Chapter 3. Research Method
2. Other Control Variables
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Koh (2009) and Ban (2007), have found that firm performance is better for family firm.
On the other hand, Westhead and Cowling (1998), Anderson and Reeb (2003), Nam and Moon (2007) and Park and Lee (2011) have said that non-family firms have higher performance. Therefore, it was difficult to predict which type of company would be higher before the research was conducted.
2. Other Control Variables
1) Board of Director Member ( BDM )
Since the firm performance is judged to be influential depending on the size of the board of directors, it is set as a variable. The size of the board is defined by the number of members within the board.
2) Outside Director Ratio ( OUT )
The ratio of outside directors in the board also influenced the firm performance, it is set as a variable.
3) Exist Audit Committee ( AUDIT )
It is a variable indicating whether an audit committee is established separately by the board. If the audit committee is installed and operated that is indicated as '1', but if there is not installed audit committee, then it is indicated as '0'. As for the AUDIT, the previous researcher Chtourou et al. (2001) reported that the more effective the management of the board and the audit committee, the less the profit adjustment of the company. In other words, the presence or absence of the audit committee could affect the firm performance, and the existence of the audit committee expects the firm performance to have a positive effect.
4) Family and Relative Parties Ratio ( FSHRP )
The ratio of family members and related parties in the board of directors could have an effect on firm performance, hence it is set as a variable.
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5) Ultimately Shareholder’s Stake ( USH )
This is set as a variable, because it indicates that shareholding of family member and family related stakeholders. According to previous researchers, wheather the family dominant firms have higher performance is in conclusive. For example, Stein (1989) suggests that family dominant firms with longer-term perspectives on investment will increase profits by avoiding managers' short-sighted decision making. But, Burkart et al. (1997) found that family governance negatively impacts corporate value in Israeli firms.
6) Foreign Ownership Ratio ( FOR )
As foreign shareholders, foreign investors are the main players in monitoring the activities of management. As foreign investors’ stakes are higher, the agent problem is reduced. Therefore, there is a positive relationship between foreign ownership and firm performance. The foreign ownership ratio (FOR) is calculated as the rate of shareholding held by the foreign investor. In this study, we predicted that the FOR related variable of foreign ownership affects firm performance positively.
7) Relative Parties Transaction ( RPT)
This is set as a variable, because the factors of transactions with the largest shareholder and related parties influence the governance structure and therefore affect the firm performance. In this paper, 1 is indicated when there is a transaction, and 0 is indicated when there is no transaction.
8) Book to Market Value ( MB )
The market-to-book value (MB) is used as a proxy for firm value. The market value of an enterprise is calculated as the sum of the market value of its equity (market cap) and the book value of its liabilities. The firm's book value is calculated as the book value of total assets.
=> = $?+4+29@09: Aℎ2-* × Aℎ2-* ,-0C*
1.+23 <280+23
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9) Growth Ratio ( GROW )
Growth of firm is expected to be positively related to firm performance. The firms with a high potential for growth are expected to be highly valued by the market, so it is set a variable.
D#$E = A23* D-.F+ℎ #2+* = (1ℎ04 H*2-IA23* − K24+ H*2-IA23*)
K24+ H*2-IA23* × 100
10) Asset Turnover Ratio ( TURN )
A high turnover rate in an enterprise means that the efficiency of the invested capital is high. If it is high that indicates the assets are being used efficiently, while a low number indicates a large number of unnecessary assets or an inefficient use of assets.
Total assets turnover is calculated as sales divided by total assets.
1M#) = A23*4
1.+23 %44*+4 × 100
11) Firm Size ( SIZE )
It is set a variable, because generally the larger size of firm has a greater possibility that increase the market competitiveness. In this paper, shall use the natural logarithm of total assets to control the effect of firm size on firm performance.
ANO; = log ( 1.+23 %44*+4 )
12) Research and Development Expense Ratio ( RND )
The ratio of research and development expenditure (RND) influences business growth and performance by investing in the future of the firm, so it is set a variable.
Hirschey (1982) argued that investment in research and development costs and advertising expenditure had a positive effect on firm's market value, Cho and Chung (2001) and An et al. (2002) argue that R&D investment contributes to corporate performance improvement over 3-7 years. Therefore, we expected RND and firm performance to have a positive relationship. This ratio is the ratio of research and
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13) Leverage Ratio ( LEV )
Leverage (LEV) is calculated at the rate of total liabilities divided by total assets.
Song, J. (2016) argues that firm performance can have positive or negative effects on firm performance according to the adequacy ratio of capital procurement. In other words, if the leverage increases, corporate creditors may increase the risk burden and act as an incentive for the management surveillance activities to minimize their risk, which may have a positive impact on firm performance due to the reduction of agency costs.
K;X = 1.+23 K02Y30+0*4
1.+23 %44*+4 × 100
14) Industry Dummy ( IND )
It is used as a variable because there is a high possibility that the difference in firm performance of each industry exist.
15) Year Dummy ( YD )
According to the study period of this paper, the yearly pile is used from 2013 to 2017 for 5 years.
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Table 6 Summarize the Definition and Measurement of Variables Variables Predicted Sign Definition and Measurement Dependent
ROA1 Net Income to Total Assets; net income divided by total assets
ROA2 Operating Profit on Assets; operating profit divided by total assets
ROE Return on Equity; net profit divided by total capital Independent ; Explanatory
CGLV + 7 is defined as the highest evaluated value and 1 is defined as the lowest evaluated value OUT ? Rate of Number of Outside Director in Board
AUDIT + Exist Audit Committee
FSHRP ? Family member and Relative Parties Ratio in Board USH ? Ultimately Shareholder’s Stake; it indicates shareholding
of family member and family related stakeholders
FOR + Foreign Ownership Ratio
RPT - Related Parties Transaction
Firm Specialization Related
MB + Book to Market Value
GROW + Sale Growth Ratio
TURN + Assets Turnover Rate; calculated as sales divided by total assets
SIZE + Firm size; natural logarithm of total assets
RND + Research and Development Ratio; the ratio of research and development expenses divided by total sales
LEV ? Leverage Ratio; the rate of total liabilities divided by total assets
IND Industry dummy; divided in 15 industries
YD Year dummy; from 2013 to 2017, for 5 years
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This paper will focus on listed companies in the KOSPI market from 2013 to 2017 while excluding the finance industry to improve comparability. This is because, the financial industry in Korea is a regulated industry, and is excluded from the sample because it is very different from non - financial sector companies in terms of financial, ownership structure and management behavior. Firms used in this research are firms whose accounting data are published in annual financial statements and has not changed its settlement period during the specified sample period in December. The data required for the analysis are extracted from the KIS-Value database provided by the NICE Information Service9. The existence of family executives, ownership stake, and the ratio of outside directors are analyzed by the Financial Supervisory Service Electronic Disclosure System (FSS-DART)10. The corporate governance index is based on the corporate governance rating announced by the Korea Corporate Governance Service (CGS). As a result, 597 companies were selected as the sample companies and 2,792 data were used for 5 years.
Table 7 Sample Selection
Original Observations 3,671
Delete: Financial Sample (725)
Incomplete data (154)
Final Observations 2,792
9 NICE Information Service Co.,Ltd. was founded by merging National Information & Credit Evaluation Inc., and Korea Information Service, Inc. in November 2010. As living history of the Korean infrastructure sector, the two companies has led the industry development before the merger. NICE Information Service Co.,Ltd. provides credit bureau (CB) and corporate intelligence services, based on its extensive credit rating and analysis experiences, the largest credit information database in Korea, accumulated know-how, excellent professionals and market reputation.
10 The Financial Supervisory Service (FSS) was established on January 2, 1999, as Korea’s fully integrated supervisory authority under the Act on the Establishment of Financial Supervisory Organizations (the
“Establishment Act”) that the National Assembly approved on December 29, 1997. The FSS conducts prudential supervision of banks, nonbank financial companies, financial investment services providers, and insurance companies in order to ensure they comply with certain safety and soundness guidelines, standards, requirements, and safeguards. In addition, the FSS performs capital market supervision, consumer
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Panel A : Sample by Year ( The firms listed on KOSPI, except the finance industry )
Year 2013 2014 2015 2016 2017 Total
Freq. 537 544 550 568 593 2,792
Percent 19.23 19.48 19.7 20.34 21.24 100
Panel B : Classifying Industry, Family or Non-Family
Industry Num. of Firm Non-Family Family
no. % no. %
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