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II. Literatures and Hypotheses
The capital market situation has been more disordered after the Asia monetary crush in 1997, the financial crisis events of Taiwan listed companies in last-half 1998 to market investors, and American large enterprise fraud cases in the end of 2001, these events not only make the investors lose their confidence in plunging their money into investment activities but also let the official authorities and investors realize that the sound corporate governance mechanism is one of the key factors to stabilize the capital market and appeal international funds. According to the report by McKinsey & Company in 2002, it indicates that many institutional investors have recognized that corporate governance is an important indicator for investment decisions. Following the huge damage caused by loosely internal corporate governance, people intend on discuss the related issues, the problem seems more serious in emerging markets. Klapper and Love (2003) explore the determinants of firm level governance and find that governance is correlated with the extent of the asymmetric information and contracting imperfections that firms face. They also find that firm-level corporate governance provisions matter more in countries with weak legal environments. Finally, they provide evidence that better corporate governance is highly correlated with better operating performance and market valuation.
One of the classic firm level governance issues is discussing the relationship of firm level governance and equity prices, such as Gompers, Ishii and Metrick (2003), they use 24 distinct corporate-governance provisions for a sample of about 1500 firms per year during the 1990s to build a Governance Index, and find that corporate governance is strongly correlated with stock returns, and the weak shareholder rights caused poor performance in the 1990s. They summarize that firms with stronger
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shareholder rights had higher firm value, higher profits, higher sales growth, lower capital expenditures, and made fewer corporate acquisitions. Griffin, Nardari and Stulz (2007) is also a hot issue research by exploring whether investors trade more when stocks have performed well in the past, they get the evidence from 46 Countries to investigating the dynamic relation between market-wide trading activity and returns in 46 markets, and find many stock markets exhibit a strong positive relation between turnover and past returns. Finally, Chung, Elder, and Kim (2010) touch the important issue of corporate Governance and liquidity, they show that companies with better corporate governance generally have greater stock market liquidity as measured by narrower quoted and effective spreads, higher market quality index, smaller price impact of trades, and lower probability of information based trading. They also find that changes in their liquidity measures are significantly related to changes in governance index over time, suggesting that firms can improve stock market liquidity by adopting better governance standards.
Hypothesis 1. The better corporate governance performance would lead to higher trading volume level and lower trading volatility.
We then take a look of some other corporate governance issues which are more concerned in our article, Ting (2009) try to identify whether the corporate governance mechanism is a major determinant for IPO firms which intend to attract the institutional investors, the result indicates that firms with higher blockholder shareholdings, more control shareholders on the board, and better information disclosure attract institutional shareholdings despite of the poor performance, because more control shareholders on the board could loosen expropriation and draw more institutional shareholdings. And after the rule's requiring setting the independent
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directors, the influence of corporate governance on institutional investors does change, however, the effect of the independent directors on the institutional investors exists only when the interaction term of control shareholders on the board and independent directors is concerned in the model. In this article, we consider shareholders on the board and independent directors as two corporate governance variables to observe the investors’ behaviors.
We think exploring the corporate governance issue by investors’ view is interested, as shown by Hsiao (2008), it indicate that among previous studies regarding the issue of board of directors, the majority of researchers focused their studies on the board’s operations from firm’s perspective, however, the relationship between board effectiveness and investor’s behavior is relatively unexplored. Therefore, they examine whether the investment behavior of the investors will be influenced by the effectiveness of the board of directors and whether the relationship between effectiveness of the board and investment behavior will be moderated by the type of investors through survey questionnaires. They separate their researched objectives into two groups, which are professional and non-professional, and the result indicate the investors’ perceptions of board effectiveness significantly influence their evaluation, when investors perceive strong-form of the effectiveness of the board, the investors tend to believe the investment risk of the company is lower, they would like to invest larger amount of money and to hold the investment longer. Then, investors’
perceptions of board effectiveness affect the amount of assets they are willing to invest according to different types of the investors, professional investors are willing to invest larger amount than non-professional.
Yang (2008) investigate general and institutional investors’ satisfaction on
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corporate governance for Taiwan listed companies and find the institutional investor's satisfaction is much lower than the general investor's satisfaction. Besides, both general investors (74.8%) and institutional investors (87.1%) are willing to pay a premium for well-governed companies, while the institutional investors pay double percentage than the general investors. Lin, and Lin (2008) investigate investors’
perceptions on corporate governance for Taiwan listed common stock through out questionnaires, and find almost all the investors keep negative views of listed companies’ corporate governance, they also find the relationship between investors’
views and functions of the board, information transparency, and the reliability of controlling shareholders are positive.
Hypothesis 2. The governance variables in ownership structures, firm structures, board structures, audit structures, information transparency, and management style make an impact on investors, especially individual investors.
Behind the satisfactions of different parties and the investors’ views of companies’
corporate governance, we should think about the investors’ perception and conviction to corporate governance mechanism, even if professional fund managers making investment decisions, the bias exist sometimes, not to mention people could put the money in or out the markets depend on complicated factors, the investors’
cognition deficit with corporate governance mechanism is apodeictic, and we could not be sure if investors take the superficial or even wrong perceptions with corporate governance mechanism into consideration while engaged in investment activities, if so, then our estimation based on investors care about corporate governance extent would be null, therefore we assume that people have at least correct cognition with
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corporate governance mechanism here.
There is a study focused on investigating the relationship between corporate governance characteristics and corporate cash holdings of Taiwanese listed companies, and further explores how corporate governance characteristics impact a firm’s value through the value of its cash holdings, Li (2007) shows that board size and insider dominance of the board are important determinants of cash holdings, in addition, the duality of chairman and CEO, insider dominance of the board, percentage of equity ownership held by directors, the ratio of institution stockholdings, family-control of a firm, the divergence between control rights and cash-flow rights all affect the value of a firm’s cash holdings, these findings are consistent with the agency view of cash holdings. That is, managers in the firms with poor corporate governance have more incentive to influence corporate cash policies for their own benefits, and the core agency problem between controlling shareholder and minority shareholders affect the value of cash holdings negatively.
Some others believe corporate governance is the most important factor in affecting companies’ value that executive should pay attentions, Lin (2003) approves the positive effects of corporate governance to firm performance, and firm performance to institutional behavior as well, the paper addresses the importance of corporate governance under poorer economic conditions, higher agency costs, and a more complicated company structure. They believe corporate governance could work effectively when the executives of companies realize the importance of the corporate governance.
Hypothesis 3. The corporate governance mechanism (CG-Index) does affect the investors’ stockholdings.
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