.159 .052 -.382
* .101 .278 -.101 -.159 -.812
**± 1
Return on Assets .048 .096 .152 -.119 .424* -.102 -.233 .120 .209 .804
**± -.970
**± 1
Asset Tangibility .109 .131 -.016 .245 -.251 -.186 .159 -.056 -.159 -.464** .614
** -.631
** 1
Q Value -.150 -.075 -.168 .124 -.355 .109 .309 -.099 -.143 -.780** .983
** -.952
** .616 1
* Correlation is significant at the 0.05 level (2-tailed).
** Correlation is significant at the 0.01 level (2-tailed).
± Coefficients in red color indicate presence of Multicollinearity
14
5.3 Regression Analysis
Table 4 shows the result of the three regression models. First step is to evaluate the models;
whether they are significant or not i.e. the hypothesis testing using the following null hypothesis:
H0: β1= β2= β3=…..= β11=0
H1: β1 and/or β2 and/or β3 ….. and/or β11is not equal to 0
Table 4 shows that the model p-values are less than the significance level of 0.05 for all the
models and so the models are significant. It can be inferred that one or more of the variables are
significant predictors.
Next step will be to judge each variable. Table 4 also shows the p-values for each variable. From
the table it is clear that firm’s age, board stock ownership and financial leverage are statistically
significant predictors of the firm value and remaining others cannot predict the firm value
significantly. This is true for all the three models as the results of the models are very close and
similar.
The most important inference is that impact of founding family influence is positive over firm
value in all the models though it is not significant. This is a surprising result as all the earlier
researchers – McConaughy et al. (1998), Mishra et al. (2001), Pindado et al. (2008), Hamberg et
al. (2013) and Barontini and Caprio (2006) – find significant and positive association between
firm value and founding family influence. Though this study also finds that positive association,
this impact is insignificant to conclude influence from the founding family causes higher firm
value.
Board stock ownership has positive impact on firm value which indicates firms where board
holds large portion of the ownership has higher value. The result is consistent with Jensen and
Meckling (1976), Mishra et al. (2001) and McConnell and Servaes (1990). The mean value of
board stock ownership is 26.49% which is lower than 50% and closer to 25% and thus it also
meet the condition implied by Mishra et al. (2001) and McConnell and Servaes (1990) in their
studies.
15
Table 4: Result of Regression Models
Founding Family
Directorship (FFD)
Founding Family
Ownership (FFO)
Founding Family
Composite (FFC)
Model F Value 80.1258 82.4469 79.5309
Model p-value 0.0000 0.0000 0.0000
Intercept -0.2796 -0.2593 -0.2064
0.6357 0.624 0.699
FFI 0.0319 0.0856 0.0107
0.7007 0.4245 0.4324
FA 0.0025 0.0024 0.0025
0.0078* 0.0055* 0.0077*
BS -0.0036 -0.0033 -0.0027
0.2175 0.2564 0.2943
BI 0.075 0.0657 0.0853
0.3552 0.4154 0.2878
BO 0.1242 0.1185 0.1133
0.0644** 0.0670** 0.0620**
CT -0.0025 -0.0023 -0.0021
0.3719 0.3994 0.4407
IIG 0.0041 0.0066 0.0214
0.9484 0.9133 0.7217
FS -0.015 -0.0132 -0.0204
0.7459 0.7691 0.6498
FL 1.5144 1.4766 1.475
0.0000* 0.0000* 0.0000*
ROA 2.7322 2.2762 2.3309
0.1771 0.2094 0.2015
AT -0.0181 -0.0903 -0.0088
0.9736 0.8655 0.9866
* Significant at 0.05 level
** Significant at 0.10 level
FFI = Founding Family Influence i.e. FFD or FFO or FFC as per model
Though board size has negative impact on firm value, it is insignificant to be called a predictor of
firm value. Mishra et al. (2001) and Yermack (1996) agree on the negative association but also
find a significant relation. Board independence is also showing insignificant relationship with
firm value while its coefficient is positive. So, presence of independent directors cannot affect
16
firm value which is consistent with Hermalin and Weisbach (1991) but contradictory with
Mishra et al. (2001).
Firm age also has positive and statistically significant impact on firm value but the coefficient
indicates the impact is very small. The result also indicates older firm has higher value which is
completely different from the inference Morck et al. (1988) made. Firm age has negative
correlation with founding family influence and non-founding family firms are having higher Q-
values on an average. This means as the firm grows older; influence of the founding family starts
declining and firm experience an increase in its value. This finding indirectly indicates founding
family influence has negative impact on the firm value.
Financial leverage has the greatest and positive impact on firm value. One standard deviation
change in financial leverage will cause about 1.5 standard deviation changes in firm value. This
is obviously a large effect. But the result is inconsistent with the finding of Mishra et al. (2001).
Return on Assets also has a large coefficient but is not significant statistically. Mishra et al.
(2001) concludes the same about the impact of ROA.
CEO tenure has no significant impact on firm value. Mishra et al. (2001) also observe the same.
The coefficient of CEO tenure is negative and average tenure is a little more than 3 years.
Though the tenure is not so high, firm value starts declining as tenure increases, a conclusion
similar to Henderson et al. (2006).
Asset tangibility is showing negative association with firm value which is consistent with the
finding of Mishra et al. (2001). But unlike their findings this report finds an insignificant
association between the two. Same sort of result is observed between firm size and firm value.
This leaves a contradiction to the findings of Rizqia et al. (2013) and Chong and López-de-
Silanes (2006).
Finally, Interest income growth is also found to be an insignificant predictor. It shows
insignificant positive association. This result is completely consistent with Mishra et al. (2001)
and Hestinoviana (2013) but inconsistent with House and Benefield (1995) and Chong and
López-de-Silanes (2006).
17
5.4 Adjustment for Multicollinearity
Table 5 shows the results of the three regression models after omitting Firm Size, Financial
Leverage and ROA as an adjustment of multicollinearity. All the models still remain significant.
Interestingly, all the founding family variables change their signs. Except founding family
directorship other measures remain insignificant even after adjustment. Founding family
directorship takes a significant negative coefficient. This indicates higher number of directors in
the board from founding family will lower the firm value.
Table 5: Results of three regression models by adjusting Multicollinearity
Founding Family
Ownership
Founding Family
Directorship
Founding Family
Composite
Model p-value 0.0004 0.0001 0.0016
Intercept 1.0944* 1.1700* 1.0345*
0.0000 0.0000 0.0000
Founding Family Influence -0.5699 -0.5349* -0.0532
0.1089 0.0156 0.2836
Firm's Age 0.0030 0.0021 0.0020
0.2317 0.3678 0.5083
Board Size -0.0251* -0.0253* -0.0200*
0.0036 0.0017 0.0175
Board Independence 0.3324 0.2736 0.3040
0.1984 0.2479 0.2726
Board Stock Ownership 0.6533* 0.6852* 0.5921*
0.0008 0.0002 0.0033
CEO Tenure -0.0092 -0.0105 -0.0080
0.3219 0.2268 0.4241
Interest Income Growth -0.1467 -0.2535 -0.0331
0.4780 0.2069 0.8839
Asset Tangibility 3.8747* 3.8413* 4.0862*
0.0249 0.0162 0.0254
* Significant at 0.05 level
18
Another noticeable point is that in all the models intercepts become significant when we adjust
for multicollinearity. Board stock ownership also remains significant and has positive
coefficients in all the models. More interestingly, two more variables become significant after
the adjustment and it is true for all the three models. Board size and Asset Tangibility are those
two variables where board size has negative impact and asset tangibility has positive impact on
the firm value.
6. Findings and Conclusion
This study observes the impact of founding family influence on firm value and corporate
governance in the banking sector of Bangladesh. For the purpose of the report sample of 30
listed commercial banks is selected. 13 from these 30 banks are having founding family
influence and remaining 17 banks are non-founding family firms. The study tries to meet two
major goals – (1) observing how influence from the founding family affects firm value and (2)
examining how other corporate governance and firm specific variables contribute to the firm
value. Using four corporate governance variables, six firm specific variables and three alternative
measures of founding family influence, the report tries to capture the impact of founding family
influence.
Firstly, the study finds negative association between firm value and founding family influence
when founding family directorship is considered as founding family influence. Other measures
also show negative but insignificant relationship. This means banks having founding family
influence are valued lower than the banks without such influence. Lauterbach et al. (1999) get
the same kind of results. But this finding is completely inconsistent with McConaughy et al.
(1998), Hamberg et al. (2013), Barontini and Caprio (2006), Mishra et al. (2001) and others. A
possible explanation can be that directors from the founding family fail to establish better
monitoring in the banks than the non-founding family directors and influence the operation and
decisions in a way that is detrimental to the firm value. Sobhan and Werner (2003) find that these
founding family members as directors favor their preferred customers to get loans. They also
find that most of these loans remain default for long period of time.
Secondly, Founding Family Firms are younger than Non-Founding Family Firms. Except this,
these two types of firms have no significant difference between them. Thus founding family
19
influence does not make the firms different from other firms in any respects. But firm age has a
positive impact on firm value indicating older firms are more valuable than younger firms and
these firms also have little influence from the founding family. This finding is inconsistent with
Morck et al. (1988). One possible explanation can be that founder and his or her family members
try to control the bank only in its early stages and as the bank starts getting older, founding
family reduces its control. As founding family influence has negative impact on firm value,
reduction in the influence increases the value.
Thirdly, board size has negative relation with firm value. Larger board reduces the agility of
decision making by the board. This finding is consistent with Mishra et al. (2001) and Yermack
(1996). Board stock ownership has significant positive impact on firm value, a result consistent
with Jensen and Meckling (1976), Mishra et al. (2001) and McConnell and Servaes (1990). As
board ownership increases, agency cost decreases and better monitoring can be ensured.
Fourthly, board independence has no significant impact on the firm value. Though the presence
of independent directors is emphasized on the regulation, this corporate governance mechanism
has no serious advantage in increasing value of the firm. Hermalin and Weisbach (1991) draw
the same conclusion.
Fifthly, Asset tangibility shows significant and very high association with firm value. This is
very surprising finding which is inconsistent with Mishra et al. (2001). The result indicates banks
having high level of tangible assets like plant, property, land and equipment will enjoy higher
value. No possible explanation is drawn on this ground as for bank tangible assets is a very
minor part of total assets. Further study is required on this ground.
Finally, financial leverage has significant and positive impact on firm value, a result consistent
with Rizqia et al. (2013) and Cheng and Tzeng (2011). This indicates firms having higher
leverage will have higher value. As Cheng and Tzeng (2011) shows financial leverage causes
increase in value until leverage reach optimal level. So, a possible explanation is that banking
firms in Bangladesh have not yet reached the optimal leverage point.
In a nutshell, this report concludes that influence of founding family has negative impact on the
firm value in banking sector of Bangladesh. The impact is small compared to the impact of other
corporate governance and firm specific factors. Further study is required on this ground. Firstly
20
this report deals with only banking sector. Other sectors can be included to understand the
overall impact of founding family influence on firm value. Besides, alternative measure of firm
value can be employed to observe whether the conclusion changes or not.
21
References
Agrawal, A. and Knoeber, C. (1996) Firm performance and mechanisms to control agency
problems between managers and shareholders. Journal of financial and quantitative analysis,
31 (03): 377--397
Ammann, M., Oesch, D. and Schmid, M. (2011) Corporate governance and firm value:
International evidence. Journal of Empirical Finance, 18 (1): 36--55
Ayorinde, A., Toyin, A. and Leye, A. (2012) Evaluating the Effects of Corporate Governance on
the Performance Of Nigerian Banking Sector. Review of Contemporary Business Research,
1 (1): 32-42
Barontini, R. and Caprio, L. (2006) The effect of family control on firm value and performance:
Evidence from continental Europe. European Financial Management, 12 (5): 689--723
Baysinger, B. and Butler, H. (1985) Corporate governance and the board of directors:
Performance effects of changes in board composition. JL Econ. \& Org., 1: 101
Beiner, S., Drobetz, W. and Schmid, M. et al. (2006) An integrated framework of corporate
governance and firm valuation. European Financial Management, 12 (2): 249--283
Booth, J. and Deli, D. (1996) Factors affecting the number of outside directorships held by
CEOs. Journal of Financial Economics, 40 (1): 81--104
Cheng, M. and Tzeng, Z. (2011) The Effect of Leverage on Firm Value and how the firm
financial quality influence on this effect. World Journal of Management, 3 (2): 30--53
Chong, A. and López-de-Silanes, F. (2006) Corporate governance and firm value in Mexico.
IDB Working Paper
Cotter, J., Shivdasani, A. and Zenner, M. (1997) Do Independent Directors Enhance Target
Shareholders Wealth During Tender Offers?. Journal of Financial Economics, 43: 195–218
DeAngelo, H. and DeAngelo, L. (1985) Managerial ownership of voting rights: A study of
public corporations with dual classes of common stock. Journal of Financial economics, 14
(1): 33--69
22
Drobetz, W., Schillhofer, A. and Zimmermann, H. (2004) Corporate governance and expected
stock returns: Evidence from Germany. European Financial Management, 10 (2): 267--293
Fama, E. and Jensen, M. (1983) Separation of ownership and control. Journal of law and
economics, pp. 301--325
Fan, P., Claessens, S. and Djankov, S. et al. (1999) Expropriation of minority shareholders:
Evidence from East Asia. World Bank Policy Research Working Paper, (2088)
Hamberg, M., Fagerl, and Nilsen, K. (2013) Founding-family firms and the creation of value:
Swedish evidence. Managerial Finance, 39 (10): 963--978
Heidi, V. and Marleen, W. (2003) Voluntary disclosure on corporate governance in the European
Union.
Henderson, A., Miller, D. and Hambrick, D. (2006) How quickly do CEOs become obsolete?
Industry dynamism, CEO tenure, and company performance. Strategic Management
Journal, 27 (5): 447--460
Hermalin, B. and Weisbach, M. (1991) The effects of board composition and direct incentives on
firm performance. Financial management, pp. 101--112
Hestinoviana, V. (2013) The Influence of Profitability, Solvability, Asset Growth, and Sales
Growth toward Firm Value (Empirical Study on Mining Companies Which Listed on
Indonesia Stock Exchange). Jurnal Administrasi Bisnis, 4 (1)
House, W. and Benefield, M. (1995) The Impact of Sales and Income Growth on Profitability
and Market Value Measures in Actual and Simulated Industries. Development in Business
Simulation & Experiential Exercises, 22
Jensen, M. and Meckling, W. (1976) Theory of the firm: Managerial behavior, agency costs and
ownership structure. Journal of financial economics, 3 (4): 305--360
Kang, D. (1998) The impact of ownership type on performance in public corporations: a study of
the US textile industry 1983-1992. Available at SSRN 10592
23
Lane, W. and Jameson, M. (1993) Control Preference and Financial Attributes: Founders as
CEOs in Small, Publicly Traded Firms. Journal of Small Business Finance, 3 (1): 43–62
Lauterbach, B., Vaninsky, A. and er, (1999) Ownership structure and firm performance:
evidence from Israel. Journal of Management and Governance, 3 (2): 189--201
McConaughy, D., Matthews, C. and Fialko, A. (2001) Founding family controlled firms:
Performance, risk, and value. Journal of small business management, 39 (1): 31--49
McConaughy, D., Walker, M. and Henderson Jr, G. et al. (1998) Founding family controlled
firms: Efficiency and value. Review of Financial economics, 7 (1): 1--19
McConnell, J. and Servaes, H. (1990) Additional evidence on equity ownership and corporate
value. Journal of Financial economics, 27 (2): 595--612
Mishra, C., Randøy, T. and Jenssen, J. (2001) The effect of founding family influence on firm
value and corporate governance. Journal of International Financial Management \&
Accounting, 12 (3): 235--259
Morck, R., Shleifer, A. and Vishny, R. (1988) Management ownership and market valuation: An
empirical analysis. Journal of financial Economics, 20: 293--315
Pindado, J., Requejo, I. and Torre, C. (2008) Does family ownership impact positively on firm
value? Empirical evidence from Western Europe. Universidad de Salamanca (Espa\~na).
Facultad de Econom\'\ia y Empresa
Rizqia, D., Aisjah, S. and others, (2013) Effect of Managerial Ownership, Financial Leverage,
Profitability, Firm Size, and Investment Opportunity on Dividend Policy and Firm Value.
Research Journal of Finance and Accounting, 4 (11): 120--130
Rosenstein, S. and Wyatt, J. (1990) Outside directors, board independence, and shareholder
wealth. Journal of financial economics, 26 (2): 175--191
Sobhan, F. and Werner, W. (2003) A comparative analysis of corporate governance in South
Asia: Charting a roadmap for Bangladesh.
24
Stulz, R. (1988) Managerial control of voting rights: Financing policies and the market for
corporate control. Journal of financial Economics, 20: 25--54
Subrahmanyam, V., Rangan, N. and Rosenstein, S. (1997) The Role of Outside Directors in
Bank Acquisitions. Financial Management, 26: 23–36
Villalonga, B. and Amit, R. (2009) How are US family firms controlled?. Review of Financial
Studies, 22 (8): 3047--3091
Weisbach, M. (1988) Outside directors and CEO turnover. Journal of financial Economics, 20:
431--460
Yermack, D. (1996) Higher Market Values of Companies with a Small Board of Directors.
Journal of Financial Economics, 40 (2): 185–211
Yizheng, Q. and Yueping, P. (2013) Founding Family, Pyramid Structure and Debt Cost.
Hypothesis, 2: 2
Yizheng, Q. (2011) Founding family control, information disclosure and equity capital cost., 1:
575--578
