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Securities Listings in 2002, and these regulations make a strict rule setting
independent directors and supervisors for IPO companies, therefore, we examine the sample period only from 2007 to 2011 (5 years) also, expecting to find if governance policies affect investors’ strategy or the changes of investors’ views on corporate governance latest years.
B. Variables
i. Independent Variables
The board of directors is the core mechanism for corporate governance, the board supervises the corporate management and its operation on behalf of all shareholders and asks the management to maximize the firm’s profit, even though there exist arguments on whether separating the CEO and chairman of the board early days, Brickley, Coles, and Jarrell (1997) argue the separation has potential costs, as well as potential benefits, in contrast to most of the previous empirical work, their evidence suggests that the costs of separation are larger than the benefits for most large firms, but the state of separating the CEO and chairman of the board has been deep-rooted in global enterprise culture latest years, so we select our corporate governance variables surrounded by the related variables to board of directors.
The measure of the corporate governance is referring to prior literatures and governance standards of Institutional Shareholder Service (ISS), we sort those governance standards in different categories that are most closely related to our theme, select one to two variables from each category, and conduct six aspects of corporate governance variables including ownership structures, board structures, audit structures,
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firm structures, information transparency, and management style. These variables are showed below, also, for the goal of easily observe, we substitute simpler codes for corporate governance variables in after tables:
1. Ownership structures
Management stockholdings (%) - The management do affect corporate policy tremendously, we define management stockholdings as the percentage of corporate management stockholdings to outstanding shares.
Blockholders’ stockholdings (%) – According to TEJ’s definition, it is defined as the percentage of corporate blockholders’ stockholdings to outstanding shares without the shares held by blockholders who serve as management or supervisors.
Blockholder is defined to the top ten or more than 5% shares holding shareholders in companies, but it is possible that some shareholders holding more than 5% stock are included to the institutional investors, this is a flaw we can’t avoid.
2. Board structures
Board size – The number of board of directors.
3. Audit structures
Independent outside directors – The number of independent outside supervisors in audit committee.
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4. Firm structures
Investments in asset (%) – We define it as the ratio of the sum of long run and short run investments to asset.
5. Information Transparency
Information transparency and disclosure ranking – According to the appraisal made by Securities and Futures Institute from 2003, the information disclosures extent is judged in seven levels which is A++, A+, A, A-, B, C, and C-, we make the digital proxies of these levels to change them into continuous variables, 7 grade substitutes for A++, 6 grade substitutes for A+, …, 1 grade substitutes for C-.
6. Management style
CEO Duality – The CEO serves in the chairman’s position concurrently, we measure it by using a dummy variable, if there is a positional duality, it is represented by 1; if not, 0.
Inside dominance of chairman of the board - The controlling shareholder serves in the chairman’s position concurrently, we measure it by using a dummy variable, if there is a part management, it is represented by 1; if not, 0.
Inside dominance of CEO - The controlling shareholder serves in the CEO’s position concurrently, we measure it by using a dummy variable, if there is a part management, it is represented by 1; if not, 0.
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ii. Dependent Variables
1. Investors’ stockholdings (%) – To explore the investors’ investment strategies, we measure the investors’ ratio of shares holding to a company’s outstanding shares. We separate investors into five types, which are individual, domestic individual, foreign individual, institutional, and foreign institutional investors.
Based on TWSE – Sources of Capital of Listed Companies (by year), the sources of capital of listed companies including government agency, domestic financial institution, domestic corporation, domestic individual etc. are classified into ten types, we define the institutional investors consist of all investors except for domestic individuals and foreign individuals.
2. Trading volumes – To explore whether corporate governance mechanism impacting the trading activities of companies, we pick trading proxies as trading value (million dollars), return (%), turnover ratio (%) to examine the effect; also, we wish to discuss whether corporate governance mechanism mitigating the volatility occurred by the trading activities, so we examine the standard deviation of these variables too.
iii. Controlling Variables
There are some other variables we need to add to our models, as shown by Fama and French (1993), the corporate size is a primary factor to affecting the stock returns, so we take it into account by using corporate asset as proxy when computing the extent of trading behaviors’ impacts; the factor of leverage ratio is under
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consideration too, leverage is quite a decisive factor to affect the firm structure of a company, and firm structure always directly affect the strategies taking by management, shareholders, or investors, we use the ratio of long run and short run debt to asset as proxy.
The past returns probably affecting the investors’ views of a corporation or the liquidity level, as shown by Griffin et al. (2007), market turnover (a liquidity proxy) is strongly and positively related to past returns in many markets, so we bring the returns of past one period and past two periods respectively into the models.
IV. Methodology and Empirical Results
In this section, first we take analyses of descriptive statistics to our researched objectives by illustrating the mean and standard deviation of whole research samples.
Second, in order to diagnose the co-linearity problem among the independent variables, we adopt Pearson correlation test to measure the correlated extent among each variable, and use simple Hausman-Taylor estimator to control for the potentially endogenous explanatory variable.
After examining the relationships among variables, third, we verify Hypothesis 1 by setting an OLS Linear Regression Model between corporate governance variables and investors’ shares holding, and we pay attention to whether there is a difference between 15 and 5 years’ data due to the implement of Information transparency and disclosure ranking. Fourth, we verify Hypothesis 2 by measuring trading volume proxies imported OLS Regression Model again, and then compare the difference between 15 and 5 years’ data. Finally, we utilize the corporate governance variables
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used before to compute the corporate governance score for every sample company called CG-Index here, hereby we examine Hypothesis 3 by adding CG-Index into the model, the results of this test would be sufficient to let us discuss whether a company’s corporate governance extent affect all its investors investment strategies and trading activities.