and monitoring mechanisms:
The evidence
from collateralized shares in Taiwan
Lanfeng Kao
Jeng-Ren Chiou
Anlin Chen
Agency problems from
collateralization
La Porta et al. (1999) also point out that deviation of control right and ( ) p g cash flow right provide the controlling shareholders incentives to expropriate the outside shareholders for their own benefit.
Claessens et al. (1999) also find that deviation of cash flow and control right would decrease the firm value. The price discount provides evidence that controlling shareholder expropriate minority shareholders.
According to the statistics from securities exchange, we find that
According to the statistics from securities exchange, we find that collateralized share of board of directors is pretty popular in Taiwan. A lot of firms with high controlling shareholders’ share
collateralization encounter financial distress during 1997 Asian Financial Crisis.
This paper examines the effect of agency costs due to collateralized share on the firm performance. We further investigate how to alleviate p g the agency costs of collateralized share through corporate control mechanisms.
Hypothesis 1
Firm performance and collateralized share:
Firm performance and collateralized share:
Collateralization causes poor performance or poor
performance causes collateralization.
Hypothesis 1: There is an inverse relation between firm
performance and the level of share collateralized by controlling shareholders. The causality runs from collateralized shares to poor
f
Hypothesis 1’
The role of conglomerate
The role of conglomerate
Hypothesis 1’: The inverse relation is more severe in conglomerate
firms than in non-conglomerate firms.
Due to the less transparency of operations and payments of cash
flows for conglomerate firms, we argue that the agency problem related to collateralized share is more severe in conglomerate firms than in non-conglomerate firms.
Hypothesis 2
The effect of monitoring mechanisms on reducing the
e e ect o
o to
g
ec a s s o
educ g t e
agency problems induced by collateralized share
Our point is to find out the possible monitoring mechanisms to
reduce the agency costs of collateralized share. The alleviation of agency costs of collateralized share will increase the willingness of investors to invest in the capital markets.
Because there is no legal regulations to reduce the agency costs
The governance role of institutional investors
The governance role of institutional investors
Hypothesis 2A: The negative relation between firm performance
and the level of share collateralized by controlling shareholders is weaker for firms with high percentage of outstanding shares held by institutions than firms with low percentage of
outstanding shares held by institutions.
Hypothesis 2B
The governance role of creditors
The governance role of creditors
Hypothesis 2B:The negative relation between firm performance
and the level of share collateralized by controlling shareholders is weaker for high debt ratio firms than for low debt ratio firms.
Hypothesis 2C
The governance role of dividend policy
The governance role of dividend policy
Hypothesis 2C: The negative relation between firm performance
and the level of shares collateralized by controlling shareholders is weaker for high cash dividend yield firms than for low cash dividend yield firms.
Measures for performance
Backward-looking measure: ROE and ROA
Backward-looking measure: ROE and ROA.
) ( * ) ( * ) ( * ) & ( * ) ( * ) ( * ) ( * ) ( * 8 1 7 1 6 1 5 1 4 2 3 1 2 1 1 0 INDUSTRY OWNERSHIP LogMV D R DEBT COLLATERAL COLLATERAL PERF PERF t t t t t t t t ) ( * ) ( * ) ( * ) ( * ) ( * ) ( * ) ( * ) ( * 8 1 1 6 5 4 2 3 1 2 1 1 0 INDUSTRY DEBT OWNERSHIP SIGMA BETA PERF PERF COLLATERAL COLLATERAL t t t t t
PERF =ROE or ROA
7 (DEBTt1) 8 (INDUSTRY)
Monitoring mechanisms
Dependent variables
Q: Pseudo Q for Tobin’s Q
i i OWNERSHIP INDUSTRY LogMV D R MONITOR MONITOR COLLATERAL COLLATERAL Q ) ( * ) ( * ) ( * ) & ( * ) ( * ) * ( * ) ( * 7 6 5 4 3 2 1 0
Q: Pseudo Q for Tobin s Q
asset total of Book value equity of ue Market val equity of Book value -asset of Book value total
Monitoring mechanisms
(cont’d)
The monitoring mechanisms:
The monitoring mechanisms:
MONITOR: The variable represent 3 monitoring
mechanisms
INSTITUTION = The percentage of outstanding shares held by
institutions.
DEBT = The debt-to-asset ratio.
CASH DIV = The cash dividend yield measured by cash CASH_DIV = The cash dividend yield measured by cash
dividends divided by stock price.
Causality between collateral and
performance
Table 2A: collateral causes performance
ROE t ROA t Intercept 0.403 (0.944) -1.154 (0.663) ROE t-1 0.257 (0.000)*** ROA t-1 0.255 (0.000)*** COLLATERAL t-1 -1.410 (0.036)** -0.629 (0.039)** COLLATERAL t-2 -0.143 (0.829) -0.033 (0.908) DEBT t-1 -5.153 (0.332) -1.101 (0.638) R&D t-1 20.607 (0.387) 11.907 (0.274) LogMV t-1 -0.341 0.147
Table 2B: performance causes collateral
Table 2B: performance causes collateral Dependent variable: Proportion of shares collateralized Intercept -0.696 (0.001)*** -0.662 (0.002)*** COLLATERAL t-1 0.590 (0.000)*** 0.587 (0.000)*** ROE t-1 0.001 (0.714) ROE t-2 -0.001 (0.651) ROA t-1 -0.004 (0.348) ROA t-2 -0.000 (0.927) BETA 0.081 (0.548) 0.087 (0.515) SIGMA -0.001 (0.867) -0.001 (0.882) OWNERSHIP t-1 -0.081 (0.826) -0.026 (0.942) DEBT t-1 0.261 (0.412) 0.147 (0.627) INDUSTRY -0.385 (0.001)*** -0.380 (0.001)
Role of conglomerate
Table 3: Collateral on performance
—conglomerate vs. non-conglomerate
Conglomerate firms Non-conglomerate firms
ROE t ROE t Intercept -1.449 (0.842) 3.825 (0.642) ROE t-1 0.364 (0.000)*** 0.228 (0.000)*** COLLATERAL t-1 -1.667 (0.011)** -0.979 (0.169) DEBT t-1 -6.415 (0.331) -4.053 (0.556) R&D 32 276 4 750 R&D t-1 32.276 (0.241) 4.750 (0.912) LogMV t-1 -0.065 (0.927) -0.954 (0.307) OWNERSHIP t-1 1.073 (0.884) 13.909 (0.061)* INDUSTRY 5.955 (0.015)** 8.264 (0.001)***
Monitoring mechanisms
Table 4: The agency problem under monitoring mechanisms
Table 4: The agency problem under monitoring mechanisms
Coefficient/variable Dependent variable：Q
Column # #1 #2 #3 ntercept -1.459 (0.000)*** -1.182 (0.000)*** -1.462 (0.000)*** COLLATERAL -0.065 (0.027)** -0.102 (0.025)** -0.028 (0.121) COLLATERAL*INSTITUTION 0.002 (0.003)*** COLLATERAL*DEBT 0.284 (0.006)*** COLLATERAL*CASH_DIV 1.388 (0.004)*** INSTITUTION 0.001 (0.605) DEBT 0.059 (0.776) CASH_DIV -3.307 (0.014)** R&D 1.940 (0.067)* 4.066 (0.000)*** 4.267 (0.000)*** LogMV 0.287 (0.000)*** 0.256 (0.000)*** 0.286 (0.000)*** INDUSTRY 0.381 (0.000)*** 0.472 (0.000)*** 0.399 (0.000)*** OWNERSHIP 0.657 (0.000)*** 0.696 (0.000)*** 0.964 (0.000)***
Monitoring mechanisms under
conglomerate
Table 5A: Monitoring effect for conglomerate firms
Table 5A: Monitoring effect for conglomerate firms
Column # #1 #2 #3 Intercept -1.493 (0.000)*** -1.175 (0.000)*** -1.623 (0.000)*** COLLATERAL -0.054 (0.123) -0.086 (0.123) -0.022 (0.335) COLLATERAL*INSTITUTION 0.002 (0.022)** COLLATERAL*DEBT 0.290 (0.023)** COLLATERAL*CASH_DIV 1.429 (0.009)*** INSTITUTION 0.002 (0.432) (0. 3 ) DEBT -0.164 (0.534) CASH_DIV -3.289
Table 5B: Monitoring effect for non-conglomerate firms
Table 5B: Monitoring effect for non conglomerate firms
Column # #1 #2 #3 Intercept -2.187 (0.000)*** -1.925 (0.000)*** -1.875 (0.000)*** COLLATERAL -0.081 (0.116) -0.145 (0.073)* -0.030 (0.327) COLLATERAL*INSTITUTION 0.002 (0.069)* COLLATERAL*DEBT 0.280 (0.108) COLLATERAL*CASH_DIV 0.092 (0.940) INSTITUTION -0.000 (0 891) (0.891) DEBT 0.329 (0.367) CASH_DIV -5.743 (0.036)** R&D 0.175 (0.923) 4.200 (0.009)*** 3.862 (0.015)** LogMV 0.418 (0.000)*** 0.357 (0.000)*** 0.370 (0.000)*** INDUSTRY 0.092 (0.375) 0.211 (0.026)** 0.188 (0.045)** OWNERSHIP 0.241 (0.442) 0.305 (0.289) 0.576 (0.046)**
Conclusions
Controlling shareholders’ share collateralization induces
Controlling shareholders share collateralization induces severe agency problems and leads to poor firm performance.
The agency-conflict-reducing mechanisms including institutional holding, debt and dividend distribution can alleviate the agency problems induced by director’s collateralized share behavior.
The agency conflict due to share collateralization is more
severe for conglomerate firms than for non-conglomerate firms and so is the monitoring effect.
