This thesis, motivated by the newly-instituted regulation, discusses the appropriateness of multiple governance mechanism design in Taiwanese market. The research follows the issue and the methodology of Cremers and Nair (2005) about governance mechanism interaction, and adds elements in relate to other governance mechanisms, such as independent director, and elements specific in the emerging market, such as the discrepancy of control rights and the pledge ratio.
The following three conclusions are raised from the research results. Firstly of all, in Taiwanese market, independent director, as well as domestic institutional investor shareholding and foreign institutional investor shareholding all have incremental effects in eliminating agency problem and increasing firms’ market valuation premium. Contrarily, discrepancy of control rights and pledge ratio show insignificant valuation effects.
Second, firms with strong domestic or foreign blockholder and sufficient board independence enjoy higher valuation than firms with only strong domestic or foreign blockholder. Moreover, domestic blockholder plays a substitutive role to independent director while foreign blockholder plays a complementary role to independent director.
In other words, in firms with sufficient domestic blockholder shareholding, independent director serve as a substitute and the incremental valuation effect is overlapping, while in firms with sufficient foreign blockholder shareholding, independent director serve as a complement and the effects facilitate each other. Thus a cost-efficient governance mechanism design of firms with sufficient domestic blockholder should be concentrating resources on strengthening single governance mechanism, while a cost-efficient governance mechanism design of firms with
director mechanism.
Third, the substitution effect between governance mechanisms is more significant in large or high-leveraged firms while the complementary effect between governance mechanisms is more significant in small or low-leveraged firms.
Therefore firms with large size and high leverage should specifically take into consideration the governance mechanism overlapping problem while firms with small size and low leverage should specifically take into consideration the cooperation function of governance mechanisms.
T
ABLES ANDF
IGURESTable 1 definition of variables
Variable Definition Governance variables
INDN The number of independent director
INDR The ratio of independent director among the board
BLK The shareholding percentage of domestic institutional investor FBL The shareholding percentage of foreign institutional investor
CTC The deviation of control rights away from cash flow rights of controlling shareholder
PLG The percentage of the shareholding of controlling shareholder pledged for bank loans
Governance ordinal variables
DIND The dummy variable that takes the value of 1 if the firm has at least two seats of independent director (INDN) and 20 percent of independent director among the board (INDR), and 0 otherwise
DBLK The ordinal variable that takes the value of 3 if the percentage of the domestic institutional shareholding (BLK) is greater than the 3rd quartile, else takes the value of 2 if BLK is greater than the 2nd quartile, else takes the value of 1 if BLK is greater than the 1st quartile, and else takes the value of 0
DFB The dummy variable that takes the value of 1 if the percentage of foreign institutional shareholding (FBL) exceeds 5 percent, and 0 otherwise
DCTC The ordinal variable that takes the value of 3 if the deviation of control rights away from cash flow rights (CTC) is less than the 1st quartile, else takes the value of 2 if CTC is less than the 2nd quartile, else takes the value of 1 if CTC is less than the 3rd quartile, and else takes the value of 0
DPLG The dummy variable that takes the value of 1 if the pledge ratio (PLG) is less than 60 percent and 0 otherwise
Firm-related variables
SIZE The natural log of total assets subtract the industrial yearly medium
LEV Leverage ratio, defined as total debt to total assets and subtract the industrial yearly medium
RET Retention ratio, defined as one minus the dividend ratio subtract the industrial yearly medium
FCF Free cash flow, defined as earnings before depreciation, interests and tax (EBDIT) minus interests, tax, and investment expenditure, scaled by total assets, and subtract industrial yearly medium
BNS The market value of stock bonus scaled by net income and subtract industrial yearly medium
G The growth rate of sales and subtract industrial yearly medium
ROA The net income scaled by the total assets and subtract industrial yearly medium Performance variable
Q Tobin’s Q, defined as the market value of assets divided by the book value of the assets where the market value of assets is computed as book value of assets plus the market value of common stock less the book value of common stock
ADJQ Tobin’s Q subtract industrial yearly medium
Table 2 lower bound of DBLK and DCTC each year (%)
The percentage of the domestic institutional shareholding (BLK) of each firm in the same year is ranked and equally classified into 4 categories by the quartiles. The ordinal variable takes the value of 3 if BLK is greater than the 3rd quartile, else takes the value of 2 if BLK is greater than the 2nd quartile, else takes the value of 1 if BLK is greater than the 1st quartile, and else takes the value of 0. Meanwhile, the deviation of control rights away from cash flow rights (CTC) of each firm in the same year is ranked and classified into 4 categories by the quarters. The ordinal variable takes the value of 3 if CTC is less than the 1st quartile, else takes the value of 2 if CTC is less than the 2nd quartile, else takes the value of 1 if CTC is less than the 3rd quartile, and else takes the value of 0.
Year Q1 Q2 Q3 Lower bound of DBLK
BLK 1 2 3
2002 19.4100 36.5550 55.1800 2003 17.8800 34.3900 55.7500 2004 17.8400 35.5600 57.7300 2005 18.4600 36.6350 58.9700 2006 18.9400 35.8650 59.0500 Lower bound of DCTC
CTC 2 1 0
2002 0.0400 1.4050 7.4300 2003 0.0100 1.3700 7.5900 2004 0.0300 1.7300 8.0300 2005 0.0300 1.6250 8.1100 2006 0.0400 1.5000 7.8400
Table 3 descriptive statistics
The table reports the sample number, mean, standard deviation, minimum and maximum of observation of variables. All variables are defined in Table 1. The sample period is from 2002 to 2006. Financial firms and firms with missing data are omitted. All the firm-related variables are industrial-adjusted.
Variable N Mean Std Dev Minimum Maximum
Governance
variables
INDN 3436 1.1935 1.5407 0.0000 7.0000
INDR 3436 12.6461 16.3489 0.0000 60.0000
BLK 3436 35.0851 21.7678 0.0000 98.5900
FBL 3436 6.2631 10.9803 0.0000 82.2900
CTC 3436 5.5554 10.3574 0.0000 88.6400
PLG 3436 9.8203 19.3418 0.0000 100.0000
Governance
LEV 3436 -0.8524 15.9109 -58.5229 62.6869
RET 3436 -9.5684 121.7256 -4428.8200 215.4100
FCF 3436 -1.1210 10.6962 -130.8058 39.8557
BNS 3436 3.8028 13.5089 -156.6107 247.4977
G 3436 7.3821 77.1343 -127.5850 2064.1500
ROA 3436 -0.6107 9.5784 -82.2118 34.9217
Performance variable
Q 3436 132.1773 70.8822 28.9586 1065.6800
ADJQ 3436 16.8005 67.5518 -80.2532 932.0650
Table 4 governance mechanisms condition each year
This table reports the annual sample number, mean, standard deviation, minimum, and maximum of governance-related variables in Taiwan, in order to observe the evolution of corporate governance in Taiwan. Among them, data in year 2002 to 2006 are included in the sample in this research, while data in year 1997 to 2001 are listed only as supplement.
Variable Year N Mean Std Dev Minimum Maximum
2005 791 35.2934 22.2409 0.0000 98.5900
Table 5 Pearson correlation coefficient of variables
INDN INDR BLK FBL CTC PLG SIZE LEV RET FCF BNS G ROA Q ADJQ
0.97837 0.05247 0.01674 0.10813 -0.261 -0.1471 -0.04621 -0.01125 0.14198 0.16024 0.0214 0.17389 0.21395 0.15416
INDN 1
<.0001 0.0021 0.3266 <.0001 <.0001 <.0001 0.0067 0.5097 <.0001 <.0001 0.2099 <.0001 <.0001 <.0001 0.97837 0.01732 -0.00346 0.06863 -0.26299 -0.17697 -0.03679 -0.01464 0.14495 0.16374 0.01866 0.17318 0.21529 0.15561 INDR
<.0001
1
0.3102 0.8391 <.0001 <.0001 <.0001 0.031 0.3911 <.0001 <.0001 0.2741 <.0001 <.0001 <.0001
0.05247 0.01732 0.45419 0.40865 0.03378 0.31887 -0.0133 -0.01723 0.11057 0.07622 0.06722 0.1748 0.13214 0.14655 BLK
0.0021 0.3102
1
<.0001 <.0001 0.0477 <.0001 0.4357 0.3126 <.0001 <.0001 <.0001 <.0001 <.0001 <.0001 0.01674 -0.00346 0.45419 -0.00115 -0.01062 0.34877 -0.06106 -0.01291 0.1113 0.06101 0.00722 0.12966 0.15002 0.14559 FBL
0.3266 0.8391 <.0001
1
0.9462 0.5336 <.0001 0.0003 0.4493 <.0001 0.0003 0.6722 <.0001 <.0001 <.0001 0.10813 0.06863 0.40865 -0.00115 -0.07512 0.15595 0.00939 -0.01411 0.06244 0.0511 0.03961 0.05849 0.06709 0.05952 CTC
<.0001 <.0001 <.0001 0.9462
1
<.0001 <.0001 0.582 0.4082 0.0002 0.0027 0.0202 0.0006 <.0001 0.0005 -0.261 -0.26299 0.03378 -0.01062 -0.07512 0.19028 0.18457 0.03405 -0.09981 -0.12922 -0.02739 -0.1472 -0.1649 -0.12777 PLG
<.0001 <.0001 0.0477 0.5336 <.0001
1
<.0001 <.0001 0.046 <.0001 <.0001 0.1084 <.0001 <.0001 <.0001 -0.1471 -0.17697 0.31887 0.34877 0.15595 0.19028 0.17306 -0.02898 0.00887 0.05415 0.08635 0.0556 0.00387 -0.00559 SIZE
<.0001 <.0001 <.0001 <.0001 <.0001 <.0001
1
<.0001 0.0895 0.6034 0.0015 <.0001 0.0011 0.8207 0.7432 -0.04621 -0.03679 -0.0133 -0.06106 0.00939 0.18457 0.17306 0.05862 -0.37422 -0.092 0.06929 -0.4087 -0.23762 -0.2482 LEV
0.0067 0.031 0.4357 0.0003 0.582 <.0001 <.0001
1
0.0006 <.0001 <.0001 <.0001 <.0001 <.0001 <.0001 -0.01125 -0.01464 -0.01723 -0.01291 -0.01411 0.03405 -0.02898 0.05862 -0.08333 -0.03016 0.00828 -0.09501 -0.0197 -0.02516 RET
0.5097 0.3911 0.3126 0.4493 0.4082 0.046 0.0895 0.0006
1
<.0001 0.0771 0.6275 <.0001 0.2483 0.1403 0.14198 0.14495 0.11057 0.1113 0.06244 -0.09981 0.00887 -0.37422 -0.08333 0.25104 0.05358 0.81172 0.33115 0.35022 FCF
<.0001 <.0001 <.0001 <.0001 0.0002 <.0001 0.6034 <.0001 <.0001
1
<.0001 0.0017 <.0001 <.0001 <.0001
INDN INDR BLK FBL CTC PLG SIZE LEV RET FCF BNS G ROA Q ADJQ 0.16024 0.16374 0.07622 0.06101 0.0511 -0.12922 0.05415 -0.092 -0.03016 0.25104 0.09646 0.35103 0.45073 0.43842 BNS
<.0001 <.0001 <.0001 0.0003 0.0027 <.0001 0.0015 <.0001 0.0771 <.0001
1
<.0001 <.0001 <.0001 <.0001 0.0214 0.01866 0.06722 0.00722 0.03961 -0.02739 0.08635 0.06929 0.00828 0.05358 0.09646 0.13179 0.07891 0.0835 G
0.2099 0.2741 <.0001 0.6722 0.0202 0.1084 <.0001 <.0001 0.6275 0.0017 <.0001
1
<.0001 <.0001 <.0001 0.17389 0.17318 0.1748 0.12966 0.05849 -0.1472 0.0556 -0.4087 -0.09501 0.81172 0.35103 0.13179 0.4138 0.44 ROA
<.0001 <.0001 <.0001 <.0001 0.0006 <.0001 0.0011 <.0001 <.0001 <.0001 <.0001 <.0001
1
<.0001 <.0001 0.21395 0.21529 0.13214 0.15002 0.06709 -0.1649 0.00387 -0.23762 -0.0197 0.33115 0.45073 0.07891 0.4138 0.97644 Q
<.0001 <.0001 <.0001 <.0001 <.0001 <.0001 0.8207 <.0001 0.2483 <.0001 <.0001 <.0001 <.0001
1
<.0001 0.15416 0.15561 0.14655 0.14559 0.05952 -0.12777 -0.00559 -0.2482 -0.02516 0.35022 0.43842 0.0835 0.44 0.97644
ADJQ
<.0001 <.0001 <.0001 <.0001 0.0005 <.0001 0.7432 <.0001 0.1403 <.0001 <.0001 <.0001 <.0001 <.0001
1
Table 6 preliminary regression analysis results
The table reports the estimates of coefficients of the preliminary regressions: equation (1) and equation (2). The sample consists of 3436 public-listed firm data from 2002 to 2006. The dependent variable is Tobin’s Q. Variable definitions are in Table 1. In parentheses are p-value and significance at 10 percent, 5 percent and 1 percent is indicated by *, **, and ***, respectively.
Variable (1A) (1B) (1C) (1D) (1E) (2) 9.48046 4.47635 8.0946 12.79928 8.45278 -0.43987 Intercept
***(<.0001) ***(0.0064) ***(<.0001) ***(<.0001) *(0.0849) (0.9361)
5.83749 5.09659
-0.79256 -2.56133 -2.89367 -1.31252 -1.18351 -3.16944 SIZE
(0.3102) ***(0.0014) ***(0.0004) *(0.0922) (0.1235) ***(0.0002) -0.44077 -0.42397 -0.39476 -0.42591 -0.42266 -0.40967 LEV ***(<.0001) ***(<.0001) ***(<.0001) ***(<.0001) ***(<.0001) ***(<.0001) 0.0094 0.00903 0.00848 0.00931 0.0094 0.00862 RET (0.2393) (0.2566) (0.287) (0.2444) (0.2404) (0.278) 0.01097 0.0445 0.00627 0.00503 0.01339 0.04145 FCF (0.944) (0.7752) (0.9679) (0.9743) (0.9318) (0.7901) 1.62215 1.64282 1.63582 1.64342 1.64512 1.61433 BNS ***(<.0001) ***(<.0001) ***(<.0001) ***(<.0001) ***(<.0001) ***(<.0001) 0.02075 0.0194 0.0223 0.02047 0.02022 0.02118 G (0.1063) (0.1297) *(0.0817) (0.1114) (0.1161) *(0.0974) 1.9319 1.86937 1.97432 1.99211 1.98185 1.82843 ROA ***(<.0001) ***(<.0001) ***(<.0001) ***(<.0001) ***(<.0001) ***(<.0001) N 3436 3436 3436 3436 3436 3436 Adj R-square 0.2955 0.3005 0.3004 0.2941 0.294 0.3047
Table 7 regression analysis of governance mechanism interaction test and firm characteristic dependence test
The table reports the estimates of coefficients of the governance mechanism interaction test in equation (8) and firm characteristic dependence test in equation (9) and (10). The sample consists of 3436 public-listed firm data from 2002 to 2006. The dependent variable is Tobin’s Q. MAXIB denotes the substitutes effect of independent director and domestic blockholder, MINIB denotes the complementary effect of independent director and domestic blockholder, MAXIF denotes the substitution effect of independent director and foreign blockholder, MINIF denotes the complementary effect of independent director and foreign blockholder, SMALL denotes small firms, LARGE denotes large firms, LOWGEAR denotes low-leveraged firms, and HIGHGEAR denotes high-leveraged firms. Other variable definitions are in Table 1. In parentheses are p-value and significance at 10 percent, 5 percent and 1 percent is indicated by *, **, and ***, respectively.
***(0.0002) HIGHGEAR×MAXIB
**(0.0282)
2.42652 -0.72889
LARGE×MINIF
*(0.0862) HIGHGEAR×MAXIF
(0.443)
Table 8 robust Test
The table reports the robust test of the governance mechanism interaction test in equation (8) and firm characteristic dependence test in equation (9) and (10) by incrementally controlling for board size (BRD). The sample consists of 3436 public-listed firm data from 2002 to 2006. The dependent variable is Tobin’s Q. MAXIB denotes the substitutes effect of independent director and domestic blockholder, MINIB denotes the complementary effect of independent director and domestic blockholder, MAXIF denotes the substitution effect of independent director and foreign blockholder, MINIF denotes the complementary effect of independent director and foreign blockholder, SMALL denotes small firms, LARGE denotes large firms, LOWGEAR denotes low-leveraged firms, and HIGHGEAR denotes high-leveraged firms. Other variable definitions are in Table 1. In parentheses are p-value and significance at 10 percent, 5 percent and 1 percent is indicated by *, **, and ***, respectively.
Variable Model B Variable Model C Variable Model D
***(0.0001) HIGHGEAR×MAXIB
**(0.0207)
2.37328 -0.73453
LARGE×MINIF
*(0.0934) HIGHGEAR×MAXIF
(0.4395)
Figure 1 valuation effect of independent director
This figure reports the mean residual Tobin’s Q for firms which have accommodated the new regulation of independent director (DIND=1) and firms have not accommodate (DIND=0). Residual Tobin’s Q is derived from equation (3). The sample consists of 3436 public-listed firm data from 2002 to 2006.
-2 -1 0 1 2 3
Q
DIND Mean of residual Tobin's Q -1.645475121 2.943690882
0 1
Figure 2 valuation effect of blockholder
This figure reports the mean residual Tobin’s Q for firms with different level of percentage shareholding by domestic institutional investors (DBLK). Residual Tobin’s Q is derived from equation (4). The sample consists of 3436 public-listed firm data from 2002 to 2006.
-4 -2 0 2 4 6 Q 8
DBLK Mean of residual Tobin's Q -3.45384531 -2.95080581 2.312459088 6.823928413
0 1 2 3
Figure 3 valuation effect of foreign blockholder
This figure reports the mean residual Tobin’s Q for firms with lower or higher than 5 percent of share hold by foreign institutional investors (DFB equals to 0 or 1 respectively). Residual Tobin’s Q is derived from equation (5). The sample consists of 3436 public-listed firm data from 2002 to 2006.
-4 -2 0 2 4 6 Q
DFB Mean of residual Tobin's Q -2.410605467 5.237446595
0 1
Figure 4 conditional valuation effect of independent director and blockholder
This figure reports the conditional mean residual Tobin’s Q for firms with different level of board independence and domestic blockholder. Residual Tobin’s Q is derived from equation (6). For instance, the left pillar represents firms with lowest domestic blockholder and weak board independence. The sample consists of 3436 public-listed firm data from 2002 to 2006.
-10
Figure 5 conditional valuation effect of independent director and foreign blockholder
This figure reports the conditional mean residual Tobin’s Q for firms with different level of board independence and foreign blockholder. Residual Tobin’s Q is derived from equation (7). For instance, the left pillar represents firms with lowest foreign blockholder and weak board independence. The sample consists of 3436 public-listed firm data from 2002 to 2006.
-4
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