Controlling Shareholders and Earnings Informativeness - Evidence from Taiwan

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Asia Pacific Management Review 18(1) (2013) xx-xx

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Controlling Shareholders and Earnings Informativeness: Evidence from Taiwan

Jei-FangLewa,*, Shing-Jen Wub

a_{Department of Accounting, National Kaohsiung University of Applied Sciences, Taiwan} b_{Department of Accounting, Soochow University, Taiwan}

Received 10 December 2010; Received in revised form 5 October 2011; Accepted 30 March 2012

Abstract

Taiwanese listed corporations, characterized by a high degree of separation between control rights and cash flow rights, are empirically studied in this research. This study investigates how the separation of cash flow rights from board seat control rights, as distinct from voting rights, affects the informativeness of earnings, as measured by the relationship between returns and earnings. This study extends the extant research by investigating the extent to which the level of disparity between these two rights affects the magnitude of earnings informativeness. Based on an empirical sample of Taiwanese listed corporations, the results indicate that earnings are generally less informative when there is a divergence between board seat control rights and cash flow rights.

Keywords: Earnings informativeness, ownership structure, board seat control rights. 1. Introduction*

Ownership concentration and ineffective corporate governance were two factors that contributed to the Asian financial crisis in 1997 (hereafter referred to as the Crisis) (Prowse, 1998). In particular, areas of concern included concentrated ownership, the dominance of controlling shareholders, separation of control rights and cash flow rights, and the limited protection of minority rights. These problems were particularly acute in countries negatively affected by the Crisis (Claessens et al., 2000). Since the Crisis, there has been increasing investor demand requesting corporate governance reforms in emerging markets (Johnson et al., 2000; Gibson, 2003). Taiwan provides an ideal setting for examining the effectiveness of corporate governance due to the high ownership concentration, weak legal protection for shareholders, deficient law enforcement, and the abundance of family controlled firms (La Porta et al., 1999; Lemmon and Lins, 2003).

However, according to Claessens et al. (2002), regarding their opinion in the Journal of Finance, 2002, the empirical data for Asian countries including Hong Kong, Indonesia, and South Korea all suggested that the divergence of ownership and control rights had a negative correlation with firm value, but this trend was not as evident in the empirical results on Taiwan. Moreover, the level of divergence demonstrated by Taiwanese corporations was generally lower than that shown by corporations in Singapore, Japan, and Indonesia. They stated:

*_{Corresponding author: jeifang_lew@hotmail.com} **_{DOI: 10.6126/APMR.2013.18.1.06}

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K.A. Hendartoa, B.M. Purwantob / Asia Pacific Management Review 18(1) (2013)xx-xx

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(B) – (A) 29.16% - 13.49% = 15.67% Deviation between control seats and control holdings (via proxy contests)

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Table 1. Sample selection and distribution Panel A: Sample selection procedure

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Year 2000-2009

Initial Sample (Taiwanese listed firm-year observations)

5,570 ( 46) ( 4) (862) ( 64) 4,594 Subtract:

Banking and insurance industries

Sales or book value of equity are less zero Missing data

Outliers Final sample

Panel B: Sample distribution by year and industry

Industry ₂₀₀₀ _{2001 2002 2003 2004 2005 2006 2007 2008 2009} Total Number Percent 11 Cement ₆ ₆ ₆ ₆ ₆ ₇ ₇ ₇ ₇ ₇ ₆₅ _1.41 12 Food ₉ ₉ ₁₁ ₁₄ ₁₄ ₁₅ ₂₀ ₂₀ ₂₀ ₁₉ ₁₅₁ _3.29 13 Plastics ₁₄ ₁₆ ₁₅ ₁₆ ₁₆ ₁₉ ₂₀ ₂₁ ₂₁ ₂₁ ₁₇₉ _3.90 14 Textiles ₁₈ ₂₀ ₂₄ ₂₅ ₂₆ ₂₇ ₃₉ ₄₁ ₃₈ ₃₆ ₂₉₄ _6.40 15 Electric and machinery 11 10 16 17 23 24 32 32 33 31 229 4.98 16 Electrical appliance and cable 7 7 7 7 7 8 12 12 12 12 91 1.98 17 Chemical ₁₂ ₁₃ ₁₄ ₁₉ ₂₁ ₂₃ ₂₇ ₂₉ ₃₀ ₃₃ ₂₂₁ _4.81 18 Glass and ceramics 3 3 3 3 4 4 4 4 4 3 35 0.76

19 Paper and pulp ₅ ₅ ₄ ₄ ₅ ₆ ₇ ₇ ₇ ₇ ₅₇ _1.24

20 Steel and iron ₁₀ ₈ ₉ ₁₁ ₁₂ ₁₅ ₂₂ ₂₂ ₂₁ ₂₀ ₁₅₀ _3.27

21 Rubber ₆ ₇ ₇ ₈ ₈ ₈ ₉ ₁₀ ₉ ₁₀ ₈₂ _1.78 22 Automobile ₂ ₄ ₄ ₄ ₄ ₅ ₅ ₅ ₅ ₄ ₄₂ _0.91 23 Electronics ₉₈ ₁₃₃ _{167 192 219 236 285 301 313 304} ₂₂₄₈ _48.93 25 Construction ₁₂ ₁₂ ₁₈ ₁₁ ₁₉ ₂₂ ₃₀ ₃₁ ₃₀ ₃₀ ₂₁₅ _4.68 26 Transportation ₁₀ ₁₁ ₁₁ ₁₂ ₁₄ ₁₄ ₁₆ ₁₇ ₁₇ ₁₇ ₁₃₉ _3.03 27 Tourism ₂ ₂ ₂ ₂ ₂ ₂ ₃ ₄ ₄ ₄ ₂₇ _0.59 29 Department stores ₆ ₇ ₈ ₉ ₉ ₉ ₉ ₈ ₉ ₉ ₈₃ _1.81 99 Other ₂₁ ₂₄ ₂₆ ₂₇ ₂₇ ₃₁ ₃₂ ₃₂ ₃₃ ₃₃ ₂₈₆ _6.23 Total ₂₅₂ _{297 352 387 436 475 579 603 613 600 4594 100%}

Table 2. Descriptive statistics (640 firms, 4594 firm-year observations)

Variables Mean Std. dev. Q1 Median Q3 Min Max

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DEV (Deviation) 7.28 20.70 1.855 3.04 5.76 0.48 574.25

Voting rights (%) 29.43 16.49 16.51 27.65 40.43 0.63 92.65

Board seat control rights (%) 64.84 21.72 50.00 62.50 81.82 9.09 100

Cash flow rights (%) 26.46 21.12 10.34 21.38 37.06 0 100

Panel B: Other variables in the models

R (%) 13.95 0.513 -24.50 5.34 42.64 -84.91 199.51 Earn 1.70 3.07 0.21 1.23 2.86 -9.38 33.26 ∆Earn -0.15 2.02 -0.90 -0.04 0.68 -12.51 16.11 Size 22.84 1.31 21.92 22.65 23.55 18.84 27.65 Growth 1.27 1.70 0.62 0.91 1.43 0.09 34.45 Loss 0.193 0.39 0 0 0 0 1 Lev 1.04 1.12 0.48 0.82 1.24 0.01 18.04

Net Worth (in millions) 13,09

9 36,912 1,826 3,665 8,303 27.478 509,138

Market Value (in millions) 18,70

8 76,979 1,562 3,510 9,259 56.070 1,523,300 Total Assets (in millions) 25,34

0 64,516 3,318 6,840 16,899 152.44 1,021,945 Variables definition: DEV is the calculated multiple of board seat control rights over cash flow rights. Voting rights is the procedure of identifying ultimate owners used in La Porta et al. (1999). Board seat control rights are the ratio of board members controlled by the ultimate owners to board size. Cash flow rights are the cash flow right held by the controlling shareholder. R is measured by the cumulative 12-month raw stock return until four months after the end of fiscal year t. Earn is earning per share (before extraordinary items) for fiscal year t. ∆Earn is the change in Earn. Size is the size of firm which is measured as natural log of total assets at the end of year t-1. Growth is M/B ratio computed as the market value of equity/book value of equity. Loss is loss incidence which equals 1 if firm’s earnings before extraordinary items are less than 0, and 0 otherwise. Lev is measured as total liability divided by total equity at the end of year t.

Table 3. Relationship between earnings and returns dependent on the level of Divergence between board seat control rights and cash flow rights

Board seat control right/Cash flow

rights (DEV) # of firm-year observations

Correlation between earnings and returns All 4594 0.18242 0.00-0.96 231 0.24369 0.97-1.85 917 0.19894 1.86-3.04 1144 0.15737 3.05-5.78 1152 0.15724 5.79-20.08 920 0.12822 >20.09 230 0.12613 Notes:

1. All correlations (Pearson) between annual accounting earnings per share (EPS) and stock returns, and the earnings coefficients from the regression of stock returns on accounting earnings per share, are significant at the 0.001 level or better.

2. The six divergence groups are categorized according to the percentile of 5%, 25%, 50%, 75% and 95% of DEV distribution.

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Table 4. Pearson correlation analysis

Variables 1 2 3 4 5 6 7 8 1. R 2. Earn 0.173*** 3. ∆Earn 0.345*** _0.273*** 4. DEV -0.046*** _-0.010 _-0.010 5. Size 0.018 0.149*** _-0.009 _0.200*** 6. Growth 0.053*** _0.079*** _0.016 _0.057*** _-0.045*** 7. Loss -0.178*** _-0.530*** _-0.241*** _0.033** _-0.062*** _0.093*** 8. Lev -0.025* _-0.205*** _-0.002 _-0.003 _0.182*** _0.209*** _0.220*** Notes:

1. Variables definition: R is measured by cumulative 12-month raw stock return until four months after the end of fiscal year t. Earn is earning per share (before extraordinary items) for fiscal year t. ∆Earn is the change in Earn. DEV is the calculated multiple of board seat control rights over cash flow rights. Size is the size of firm which is measured as natural log of total assets at the end of year t-1. Growth is M/B ratio computed as the market value of equity/book value of equity. Loss is loss incidence which equals 1 if firm’s earnings before extraordinary items are less than 0, and 0 otherwise. Lev is measured as total liability divided by total equity at the end of year t.

2. ***, **, and * indicate significance at the 1%, 5%, and 10% levels for the two-tailed tests, respectively. Table 5. The Effect of Divergence between Board Seat Control Rights and Cash Flows Right on the Earnings Informativeness (n=4594)

Variables Pred. Sign Model (1) Model (2)

Earn ₍+ 0.0689_2.68)*** -0.0024 _{(-0.08 )} EarnDEV － -0.0214** -0.0171 * (-2.00) (-1.43 ) ΔEarn + 0.4460 *** (17.34 ) ΔEarnDEV － -0.0280 ** (-1.73 ) EarnSize ? -0.0180 -0.0065 (-1.15) (-0.39 ) ΔEarnSize ? -0.0872 _{(-5.66 )}*** EarnGrowth ? -0.0088 0.0912 *** (-0.41) ( 3.29 ) ΔEarnGrowth ? -0.1462 *** (-5.67 ) EarnLoss + 0.0843*** 0.0649 *** ( 4.13) ( 2.50 ) ΔEarnLoss + -0.1080 *** (-4.81 ) EarnLev ? 0.0701*** 0.0611 * ( 3.21) ( 1.86 ) ΔEarnLev ? 0.0128 ( 0.48 )

COEF. Test (F-test)

EarnDEV+ΔEarnDEV F-value=6.08**

Highest VIF 3.14093 4.01885

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Model F 13.54 (p<.001) 43.17 (p<.001)

Notes:1. The Huber-White heteroscedasticity-consistent robust standard errors (Rogers, 1993, generalizing White 1980) adjustment procedure is used to estimate the reported t-statistics (in parentheses).

2. Model specification: Model (1) 4 , 0 1 , 2 , , , , , 1 k i t i t i t i t k i t i t i t k

R  Earn  Earn DEV  Earn X 

        Model (2) 4 4 , 0 1 , 2 , , 3 , 4 , , , , , , , 1 1 k k i t i t i t i t i t i t i t k i t i t k i t i t i t k k

R  Earn Earn DEV  Earn  Earn DEV Earn X  Earn X 

                 3. Variables definition: t i R_,

= firm i’s cumulative 12-month raw stock return until four months after the end of fiscal year t

t i

Earn,_{= firm i’s earning per share (before extraordinary items) for fiscal year t} t

i

DEV_,

= The ratio of board seat control rights over cash flows rights of the largest ultimate owner of firm i

, k i t

X

= vector of control variables, k=1,2 , 3, and 4

1 , i t

X

: Sizei,t = size of the firm, natural log of firm i’s total assets at the end of year t-1

2 , i t

X

: Growthi,t= M/B ratio computed as the market value of equity/book value of equity

3 , i t

X

: Lossi,t = 1 if firm i’s earnings before extraordinary items are less than 0, and 0 otherwise

4 , i t

X

: Levi,t = firm i’s total liability divided by total equity at the end of year t

4. ***, ** and * respectively indicate significance levels at the 1%, 5%, and 10% (one-tailed for the coefficients with predicted sign, and two-tailed otherwise).

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Table 6. Additional Test: Endogeneity Concern when Controlling Shareholders’ Control exceeds Ownership (2SLS)

Panel A: The empirical results of Stage 2 (Model (1) and Model (2)) Panel B: The empirical results of the Stage 1 (Model (3))

Variables Pred. Sign Model (1) Model (2) Variables Pred. Sign vs. Model (1) vs. Model (2)

Earn + 0.0228_{( 6.67)}*** 0.0197_{( 3.91)}*** Pyramid + 14.4335_{( 4.63)}*** 6.3248_{( 10.11)}*** EarnDEV － -0.0014_(-3.49)*** -0.0036_(-3.42)*** Cross + 6.3401_{( 2.19)}** 2.2322₍_3.8)*** ΔEarn + 0.0688_(17.29)*** Size ? 6.1847_(5.72)*** 2.5251_(11.60)*** ΔEarnDEV － -0.0001 _(-0.15) Growth ? 4.5160_{( 5.28)}*** 0.4838_{( 2.79)}*** EarnSize ? -0.0001 0.0001 _{( 0.04)} _{( 0.11)} SE ? 0.5051 0.52 _{( 0.88)} _{( 0.11)} ΔEarnSize ? -0.0108*** SE2_? 0.0020 -0.0008 (-5.90) ( 0.17) (-0.33) EarnGrowth ? -0.0015_(-2.11)** -0.0001 _(-0.10) ΔEarnGrowth ? -0.0037_(-4.14)*** EarnLoss + 0.0470_{( 4.88)}*** 0.0391_{( 4.54)}*** ΔEarnLoss + -0.0457_(-6.78)*** EarnLev ? 0.0076_{( 4.73)}*** 0.0069_{( 3.76)}*** ΔEarnLev ? -0.0001_(-0.08)

EarnDEV+ΔEarnDEV F-value=28.62***

Adj. R2_40.99%_50.12% _12.39% _41.12%

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Notes: 1. The variables of Model (1) and Model (2) are the same as for Table 5. The variables definition in Model (6) is as follows: Pyramid is equal to 1 if firm has stock pyramids, and 0 otherwise. Cross is equal to 1 is firm has cross-holding, and 0 otherwise. SE is measured as the standard deviation of monthly stock return of lagged five-years. SE2 is measured as squared term of SE.

2. ***, ** and * respectively indicate significance levels at the 1%, 5%, and 10% (one-tailed for the coefficients with predicted sign, and two-tailed otherwise). Table 7. Additional Test: Tests for Sub-sample Depends on the Ultimate Control Type

Variables Pred. _Sign _ModelGroup 1: Family _{(1) Model}_{(2) Model}Group 2: Mutual _{(1) Model}_{(2) Model}Group 3: Manager _{(1) Model}_{(2) Model}Group 4: Government _{(1) Model}₍₂₎

Earn + 0.1248 _{( 2.97)}*** 0.01354 0.1215_{( 0.30)} _{( 1.51)}* 0.08327 _{( 0.94)} -0.0195 _{(-0.35 )} -0.05045 _{(-0.80 )} -0.1158 _(-0.24) -0.2829 _{(-0.47 )} EarnDEV － -0.0563 *** -0.03708** 0.7629 0.04585 -0.0440 ** -0.04598** 0.0533 0.06204 (-3.41) (-2.05) ( 0.37) ( 0.88) (-1.97 ) (-1.82 ) ( 0.21) ( 0.22) ΔEarn + 0.52896_(12.57)*** 0.46149_{( 4.94)}*** 0.47536_{( 9.70)}*** 0.57739 _{( 1.09)} ΔEarnDEV － -0.05229_(-2.55)*** -0.04872 _(-0.74) -0.05436_{(-1.49 )}* -0.30139 _{(-1.02 )} EarnSize ? -0.0272 -0.00627_(-1.31) _(-0.33) 0.3189_{( 1.08)} 0.00639_{( 0.12)} 0.0073 _{( 0.22 )} 0.00691_{( 0.18)} 0.2715 0.2453_{( 0.99)} _{( 0.67)} ΔEarnSize ? -0.06508_(-3.74)*** 0.03447 _{( 0.68)} -0.15333_{(-4.46 )}*** -0.21658 _{(-0.50 )} EarnGrowth ? -0.0312 _(-0.94) 0.08298_{( 2.55)}*** 0.8685 -0.05663 _{( 0.16)} _(-0.51) 0.0833 _{( 1.58 )}* 0.15941_{( 2.50)}*** 0.0839 _{( 0.50)} 0.36238_{( 1.82)}** ΔEarnGrowth ? -0.12353_(-4.24)*** -0.11963_(-1.35)* -0.26447_{(-5.07 )}*** -0.08448 _{(-0.30 )} EarnLoss + 0.0887 _{( 3.53)}*** 0.05633_{( 1.85)}** 0.1928_{( 1.33)}* 0.0764 0.0629 _{( 0.89)} _{( 1.40 )}* 0.02421 -0.1487 _{( 0.35)} _(-0.69) 0.34544 _{( 0.81)} ΔEarnLoss + -0.1017_(-3.79)*** -0.24973_(-3.32)*** -0.04679_{(-0.82 )} -0.63101_{(-1.28 )} EarnLev ? 0.0741 _{( 2.56)}** 0.06151 0.8706 _{( 1.36)} _(-0.15) 0.14265 0.0169 _{( 1.48)} _{( 0.35 )} 0.03315 0.3581 _{( 0.58)} _{( 1.81)}* -0.45681 _{(-0.67 )} ΔEarnLev ? -0.02207 _(-0.61)-0.00158 _(-0.02)0.05461 ₍_0.86)0.94152 ₍_1.23)

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K.A. Hendartoa, B.M. Purwantob / Asia Pacific Management Review 18(1) (2013)xx-xx 235 # of obs. 3194 3194 468 468 879 879 89 89 Highest VIF 4.99863 5.95657 2.61473 3.96761 2.73026 4.44325 6.95587 7.25475 Adj. R2 _{4.37% 16.33% 1.80% 12.91% 0.83% 13.94% 4.04% 4.22%} Model F 12.21 (p<.001) 32.90 (p<.001) 1.66 (p=0.067) 4.51 (p<.001) 2.23 (p=0.039) 8.99 (p<.001) 1.34 (p=0.221) 1.22 (p=0.2712) Notes:

1. The variables are the same as for Table 5.

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Table 8. Agency Problem for Controlling Shareholders and Dividends Informativeness

Variables Pred. Sign Model (4) Model (5)

Div ₍+ 0.0495_1.39)* -0.0204_(-0.63) DivDEV － -0.0180** -0.0145* (-1.98) (-1.49) ΔDiv + 0.2840_(11.21)*** ΔDivDEV － -0.0220** (-1.67) DivSize _(-3.03)? -0.0573*** -0.0188_(-1.41) ΔDivSize ? -0.0551_(-4.02)*** DivGrowth + 0.0234 ₍_{0.66) (}0.0591_1.94)** ΔDivGrowth _(-6.69)+ -0.1227*** DivLoss ₍+ 0.0010 _0.07) 0.0148_{( 1.24)}*** ΔDivLoss + -0.0017_(-0.10) DivLev ₍? 0.1034_5.08)*** 0.0487₍_2.86)*** ΔDivLev ? 0.1345₍_6.15)***

EarnDEV+ΔEarnDEV F-value=3.30*

Highest VIF 4.98273 6.52785

Adj. R2_2.05% _11.21%

Model F 8.47 (p<.001) 31.50 (p<.001)

Notes:

1. The Huber-White heteroscedasticity-consistent robust standard errors (Rogers, 1993, generalizing White 1980) adjustment procedure is used to estimate the reported t-statistics (in parentheses).

R  Div  Div DEV  Div X 

        Model(2) 4 4 , 0 1 , 2 , , 3 , 4 , , , , , , , 1 1 k k i t i t i t i t i t i t i t k i t i t k i t i t i t k k

R  Div  Div DEV  Div  Div DEV Div X  Div X 

 

              

3. Variables definition:

t i

R, _{= firm i’s cumulative 12-month raw stock return until four months after the end of fiscal year t}

t i

Div, _{= firm i’s common stock dividends in year t, scale by market value of equity at the end of year t-1} t

i

DEV_,

, k i t

X

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K.A. Hendartoa, B.M. Purwantob / Asia Pacific Management Review 18(1) (2013)xx-xx 234 1 , i t X

2 , i t

X

3 , i t

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4 , i t

X

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Table 9. Year-by-year Regression with Interactions for Ownership Structure (for the Test of Model (1))

Variables _(n=252)2000 _(n=297)2001 _(n=352)2002 _(n=387)2003 _(n=436)2004 _(n=475)2005 _(n=579)2006 _(n=603)2007 _(n=613)2008 _(n=600)2009 Fama-MacBeth t-statistic

Mean (t-value) Earn 0.1795_{( 1.03)} -0.1144 _(-1.41)* 0.4297 _{( 5.01)}*** -0.0112 _(-0.12) 0.4886 _{( 4.81)}*** 0.1841 _{( 1.62) (-0.69) (}* -0.0384 0.0490 _{0.67) (}0.3745 _{2.37) (-0.63)}*** -0.0605 0.1481₍_2.14)** EarnDEV -0.0462_(-1.36)* -0.1215 _(-2.05)** -0.0767 _(-3.08)*** 0.0062 _{( 0.18)} -0.0312 _(-2.12)** 0.0524 _{( 0.78) (-1.56) (-1.67) (-1.87) (-3.40)}-0.0428 * -0.0333 ** -0.0549 ** -0.0774 *** -0.0438_(-2.99)*** Sign(+/−) − − − + − + − − − − 8/10 EarnSize -0.0354_{(-0.58) (}0.0941 _{1.61) (-1.43) (-2.39) (-0.33) (-2.91) (-1.69) (-0.39) (}-0.0691 -0.1154 ** -0.0148 -0.1309 *** -0.0554 ** -0.0172 0.0455 _{0.79) (}0.0599 _1.23) -0.0239 _(-1.02) EarnGrowth -0.0023_(-0.02) -0.1082 _(-1.31)* -0.2601 _(-3.58)*** 0.0711 _{( 1.04)} -0.1184 _(-1.10) 0.0989 _{( 1.03) (-2.10) (}-0.0813 ** 0.0915 _{1.53) (-2.07) (-0.89) (-1.55)}* -0.3657 ** -0.0681 -0.0743* EarnLoss 0.1146_{( 1.53)}* -0.1076 _(-1.10) 0.2535 _{( 3.65)}*** 0.0442 _{( 0.77)} -0.0707 _(-1.07) 0.0174 _{( 0.30)} 0.2234 _{( 3.77)}*** 0.0435 _{( 1.13)} 0.0270 _{( 0.38)} 0.1856 _{( 3.27)}*** 0.0731_{( 1.92)}** EarnLev 0.1138_{( 1.02)} 0.3996 _{( 3.99)}*** -0.0280 _(-0.43) -0.0641 _(-1.57) 0.1869 _{( 2.38)}** 0.0868 _{( 1.29)} 0.0868 _{( 1.37)} 0.0907 _{( 1.95)}* 0.1213 _{( 2.38)}** 0.0934 _{( 2.62)}*** 0.1087_{( 2.75)}*** Highest VIF 5.63152 3.89942 3.46551 4.21211 4.25317 5.79590 3.93910 4.76664 4.68588 8.06705 Adj.R2 _12.22% _{9.57% 36.37% 7.47% 32.47% 17.25% 12.45% 25.66% 16.15% 8.59%} Model F 3.69 (p<.001) 3.41 (p<.001) 16.48 (p<.001) 3.40 (p<.001) 17.20 (p<.001) 8.66 (p<.001) 7.41 (p<.001) 17.17 (p<.001) 10.17 (p<.001) 5.38 (p<.001) Notes:

R  Earn  Earn DEV  Earn X  

      

3. Variables definition:

t i

R, _{= firm i’s cumulative 12-month raw stock return until four months after the end of fiscal year t}

t i

Earn,_{= firm i’s earning per share (before extraordinary items) for fiscal year t}

t i

DEV_, _{= The ratio of board seat control rights over cash flows rights of the largest ultimate owner of firm i}

, k i t X

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2 ,

i t X

3 , i t X

4 , i t X

4. ***, ** and * respectively indicate significance levels at the 1%, 5%, and 10% (one-tailed for the coefficients with predicted sign, and two-tailed otherwise). Table 10. Year-by-year Regression with Interactions for Ownership Structure (for the Test of Model (2))

Variables _(n=252)2000 _(n=297)2001 _(n=352)2002 _(n=387)2003 _(n=436)2004 _(n=475)2005 _(n=579)2006 _(n=603)2007 _(n=613)2008 _(n=600)2009 Fama-MacBeth t-statistic Mean (t-value) Earn 0.2996_{( 2.00)}** -0.0804 _(-0.89) 0.3273 _{( 3.24)}*** -0.0578 _(-0.66) 0.3470 _{( 3.84)}*** 0.2370 _{( 2.26)}** -0.0053 _(-0.08) 0.0662 _{( 0.81)} 0.2115 _{( 2.16)}** 0.0019 _{( 0.02)} 0.1347_{( 2.55)}*** EarnDEV -0.0030_{(-0.03) (-2.58) (-2.61) (-0.78) (}-0.0920 *** -0.0810 *** -0.0289 0.0207 _{0.45) (-2.06) (-2.70) (}-0.0887 ** -0.0817 *** 0.0048 _{0.17) (-1.91) (-0.10)}-0.0367 ** -0.0055 -0.0392_(-2.86)*** Sign(+/−) − − − − + − − + − − 8/10 ΔEarn 0.1624* 0.5568 *** 0.3970 *** 0.4692 *** 0.3931 *** 0.5169 *** 0.4652 *** 0.3177 *** 0.5173 *** 0.6493 *** 0.4445*** ( 1.34) ( 5.04) ( 5.97) ( 4.56) ( 4.37) ( 6.05) ( 7.22) ( 3.76) ( 6.08) ( 6.81) (10.33) ΔEarnDEV -0.0817_{(-0.94) (-2.95) (-1.73) (-1.36) (}-0.1019 *** -0.0309 ** -0.0565 * -0.0860 _{-1.79) (-1.65) (-1.84) (-1.99) (-2.13) (-2.02)}** -0.0585 * -0.0826 ** -0.0615 ** -0.0876 ** -0.1300 ** -0.0777_(-8.95)*** Sign(+/−) − − − − − − − − − − 10/10 EarnSize -0.0312_{(-0.43) (}0.0189 _{0.32) (-0.82) (-1.04) (}-0.0462 -0.0481 -0.0011 _{-0.03) (-2.55) (}-0.1200 ** 0.0286 _{0.88) (-0.35) (-0.98) (}-0.0234 -0.0386 0.0530 _0.93) -0.0208_(-1.35) ΔEarnSize -0.0125_{(-0.16) (-0.52) (-1.86) (-2.02) (}-0.0336 -0.0903 * -0.1045 ** -0.0027 _{-0.06) (}0.0487 _{1.02) (-2.80) (-0.72) (-2.39) (-2.69)}-0.1473 *** -0.0448 -0.0947 ** -0.1363 *** -0.0618_(-3.10)*** EarnGrowth 0.0338 -0.0896 -0.1942 *** _0.1177** _-0.0382 _-0.0194 _-0.0379 _0.1017* _-0.1412** _-0.0795 _-0.0347 ( 0.46) (-0.96) (-2.64) ( 1.73) ( -0.43) (-0.21) (-0.42) ( 1.57) (-1.86) (-0.71) (-1.11) ΔEarnGrowth -0.1312_{(-2.13) (-0.01) (-1.39)}** -0.0008 -0.0926 * -0.0524 _(-0.74) -0.0682 ₍_-0.99) -0.0151 _(-0.16) -0.1074 _{(-1.15) (-2.59)}-0.0893 *** -0.1629 _(-2.30)** -0.2498 _(-3.27)*** -0.0970_(-4.21)*** EarnLoss 0.0672 -0.1315 0.2969 *** 0.0401 -0.0338 0.0484 0.2613 *** 0.0366 -0.0611 0.1968 *** 0.0721* ( 0.70) (-1.05) ( 4.32) ( 0.62) ( -0.46) ( 0.68) ( 3.56) ( 0.74) (-0.80) ( 2.76) ( 1.63) ΔEarnLoss -0.0817_{(-0.72) (-1.62) (-4.33) (-1.05) (}-0.2011 * -0.2265 *** -0.0571 -0.1066 _{-1.66) (-2.04) (-4.71) (-1.65) (}** -0.1308 ** -0.3218 *** -0.0655 ** 0.0027 _{0.04) (-3.22)}-0.1923 *** -0.1381_(-4.51)*** EarnLev -0.0307 0.3873 *** -0.0124 -0.1049 * 0.2030 ** 0.1011 -0.0314 0.0783 0.2028 ** 0.0366 0.0830* (-0.26) ( 3.59) (-0.20) (-1.81) ( 2.38) ( 1.53) (-0.34) ( 1.61) ( 2.35) ( 0.41) ( 1.79) ΔEarnLev 0.1752 -0.1513 -0.0037 -0.0923 -0.0940 -0.1853 ** _0.1937* _-0.0461 _-0.0476 _0.0321 _-0.0219

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K.A. Hendartoa, B.M. Purwantob / Asia Pacific Management Review 18(1) (2013)xx-xx 235 ( 1.49) (-1.63) (-0.09) (-1.12) ( -1.17) (-2.30) ( 1.83) (-0.89) (-0.64) ( 0.55) (-0.55) F-test:(F-value) EarnDEV+ ΔEarnDEV 0.67 3.06* _4.86** _1.43 _2.14 _3.83** _4.59** _3.19* _3.31* _5.12** Highest VIF 8.89508 4.49369 4.79312 5.12966 5.21192 7.52931 8.64468 4.15235 6.83133 9.23708 Adj.R2 _{17.55% 16.39% 43.49% 15.49% 37.21% 25.86% 25.82% 31.41% 24.83% 16.62%} Model F 3.76 (p<.001) (p<.001) 3.98 (p<.001) 15.06 (p<.001) 4.48 (p<.001) 14.60 (p<.001) 9.50 (p<.001) 11.22 (p<.001) 15.44 (p<.001) 11.69 (p<.001) 6.90 Notes:

1.ΔEarni,t is the change in Earni,t between year t-1 and t. The remaining variables in Table 8 are the same as Table 7.

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Table 11. Additional Test: Use of Alternative Measure of Cumulative Abnormal Returns (CARs)

Variables Pred. _Sign Model (1) Model (2)

Earn ₍+ 0.0839_3.22₎*** 0.0314_{( 1.01 )} EarnDEV － -0.0267** -0.0401*** (-1.76 ) (-2.71 ) ΔEarn + _{( 9.37 )}0.2374*** ΔEarnDEV － -0.0419_{(-3.13 )}*** EarnSize _(-3.20? -0.0534***₎ -0.0204_{(-1.14 )} ΔEarnSize ? -0.0855_{(-4.76 )}*** EarnGrowth ? -0.0871_{(-4.08 )}*** -0.0881_{(-3.02 )}*** ΔEarnGrowth ? -0.0149_(-0.59***₎ EarnLoss ₍+ 0.0689_3.40₎*** 0.0712_{( 2.86 )}*** ΔEarnLoss + -0.0757_(-3.48***₎ EarnLev ? _{( 4.73 )}0.0982*** _{( 4.02 )}0.1189*** ΔEarnLev ? -0.0322 _(-1.35)

EarnDEV+ΔEarnDEV F-value=21.41***

Highest VIF 3.14924 4.62024

Adj. R2_4.60%_7.71%

Model F 18.07 (p<.001) 21.23 (p<.001)

Notes:

CAR  Earn  Earn DEV  Earn X 

        Model (2) 4 4 , 0 1 , 2 , , 3 , 4 , , ₁ , , ₁ , , , k k i t i t i t i t i t i t i t k i t i t k i t i t i t k k

CAR  Earn Earn DEV  Earn  Earn DEV Earn X  Earn X 

                 3. Variables definition: t i CAR_,

=firm i’s cumulative 12-month abnormal stock return until four months after the end of fiscal year t

t i

Earn_,

= firm i’s earning per share (before extraordinary items) for fiscal year t

t i

DEV_,

, k i t

X

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2 , i t

X

3 , i t

X

4 , i t

X

4. ***, ** and * respectively indicate significance levels at 1%, 5%, and 10% (one-tailed for the coefficients with predicted sign, and two-tailed otherwise)

Table 12. The Alternative Measures of Board-Cash Divergence Panel A: Descriptive Statistics

Variables of Divergence Mean Std. dev. Q1 Median Q3 Min Max

B-C 40.92 25.426 23.61 41.62 59.45 -45.05 99.48

Natural log of B/C 1.261 0.969 0.615 1.11 1.75 -0.73 5.85

Natural log of B-C 3.577 0.785 3.293 3.77 4.10 -4.61 4.60

Panel B: The Empirical Results

Variables Pred. _Sign

Alternative Measures of Divergence

Natural log of B/C B-C Natural log of B-C Model (1) Model (2) Model (1) Model (2) Model (1) Model (2) Earn + 0.0968₍_3.34)*** -0.0290_(-0.94) 0.0769_{( 2.56)}*** -0.0233_(-0.72) 0.1493 _{( 2.30 )}*** -0.0030_(-0.05) EarnDivergence － -0.0433** -0.0436** -0.0416** -0.0435** -0.0811 * -0.0540 (-1.93) (-1.97) (-1.68) (-1.79) (-1.29 ) (-0.88) ΔEarn + 0.4141_(14.41)*** 0.4283_(14.88)*** 0.4560_(11.69)*** ΔEarnDivergence － -0.0364_(-1.51)* -0.0539_(-2.27)** -0.0780_(-2.33)** EarnSize ? -0.0015 _(-0.09) 0.0278_{( 1.65)}** -0.0019_(-0.11) 0.0288_{( 1.70)}* 0.0005 0.0327_{( 0.03 )} _{( 1.83)}* ΔEarnSize ? -0.0853_(-5.36)*** -0.0882_(-5.65)*** -0.0966_(-5.94)*** EarnGrowth + 0.0127 _{( 0.59)} 0.0877_{( 3.50)}*** 0.0089 0.0811_{( 0.41)} _{( 3.23)}*** -0.0029 _{(-0.13 )} 0.0749_{( 2.87)}*** ΔEarnGrowth _(-5.78)+ -0.1198*** -0.1192_(-5.75)*** -0.1255_(-5.86)*** EarnLoss + 0.0772₍_3.77)*** 0.0787_{( 3.34)}*** 0.0763_{( 3.72)}*** 0.0765_{( 3.24)}*** 0.0869 _{( 4.09 )}*** 0.0831_{( 3.34)}*** ΔEarnLoss + -0.0840_(-3.93)*** -0.0838_(-3.95)*** -0.0839_(-3.79)*** EarnLev ? 0.0372_{( 1.74)}* 0.0130_{( 0.52)}* 0.0402_{( 1.89)}* 0.0159_{( 0.64)}* 0.0327 _{( 1.48 )} 0.0051_{( 0.20)} ΔEarnLev ? 0.0217 _{( 0.95)} 0.0235 _{( 1.04)} 0.0273 _{( 1.15)}

COEF. Test (F-test) _F-value=

6.09** F-value= _9.72*** F-value= _6.19** EarnDivergence + ΔEarnDivergence Highest VIF 4.02242 4.99054 4.48862 5.42007 2.21020 7.46181 Adj. R2_2.81%_10.72%_2.78%_10.77%_2.69%_10.41% Model F 11.36 30.43 11.26 30.58 10.34 10.41

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235

(p<.001) (p<.001) (p<.001) (p<.001) (p<.001) (p<.001) Notes:

R   Earn  Earn DEV  Earn X 

        Model (2) 4 4 , 0 1 , 2 , , 3 , 4 , , , , , , , 1 1 k k i t i t i t i t i t i t i t k i t i t k i t i t i t k k

R  Earn Earn DEV  Earn  Earn DEV Earn X  Earn X 

                 3. Variables definition: t i R_,

= firm i’s cumulative 12-month raw stock return until four months after the end of fiscal year t

t i

Earn_,

= firm i’s earning per share (before extraordinary items) for fiscal year t

t i

DEV_,

, k i t

X

= vector of control variables, k=1, 2 , 3, and 4

1 , i t

X

: Size i, t = size of the firm, natural log of firm i’s total assets at the end of year t-1

2 , i t

X

: Growth i,t= M/B ratio computed as the market value of equity/book value of equity

3 , i t

X

: Loss i,t = 1 if firm i’s earnings before extraordinary items are less than 0, and 0 otherwise

4 , i t

X

: Lev i,t = firm i’s total liability divided by total equity at the end of year t B = firm i’s board seat control rights for fiscal year t

C = firm i’s cash flows rights for fiscal year t

4. ***, ** and * respectively indicate significance levels at 1%, 5%, and 10% (one-tailed for the coefficients with predicted sign, and two-tailed otherwise).