Good Corporate Governance

Article 1

Title

Identification of Role of Social Audit by Stakeholders as Accountability Tool in Good Governance

Topic

This study undertakes the construction of a standardized Likert scale questionnaire to assess the role of social audit as perceived by stakeholders.

Previous Research used by the article

• Praveen Kumar (2000) has explained that Accountability gives sanctity to power and makes it more meaningful and relevant in the scheme of governance.
• Dhiraj Nayyar (2000) concluded that most of the failures of the state came about because of poor implementation, which is a result of weak or nonexistent institutions.
• Gore (1994) opined that it is now possible for a president whether of a company or of a country — to decentralize yet at the same time keep field operators fully informed and accountable for results.
• Angela Liberator (2004) observed that accountability is a term that requires many specifications, namely whose accountability to whom and how.
• Gray Owen (1996) opined that Social Auditing is a process that enables an organization to assess and demonstrate its social, economic, and environmental benefits and limitation. It is a way of measuring the extent to which an organization lives up to the shared values and objectives it has committed itself (Boyd, 2005).

Hypothesis

Social audit creates confidence in society regarding government initiatives, promotes transparency and efficiency, improves social, ethical and environmental performance, enhance inclusion, facilitates monitoring and ensures accountability.

Variable used

• Transparency and information flow for the stakeholder
• Efficiency and productivity
• Governance’s reliability

Method of analysis

A list of 30 positive statements identifying the likely role of social audit is prepared and placed in a 5 point Likert scale. The most positive answer is rated at 5 point and the most negative at 1 point.

Retest was done after 15 days interval. Results were compiled and Pearson’s correlation coefficient calculated along with other statistical analysis done by using SPSS Software.

Result

Figure-1 shows the % age of responses for each of the 5 types i.e. strongly agree, agree, undecided, disagree & strongly disagree. The mean for the test score is 3.61 with standard deviation and variance at 0.87 and 0.75 respectively. In case of retest, the mean score has decreased to 3.51 and there is increase in the standard deviation and variance to 1.02 and 1.04 respectively. Pearson’s correlation coefficient is 0.834, which is substantially high and thus proves that designed questionnaire is reliable. Validity of the questionnaire had already been checked for face and content validity as specialists expressed their opinions and verified that contents conform to the objective of this study. Largest percentage of responses, both during test and retest, are in the ‘agree’ category i.e. those who have agreed with the statement given (55.2 % during test and 50.4 % during retest). Next large number of responses is in ‘undecided’ category (21.7 % during test and 21.6% during retest). Total responses in ‘agree’ and ‘strongly agree’ categories collectively are 65.2% and 62 % in test and retest categories respectively.

Conclusions:

Since social audit is a new concept and most of the people do not have awareness about it thus they may not be sure about the benefits or the role social audit can play. Because majority of the responses have confirmed the statements, present study has been able to identify the role or the benefits which stakeholders perceive to accrue to them. These benefits or role areas can be summarized as follows:

• Stakeholders accepted that social audit helps the government in monitoring, accounting for and reporting the activities/actions.
• The exercise of social audit improves social, ethical and environmental performance.
• Public is convinced and confident that social audit contributes towards achievement of efficacy and effectiveness of the administration.
• The important finding was that it creates confidence on governmental actions in the community.
• It makes administration more transparent and accountable.
• It provides verifiable data to substantiate claims on social performance.
• It enhances inclusions, partnership and participation.
• Collectively, social audit is a tool for social accountability in good governance.

Article 2

Title

Corporate Social Responsibility, Good Corporate Governance and The Intellectual Property: An External Strategy Of The Management to Increase The Company’s Value

Topic

This research investigates in three folds, the relationships among corporate governance, corporate social responsibility and firm performance, then intellectual property and firm performance

Theory used by the article

According to shareholder theory, the supporters of CSR (Jones, 1995; Donaldson and Preston, 1995) say that CSR is a mechanism to achieve a better financial condition, as well as maximizing the property of the shareholders (Swanson, 1999; Whetten, Rands and Godfrey, 2001 in Mackey, Mackey and Barney, 2007).

On the contrary, some parties refuse CSR, such as Friedman (1962) who states that the company should maximize the property of the stakeholders; in Mackey, Mackey and Barney (2007), maximize the present value of the future cash flow of the company (Copeland, Murrin and Koller, 1994).

The approach of stakeholders-agency (Hill and Jones, 1992) can reduce the agency expense such as the profit management, because a manager as an agent is monitored by different stakeholders.

The intellectual capital is from the process of knowledge and intangible activities as additional value of a company (Bueno et al, 2007).

Hypothesis

• H1: Institutional Ownership has a positive influence towards CSR rating.
• H2: Market Capitalization has a positive influence towards the CSR Rating.
• H3: The independent board of commissioners, the audit committee, and the audit quality of KAP the Big 4 have a positive influence towards the CSR Rating.
• H4: The CSR rating, the institutional ownership, commissioner, the audit committee, the audit KAP the big 4 have a positive influence towards the way of works of the company.
• H5: The Association of Intellectual Property and Tobins’ Q and ROE

Variable used

The Testing of Hypothesis 1 – 3

CSR = CSR rating of Ministry of Environment, 1 for gold, green, and blue rating (the category of compliant companies), and 0 for red and black rating (for non compliant companies).

INST = The ownership proportion of Institutional investors.

KP = Logarithm of market capitalization/ market values.

Market values = closing price of the stock x the amount of outstanding shares

DKInd = The proportion of independent commissioner board.

KOMAUD = 1 if the company has the audit committee, and 0 if it does not have.

Kualaud = 1 if the company is audited by KAP Big 4, and 0 if it does not. The Big 4 includes Ernst and Young (EY), Klynveld Peat Marvick Goerdeler (KPMG), Deloitte Touche Tohmatsu, and Price Water House Coopers (PWC).

HTG = The ratio of total debt to total assets.

PPenj = The sales growth, calculated as follows:

ΔPPenj = ((Salest – Salest-1)/ Salest-1) x 100

Hypothesis 4 Testing

MVE = closing price of the stock in the end of year book x the amount of outstanding shares.

DEBT = (current liabilities – circulating assets) + supply book value + long term debt.

TA = book value of total assets.

Tobin’s Q = calculated by using the formula:

Tobin’s Q = (MVE + DEBT)/ TA

MVE = closing price of the stock in the end of year book x the amount of outstanding shares.

DEBT = (current liabilities – circulating assets) + supply book value + long term debt.

TA = book value of total assets.

The Testing of Hypothesis 5

ROE = used as the measurement of the operational ways of work of the company (Klapper and Love, 2002 in Darmawati et al., 2004) which was calculated by using the formula: ROE = net profit/ total equity

ROE was used to calculate the rate of return which gave return to the capital owners. High ratio indicated better ways of work of the company.

IntelProperty = involved the values of the patent, trademarks, and copyrights (table 2).

Assets composition = was control variable, because circulating assets and intangible assets are easier to be deflected than tangible fixed assets (Darmawati et al., 2004). The assets composition was measured by using ratio between fixed assets and sales (Klapper and Love, 2002 in Darmawati et al., 2004).

SIZE = sales log, was a control variable, because big companies developed more soft capital, such as developing the information technology, researches and development, than small companies.

Method of analysis

Hypothesis 1 – 3 of this research were tested by using logit:

CSRit = α0 + β1INSTit + β2KPit + β3DKIndit + β4Kualaudit + β6HTGit + β7PPenjit + εit

Hypothesis 4 Testing with Double Regression, with the following formula:

Tobin’s Qit = α0 + β1CSRit + β2INSTit + β3DKIndit + β4KOMAUDit + β5 Kualaudit + εit

The research design used to test hypothesis 5 was as follows:

Tobin’s Qit = α0 + β1IntelPropertyit + β2KompAktit + β3SIZEit + εit

ROEit = α0 + β1IntelPropertyit + β2KompAktit + β3SIZEit + εit

Result

Conclusions:

The result of H1 – H3 indicated that the independent board of commissioners board proportion had a positive relationship to CSR rating. This indicated that the company which had the independent board of commissioners had good CSR rating. Whereas, other variables such as the institutional ownership, market value, audit committee, and audit quality did not relate to the rating of CSR. The result of H4 test indicated that CSR rating and the institutional ownership were positively related to the company’s work represented by Tobin’s Q and ROE. This revealed that the intellectual property had important role towards the values of the company. The intellectual property could improve the values of the company and investors considered the variable of intellectual property as an important thing.

Foreign Investment

Article 1

Title

Foreign Ownership and Investsment: Evidence From Korea

Topic

Relationship among financing decision, dividend policy and ownership

Theory used by the article

Modigliani and Miller (1958) maintained that firm’s investment depend solely on the profit opportunity.

Jensen and Meckling (1976), Managers who are not owners may pursue their own interest not the stockholder interest.

Jensen (1986) Argues that managers tend to spend all available funds on investment projects at their own discretion.

Hypothesis

• There are a relationship between debt policy, dividend policy, and ownership structure.
• Ownership structure affects investment
• Cash flow sensitivity of investment to be lower in foreign owned firm than in domestically owned firm

Variable used

Abbrevation	Description
Kt It · Qt TAt Bt Et CFt Highi Lowi Beforet Aftert	Captal at the beginning of period t Capital expenditure during periond t Average Q at the beggining of period t Total asset at the beggining of period t BV at the beggining of period t Market value of equity at the begng t Cash flow during period t 1 for firm with high for own, 0 for low 1 for firm with low for own, 0 for high 1 before 1998, = 0 after 1998 1 after 1998, = 0 before 1998

Method of analysis

The ordinary least squares (OLS) estimation method for dynamic investment models is likely to result in biased estimates because of endegoneity and heterogeneiry and heterogeneity problems.

The generalized method of moments (GMM) estimation is widely used for dynamic panel models.

Result

For both the q model and the Euler model, it is found that firms are financially constrained since the coefficient in CF/K is statistically significant at the conventional level. This suggest the availability of internal funds does affect investment levels.

Both a q model and an Euler equation are estimated, adopting two classification methods to distinguish high foreign ownership from low foreign ownership. In both models, the cash flow sensitivity for firms with high foreign ownership is statistically insignificant. Cash flow has a significant impact on the investment of firms with low foreign ownership. This finding suggest that financial constraints faced by firms decrease as foreign ownership increases.

Liquidity constraints are reduced mainly in firms with low foreign ownership. Cash flow sensitivity in firms with high foreign ownership is statistically insignificant regardless of time periods.

If the value of the firm is directly related to financial constraints that the firm faces, the effect of cash flow on investment may also have a non linear relationship with the level of foreign ownership.

Foreign ownership seems to have a linear relationship to financial constraints.

Conclusions:

The result however, does not suggest that developing countries should entirely open their stock market to foreign investors. Many countries, in fact, experienced severe instability in capital markets after abruptly opening their stock markets. The findings simply suggest that foreign ownership plays a role in reducing financial constraint on firms, and thus improves accesibility of external financing for investment. In adition to capital inflows, the relaxation of the information assymmetry can also be a potential benefit of open financial markets.

Article 2

Title

Foreign ownership and firm performance: evidence from turkey

Topic

The  study  investigates  whether  foreign  owned  firms  perform  significantly  better than domestically owned Turkish corporations quoted on Istanbul Stock Exchange (ISE), in Turkey.

Previous Research used by the article

• Earlier and recent empirical studies conclude that the MNEs have performed better than the domestically owned firms. Therefore, the foreign ownership has positive influences on the firms performance.
• Researches on firms with foreign ownership operating in developed countries, Goethals and Ooghe (1997) conducted a study to investigate the performance between 25 Belgian firms and 50 foreign companies, which are Belgian taken over by foreigners.
• Besides Alan and Steve (2005) also looked at the short and long term performance of UK corporations acquired by foreigners.
• Grant (1987) and Qian (1998) assessed the relationship between the return performance and multiple explanatory factors per se multinationality.
• Liu et al. (2000) looked at the issue from different angle and examined intra-industry productivity spillovers from FDI on manufacturing sector in UK.
• Piscitello and Rabbiosi (2005) extended the study to Italy to investigate the influence of inward FDI coming into existence through acquisitions.
• Akimova and Schwödiauer (2004) examine the impact of ownership structure on corporate governance and performance of privatized corporations in Ukrainian transition economy
• The most recent study conducted by Barbosa and Louri (2005) investigate if MNEs operating in Portugal and Greece perform differently than their domestic counterparts.

Hypothesis

Foreign ownership participation increases the performance of the firm

• The hypothesis to test the effect of foreign ownership presence on ROA are:

Ho: there is no significant difference between firms with FO and domestic firms in corresponding to ROA

H1: there is no significant difference between firms with FO and domestic firms in corresponding to ROA

• The hypothesis to test the effect of foreign ownership presence on ROE are:

Ho: there is no significant difference between firms with FO and domestic firms in corresponding to ROE

H1: there is no significant difference between firms with FO and domestic firms in corresponding to ROE

• The hypothesis to test the effect of foreign ownership presence on OPM are:

Ho: there is no significant difference between firms with FO and domestic firms in corresponding to OPM.

H1: there is no significant difference between firms with FO and domestic firms in corresponding to OPM

Variable used

• ROA  as  the  operating  profits  before  interest,  depreciation  and  taxes  to  the  book value  of  total  assets.
• OPM  is  operating  profits  before  interest,  depreciation  and  taxes  to  the  book  of sales.
• ROE is defined as profit before taxes to the book value of total equity.

Method of analysis

In this study t-test statistics is performed to test whether there are many significant differences on Return on Asset (ROA), Return on Equity (ROE), Operating Profit Margin (OPM) ratios between the firms with foreign participation ranging from 0%-100%, 25%-100%, 50%-100% in capital structure and domestic firms.

Result

As  it  can  be  seen  in  Table  I,  for  year  2003  (0%-100%  FO),  H0  is  rejected. (p=0,011<0,05).When  ROAs  are  compared,  it  is  found  that  the  firms   ROAs  with  FO  (Foreign Ownership) and domestic  firms are  different significantly after t-test was performed (t0,05: 298 = -2,550). According  to  the finding, ROA of  firms  with  FO, which is 21.38 %, is  higher  than ROAs  of domestic firms, which is 14.59 %.

Moreover, for  year  2004 (0%-100% FO),  H0 is also rejected. (p=0,021<0,05). It also is reached to  same  conclusion  in  2004  that  there  is  significant  difference  on  the  firms   ROAs  with  FO  and domestic firms (t0,05:  298 = -2,314). Based on  this outcome, ROA  of  firms with FO, which  is  23.70 %, is higher than ROAs of domestic firms, which is 15.92 %.

For  year  2003 (25%-100% FO), H0 is  rejected.  (p=0,010<0,05).  When ROAs  are  compared,  it is  found  that  the  firms   ROAs  with  FO  and  domestic  firms  are  different  significantly  after  t-test  was performed (t0,0 5: 288  =  -2,589).  According  to  the  finding,  ROA  of  firms  with  FO,  which  is  22.28  %,  is higher than ROAs of domestic firms, which is 14.59 %.

For  year  2003  (50%-100%  FO  ownership),  H0  is  rejected.  (p=0,037<0,05).  When  ROAs  are compared, it is found  that the firms  ROAs  with  FO  and domestic firms are different significantly after t-test  was  performed  (t0,05:  272  =  -2,097).  According  to  the  finding,  ROA  of  firms  with  FO,  which  is 23.46 %, is higher than ROAs of domestic firms, which is 14.59 %.

However  for  year  2004  between  25%-100%  and  50%-100%  foreign  ownership  participation level, there are  no  significant  differences  between firms  with  FO and  domestic firms in  corresponding to ROA.

As  can  be  seen  Table  II  for  year  2003-2004  among  foreign  ownership  participation  level groups,  there  are  no  significant  differences  between  firms  with  FO  and  domestic  firms  in corresponding to ROE.

The  findings  indicate  that  for  year  2003-2004  among  foreign  ownership  participation  level groups,  there  are  no  significant  differences  between  firms  with  FO  and  domestic  firms  in corresponding to OPM.

Conclusions:

In this paper, t-test statistics confirm the hypothesis that firms with foreign ownership in respect to ROAs have better performed that domestic firms. Therefore, our result show that firms with foreign ownership perform better than domestic firms in Turkey for the perion 2003-2004. This findings matches the prior studies conclusions of performance of foreign owned firms and domestic in developed, developing and transition economies.

They provided some evidence of foreign ownership benefit positively on performance of firms listed in ISE. There many be couple reasons why foreign ownership increases firm perfomance. One reason might be ability to monitor or control or give incentives for managers leading manage a firm more seriously and avoiding initiatives reducing the corporate values. Another one would be transfering new technology by foreign firms generating savings on operating expenses.

Relations among financing decision, dividend policy, and ownership

Title

Interrelationships among capital structure, dividends, and Ownership: Evidence from South Korea

Topic

Relationship among financing decision, dividend policy and ownership

Theory used by the article

• Convergence of interest theory: Debt and ownerships are subtitutes-twomeans of accomplishing the same task. Stock ownership is expected to have a negative effect on leverage if convergence of theory holds.
• Entrenchment theory: Insider ownership  have a positive impact on leverage if the entrenchment theory of Morck et al. (1988) holds, because new debt policy must be used in conjunction with ownership to ensure that management acts appropriately. dividends are expected to have positive impact on debt if the entrenchment theory is valid, because both can be used to reduce cash flows and liquidity that would otherwise be misused by management.
• Pecking order theory: According to the pecking order theory of Myers and Majluf (1984), management prefers internal funds (available liquid assets) to leverage, in part because liquid assets can be spent in a more discretionary, and potentially sub-optimal, manner. This increases agency costs, and in turn increases the need for debt financing to reduce the use of internal funds. Consequently, both cash flow and liquidity are expected to have a negative impact on debt. Since more profitable firms have ample stored funds, profitability should exhibit a negative relationship with leverage.
• Signalling theory, managers are willing to use leverage and or dividends as a means of providing a positive signal to capital markets.

Hypothesis

There are a relationship between debt policy, dividend policy, and ownership structure.

Variable used

Firms leverage (LEV): The ratio of total debt to book value of total assets.

Dividends (DIV): The ratio of cash dividends to operating income.

Firm’s ownership (OWN): Measured by the percentage of stock owned by insiders

Firm’s cash flow (CF): Calculated as the ratio of net income plus depreciation to total assets.

Firm liquidity (CR): Measured as the ratio of current assets to current liabilities.

Profitability (PRO): The ratio of net income to net sales.

Firm’s size (SIZE): Characterized by the natural log of market value of equity.

Method of analysis

Simultaneous equations model is estimated using 3 stage least squares (3SLS) methodology. The 3SLS method is preferred over the ordinary least squares (OLS) method as the latter leads to biased and inconsistent parameter estimates when a system has interdependent endogenous variables.

Result

The debt equation result

Examining the 3SLS results in Table 3, we see that the coefficient estimate for OWN is significantly negative. Concomitantly, the DIV variable has a significantly positive coefficient estimate-a finding that supports entrenchment theory. The negative and statistically significant parameter estimates for CF and CR are also consistent with Myers and Majluf’s (1984) pecking order theory. Finally, the coefficient for PRO is not statistically different from zero.

The dividend equation results

Unlike the results of Table 3, the 3SLS coefficient estimates for the dividend equation provide consistent results in favor of entrenchment theory. The OWN and LEV coefficient estimates are both significantly positive, implying that not only are debt and dividend policies complementary, but also that higher ownership levels lead to higher dividends, possibly to prevent entrenched managers from acting in a manner inconsistent with stockholders.

The ownership equation results

The results in Table 5 provide evidence which is consistent with that presented in the previous two tables. In Table 3, we noted that managerial ownership was negatively related to debt policy. The 3SLS results in Table 5 also exhibit a negative relationship between these two variables; however, the causality is reversed. Again, the sign and significance of this coefficient estimate supports the convergence of interests theory. The estimates in Table 4 gave a positive and significant relationship between dividends and ownership-a finding consistent with entrenchment theory. Table 5 provides an analogous result, although again the causality is reversed. Thus, we find additional evidence that entrenchment theory and the convergence of interests theory are not mutually exclusive alternatives to explain agency costs.

Unexpectedly, the CF and CR variables have negative and significant coefficient estimates, implying that liquidity is not a significant determinant of managerial ownership-a finding that goes against the pecking order theory. Finally, the coefficient for SIZE is not significant, which is inconsisteznt with previous empirical results.

Conclusions:

The 3SLS regression results suggest that higher levels of ownership and dividends negatively affect leverage. Concomitantly, ownership and leverage both positively impact dividends. Lastly, we find that leverage is negatively associated with ownership, while dividends positively impact ownership.

This study also considers the convergence of interests theory and the entrenchment theory and their abilities to explain the role of managerial stock ownership in lowering agency costs.

Title

Financial decisions, ownership structure and growth opportunities: An analysis of Brazilian firms

Topic

influence of financial decisions and ownership structure on firm value in function of whether companies have profitable growth opportunities

Theory used by the article

Underinvestment theory: The underinvestment view (Myers, 1977) stresses the negative effect of too much corporate debt on firm value, since it may incentivize managers to forego profitable investment projects.

Overinvestment Theory: The overinvestment view applies when the firm has no growth opportunities, and is closely related to the free cash flow (Jensen, 1986 and 1993; Lang et al., 1996; Smith and Watts, 1992; McConnell and Servaes, 1995; Singh and Faircloth, 2005). This theory emphasizes the negative consequences of too much cash flow under the discretionary control of managers. If the firm has no growth opportunities, managers are likely to be tempted to waste the cash flow on unproductive projects.

Signalling theory: The signalling explanation is based on the asymmetric information between managers and investors (Amihud and Murgia, 1997; Benartzi et al., 1997). Firms with the best investment projects need to signal their growth opportunities in such a way that cannot be imitated by firms without good investment projects.

Free cash flow theory:  Consistent with free cash flow theory, shareholders welcome dividend payments since the funds under managers’ discretionary control decrease. Consequently, the value of the firm is also positively related to dividend payout in firms with the poorest growth opportunities.

Hypothesis:

• H1a: For firms with growth opportunities a negative relation exists between corporate debt and firm value.
• H1b: For firms without growth opportunities a positive relation exists between corporate debt and firm value.
• H2a: For firms with growth opportunities either a positive or a negative relation exists between dividends and firm value.
• H2b: For firms without growth opportunities a positive relation exists between dividends and firm value.
• H3: Both for firms with and without growth opportunities a positive relation exists between ownership concentration and firm value.
• H4: A non-linear relation exists between ownership concentration and firm value. This relation – initially positive and negative beyond a critical threshold – holds for firms with growth opportunities.

Variable used

• They measure the growth opportunities with the equity market-to-book ratio (MBE).
• Two additional measures of growth opportunities: the price-earnings ratio (PER) and investment intensity (INV). PER is the market value-to-net profit ratio. Investment intensity is measured as the ratio of investment, including plant, property and equipment (PPE) and R&D, to the existing capital stock.
• The explanatory variables are different measures of financial leverage, dividend policy and ownership structure. With regard to debt, this work uses the financial leverage ratio (LEV), defined as the book value of debt divided by total assets. Dividend policy (DIV) is introduced through the ratio dividends over total assets.
• Concerning ownership structure, the work uses the proportion of shares owned by the largest shareholder (C1) as a measure of ownership concentration. It also uses C1 squared (C1²) to test a possible non-linear effect of ownership concentration. Firm size is a control variable, measured as the log of total assets (SIZE).

Method of Analysis

They defined a multivariate regression model in which the q ratio depends on the leverage, dividends and ownership structure as follows (sub-index i refers to the firm and t to time):

Q_it = β₀ + β₁·LEV_it + β₂·DIV_it + β₃·C1_it + β₄·C1²_it + β₅·SIZE_it + η_i + η_t + ε_it (1)

The panel data methodology makes it possible to control the so-called constant and unobservable heterogeneity (Arellano, 2003; Hsiao, 2004). Panel data estimations rely critically on the fixed-effects term (η_i), namely the identification of some specific features of each firm that remain fixed over time. The fixed-effects term is unobservable, and hence becomes part of the random component in the estimated model. We also controlled for the effect of macroeconomic variables through a time effect η_t. The random error term ε_it controls both for the error in the measurement of the variables and for the omission of some relevant explanatory variables.

Result

Table 4 shows the results of the basic estimation; they confirm most of the hypotheses about the influence of leverage, dividends and ownership on firm value depending on the availability of growth opportunities. First, financial leverage is significant in all the estimations (columns 1-3 in panel A. Thus, consistently with Hypothesis 1a, the coefficient of LEV is negative for firms with the most growth opportunities.

In contrast (panel B in Table 4), when firms lack profitable projects, leverage is positively and significantly related to firm value. This result corroborates Hypothesis 1b, which suggests the disciplinary role of debt and how the value of the firm increases through a reduction in the free cash flow, preventing managers from incurring wasteful expenses.

Table 4 also reports the results for the dividend policy. This result implies dividends have a dual but complementary function. Firms with high growth opportunities seem to use dividends to signal growth opportunities (Hypothesis 2a). For firms without growth opportunities, where the free cash flow problem is more severe, dividends seem to play a disciplinary role on managers (Hypothesis 2b).

Third, as far as the ownership concentration is concerned, column (2) shows a positive relation with the value of the firm irrespective of the growth opportunities. This result confirms Hypothesis 3 by showing how the stake owned by the largest shareholder creates incentives to improve the firm’s performance through a more detailed control of managers. Nevertheless, when a quadratic term for ownership concentration (C1²) is introduced, there are significant differences between firms with and without growth opportunities, as reported in column (3). In this case, for companies with good investment projects, a non-linear relation exists between firm performance and ownership concentration: positive for low levels of ownership concentration and negative for high levels. These results are coherent with Hypothesis 4, and suggest a combination of alignment and entrenchment effects (Morck et al., 1988).

Conclusion

The results of this work show that leverage and dividends in Brazil play a dual role depending on the availability of growth opportunities. Also, ownership concentration may improve the control of managers, but at the same time may also exacerbate problems between large and small shareholders in firms with the most growth opportunities.

The results suggest that ownership concentration improves the value of all the firms, irrespective of the growth opportunities. But on the other, in firms with growth opportunities there is a risk that large shareholders will expropriate wealth at the expense of minority shareholders according to the non-linear relation uncovered.

Interrelationships among capital structure, dividends,

Dividend Policy

The Effect of Asymmetric Information on Dividend Policy

Main Topic

This article examines the effect of asymmetric information on dividend policy in light of an alternative explanation based on the pecking order theory.

Theory and Previous Research

Theory used

• Pecking Order Theory
• Signaling Theory
• Residual Theory

Previous Research

• The various explanation of dividend policy can be classified into at least three categorized of market imperfections; agency costs, asymmetric information, and transaction costs.
• Rozeff(1982) and Easterbrook(1984) argue that the dividend payments may serve as a mechanism to reduce agency costs of external equity. The agency costs arise from costs associated with monitoring managers and/ or from risk aversion on the part of managers.
• Aharony and Swary(1980); Asquith and Mullins(1983) argue that the evidence indicates a positive relation between stock price response and the sign of the announced dividend change.
• Miller and Rock(1985) develop a model in which higher dividends are associated with higher earnings.
• Pecking order theory predicts that the higher the level of asymmetric information, the lower the dividends.
• Signaling Theory predicts the firm with higher level of asymmetric information will have to pay a higher level of dividends to signal the same level of earnings as a firm with a lower level of asymmetric information.

Hypothesis

Pecking order theory predicts that the higher the level of asymmetric information, the lower the dividend. Devidends are inversely related to the level of asymmetric information.

Variables

• Devidend Yield (DIVYLD)
• Agency costs of (external) equity – Insider Ownership (INSOWN)
• Growth or investment opportunity – Growth measure  (MTOB)
• Analyst following the firm (ANAL)
• Cash Flow (CFTOB)
• Agency costs of debt and financial distress (DIST)
• Book Value of asset (BVA)

Method of Analysis

• Tobit Model
• Both dividend-paying and non-dividend paying firms.

Yi* = β’X + εi

Yi* =optimum dividend level for firm i

Yi =measured dependent variable (of optimum dividend level)

X =vector of explanatory variables

Εi =Disturbance term

Result

—  Analyst following (LOGANAL) and cash flow (CFTOB) are positive and significant

—  The coefficient of growth opportunities (MTOB) is negative and significant

—  The distress (DIST) variable is positive and significant

—  Dividends are unrelated to insider ownership variable (INSOWN)

—  Firm that resort to external sources for funds attempt to first exhaust their internal funds by paying lower dividend

—  Larger firms, which have less asymmetric information, pay higher devidends

—  Issue cost increase with the level of asymmetric information given firm size

Conclusion

—  The empirical result above indicates that dividends are positively related to both analyst following and cash flow, but negatively related to growth opportunities.

—  A higher analyst following implies less asymmetric information. The positive relation between dividends and analyst following is consistent with the pecking order theory.

—  The positive relation between dividend and cash flow and the negative relation between dividend and growth opportunity are consistent with the pecking order theory.

—  Dividends are unrelated to the insider ownership variable when the level of asymmetric information is explicitly controlled.

Dividend Policy Behaviour in the Jordanian Capital Market

Main topic

This paper examines the dividend policy behavior of companies listed on the Jordanian capital market

Theory used and previous research

Dividend Policy theory

Previous research:

• Lintner’s (1956) classical paper, US and British corporations follow stable dividend policies.
• Kato and Lowentein (1995) find that Japanese companies follow stable dividend policy. Similarly, this conclusion was arrived at by Shevlin (1982), Leithner and Zimmermann (1993), and Lasfer (1996) who examined Canadian, European, and British corporations respectively.
• Adaoglu (2000) examined the dividend policy of Turkish corporations. Contrary to the empirical evidence which supports stability, his empirical results show that Turkish companies follow unstable cash dividend policies.
• Aivazian et al. (2001) examine the dividend behaviour of firms operating in eight developing countries as well as 100 American firms over the time period 1981-1990.

Hypothesis

• Jordanian listed companies follow stable cash dividend policies
• current dividends more sensitive to past dividends
• the 1996 introduction of dividend tax had any impact on the dividend behaviour of listed companies

Variables

Three main variables which are used in this paper:

• dividend per share
• dividend payout ratio
• earnings per share

Method of analysis

• pooled ordinary least squares
• the fixed effects model
• the random effects model to choose the more appropriate model for our sample.

Result

Conclusion

The empirical research in this paper focused on the time period 1985-1999. Based on a sample of 44 Jordanian companies which are listed on ASM, the empirical evidence shows that these companies follow stable dividend policies. Indeed the results indicate that lagged dividend per share is more important than current earnings per share in determining current dividend per share. Moreover, the empirical results indicate that the 1996 imposition of taxes on dividends did not have any significant impact on the dividend behaviour of the listed companies.

Dividend Policy Behaviour in the Jordanian Capital Market

CAPITAL STRUCTURE

Article 1

TITLE

An Empirical Study on the Determinants of the Capital Structure of Listed Indian Firms

TOPIC

This article presents empirical evidence on the determinants of the capital structure of non-financial firms in India based on firm specific data.

THEORY USED BY ARTICLE RESEARCH

• Modigliani-Miller (MM) Theory
• Static trade-off theory
• Pecking order theory
• The Tax Based Theory
• The Signaling Theory
• The Agency Theory

HYPOTHESIS OF RESEARCH

Tax effect and signaling effect play a role in financing decisions where as agency cost effect financing decision of big business houses and foreign firms

The size of the firm and business risk became significant factors influencing the capital structure during post-liberalization period.

VARIABLE USED

• Measures of leverage (Dependent variable)
  • Book leverage
  • Market leverage
  • Explanatory variables
    • Non-debt tax shield (NDTS)
    • Tangibility
    • Profitability
    • Business risk
    • Growth opportunity
    • Growth
    • Size
    • Agency variables
      • big business group firms, foreign private firms, other firms

METHOD OF ANALYSIS

Regression model used to analyze the determinants of Indian firms’ capital structure.

RESULT OF THE ANALYSIS RESEACRH

Empirical Result

The book value based leverage (LBV) has decrease during post liberalization period whereas, market value based leverage (LMV) shows increase during the same period.

Non-dept tax shield (NDTS) has decreased during post liberalization period due to declined tax rates.

Profitability has also decreased due to increased competition due to liberalization and general recession in some major sectors.

There has been significant decrease in mean debt-equity ratio across the groups and industries.

Except growth rate and size all other explanatory variables have significant correlation with leverage during liberalization period whereas all the explanatory variables are significantly correlated with leverage during post liberalization period.

The interpretation of these result is presented below:

Tax and signaling effects on financing decisions

The overall results are consistent with the prediction of the tax based model and signaling model. The estimated coefficients of Non-debt tax shield, Cash operating profit, Market to book value ratio are consistently significant and have predicted signs across the equations.

Agency effects on financing decisions

Foreign investors are not adopting high leverage to discipline management. For big group firms these coefficients are negative and significant when leverage is measured in terms of market value.

Industry classification have no impact on the determinants of debt-equity choices.

CONCLUSIONS

Traditional factors that are affecting financing decisions are profitability, tangibility, taxes, and growth are all significant.

The size and risk measures are additional factors which influence capital structure decisions during post liberalization period.

Ownership pattern is significant when leverage is measured in terms of market value.

Leverage measured in terms of market value reveals better goodness of fit.

Capital Budgeting

Article 1

Capital Budgeting: NPV v. IRR Controversy

Unmasking Common Assertions

Main topics:

Capital Budgeting and Investment Decisions

This journal help asses the very basics of reckoning investment opportunitues as well as to improve the current pedagogy

Theory and Previous Research

Capital Budgeting The process in which a business determines whether projects such as building a new plant or investing in a long-term venture are worth pursuing. Oftentimes, a prospective project’s lifetime cash inflows and outflows are assessed in order to determine whether the returns generated meet a sufficient target benchmark.

Hypothesis

• NPV and IRR method is plain mathematics and does not pretend to be ranking device.
• There is no real conflict between NPV and IRR, the solution of a polynomial is the subject matter.

Variables Used:

• NPV
• IRR
• Discount rate
• Cash flow

Method of Analysis

Comparison between NPV and IRR

Analysis and Conclusion

NPV is the function of the discount rate, a curve in the plat plane. Both finding NPV and IRR follow from the very same mathematics.

The IRR fails in numerous cases in making sound capital budgeting decision.

The classical NPV/IRR-method meets only nominalism. A real good method contains everything.

Article 2

A Review of the capital budgeting behavior of large South African firms

Main topics:

What methods leading South African companies use to evaluate capital investments

What methods these companies use to evaluate mutually exclusive projects in order to choose between them.

Theory and Previous Research

• Capital Budgeting Theory
• Capital investment typically account for a large amount of the funds of the organization ( Holmes 1998:2)
• Capital investment normally have fundamental affect on the future cash flows of the organization(Holmes 1998:2)
• Once an investment decision has been taken, it is often not possible to reverse it, or it is very costly to do so (Holmes 1998:2)
• Once the fund have been commited, they are normally tied up for a considerable period of time
• Investment affect the profitability and long term strategy of the organization (Andrews & Butler 1986:31)

Hypothesis

Older methods such as accounting payback are still practiced, but they are increasingly being used merely as secondary methods to support the primary method

Variables Used:

• Internal rate of return
• Net present value
• Profitability index
• Accounting payback
• Present value payback
• Accounting return on investment
• Adjusted internal rate of return
• Other methods

Method of Analysis

The analysis is using questionnaire. The questionnaire was divided into four section. The first section dealt with each company’s characteristics, such as the business sector it operated in, the size of its assets, the size of its capital budget, its growth rate and profitability. Section two dealt with the capital budgeting practices of these companies, such as which methods they used, how they evaluated and choose between mutually exclusive projects, and what discount rates and reinvestment rates they used. Section three dealt with risk and the techniques it used to adjust for uncertainty. Section four contained a hypothetical sccenario where the respondent had tochoose between mutually exclusive projects.

Conclusion:

All companies realise that the long-term profitability and success of a company lies in its ability to identify and select capital investments that will increase value and will provide the company with the competitive edge that it needs to beat the competition

Older methods such as accounting payback are still practiced, but they are increasingly being used merely as secondary methods to support the primary method.

The result suggest that South Africa companies prefer to use the IRR and NPV to evaluate capital investments.

NPV would have been a simpler and quicker method to use.

The respondents did not select the project that would have maximize shareholder wealth.

in order to be truly globally competitive, companies have to ensure that they use the precious resources that they have effectively.

Securities Valuation

Article 1

Discussion of “The Book to Price Effect in Stock Returns: Accounting for Leverage”

Main Topics: The relation of financial leverage to future returns after controlling for the firm assets risk.

Theory & Previous Research

• Penman, Richardson, and Tuna describe the theoretical deconstruction of the book to market ratio into two components: a net operating asset component and financial leverage.
• Penman uses the residual income valuation framework to theoretically illustrate the expectation embedded in price for given book to market ratio realization.
• Petkova and Zhang show that the value premium itself tends to covary positively with time varying risk attribute.

Hypothesis:  The negative relation between leverage and return is robust to control for primitive firm characteristics, such as beta, standard deviation of returns, the volatility of earnings, and financial distress, which would influence a firm’s optimal capital structure choice, leading the authors to conclude that endogeneity is not the source of the negative leverage-returns relation.

Variables:

PRT decompose the book to market ratio into the formula that the variables consist of:

—  An unlevered, net operating asset based pricing multiple

—  Financial leverage

Method of Analysis: Book-to-Market Ratio

Analysis: High (low) book to market ratio implies that prices contain expectation of low (high) return on equity realizations and lower (higher) growth in book value in the other words, as currently priced, a high (low) book to market firm is expected to be a poor (strong) performer and therefore more (less) risky.

Conclusion: The conference paper by PRT provides a theoretical decomposition of the book to market ratio and uses this framework to document a robust negative relation between future return and leverage after holding the net operating asset dimension of the firms pricing multiple constant.

Article 2

On Capital Market Ratios and Stock Valuation: A Geometric Approach

Main Topic

—  This paper presents a new technique for the empirical analysis of some capital market ratios and stock valuation

—  show how capital market ratios (such as the price to earning ratio) can be plotted in a constructed stock valuation box

Theory and Previous Research

—  CAPM

—  Capital Market Ratios theory

—  Stock Valuation Box theory

Hypothesis: New measure of PERs is better than the traditional one

Variables

—  PER

—  PERs

—  Individual stock (or  portfolio) returns

Method of Analysis

—  The Mizon-Richard-,

—  Davidson-MacKinnon- and Cox-Pesaran tests

Result

—  The Mizon-Richard tests confirm the finding: They reject the null hypothesis that model with PER is the true model, and we do not reject the null that model with PERS is the true one.

—  The Davidson-MacKinnon- and Cox-Pesaran tests in regressions using the 5- year data also confirm these findings.

—  These results indicate that empirical work that use PER, the traditional P/E ratio, as the dependent variable may suffer from misspecification problem, which can be addressed using the new share approach of P/E ratio we develop in this paper, the PERs.

Conclusion

—  This PERs is free from the asymmetric and non-proportionality characteristics of PER.

—  We provide some evidence that the new measure, PERs, with its scaling and proportionality properties, may be the better measure of price to earning ratio

—  SVB can be use as a tool of analysis in providing a crucial first stage for analyzing changes in stock valuation components, in particular those assumed to be correlated with potential increase and decrease in stock value.

—  The versatility of this simple methodology is emphasized by its applicability for any number of years and for any single and sectoral study of stock performance.

Risk, Return, and Market efficiency

Article 1

Extending the Capital Asset Pricing Model: the Reward Beta Approach

Topic: to know is reward beta approach better than CAPM and the three-factor model.

Theory:

– Fama And French (1992), doubt about the validity of the CAPM.

– Fama and French (2004) conclude that the CAPM’s empirical problems invalidate most of its current applications.

–  Fama and French (1992) provide strong evidence for size and book to market effects.

–  Bornholt (2006) extends these case by deriving a board class of mean risk asset pricing models that includes the CPAM as a special case.

–  Fama and French (1993) typically show increasing average excess returns and decreasing CPAM betas as book to market equity increases.

–  Fama and French (1992,1993,1995,1996) argue that if stocks are priced rationally, then size and book-to-market equity must proxy for underlying risk factors.

–  Fama and French (1993) use the three-factor model to explain the cross-sectional variation in the returns of 25 portfolios of stocks sorted on size and book-to-market equity comprising New York Stock Exchange (NYSE), American Stock exchange (AMEX) and National Association of Securities dealers Automated Quotation System (NASDAQ) stocks.

–  Fama and French (1992, 1993, 1995, 1996) argue that size and book-to-market equity must proxy for two underlying risk factors if stocks are priced rationally.

Hypothesis:
Reward Beta Approach perform better than the CAPM and the three-factor model.

Variables:

The reward beta approach

Rf=the risk free rate

Ri and Rm=random returns of security I and the market

Βi= CAPM beta

A version of the market model

J= portfolio j

Εj= a random error term

Empirical evaluation

Method of Analysis

• The reward beta approach
• A version of the market model.
• Empirical evaluation
  • Within sample estimates of betas and factor sensitivities
  • Out-of-sample test
  • Robustness

Analysis:
Both the CAPM and the Fama French three factors model are known to have deficiencies.The empirical evidence does not support the CAPM, whereas the three factor model lacks theoretical asset pricing justification and its appeal is limited in practice by estimation problems.

The reward beta approach is based on asset pricing theory and is strongly supported by the empirical evidence reported.

These advantages make this approach a better choice across a range of applications.

Article 2

A Historical Analysis of Market Efficiency: Do Historical Returns Follow a Random Walk?

Main Topic: Market Efficiency

Main problem: try to find that historical returns follow a random walk or not

Theory:

Market efficiency is directly or implicitly tested any time a study is performed to identify stock price reactions to certain events such as dividend announcements (Bajaj and Vijh 1995, 1990), earnings announcements (Bamber 1987), stock splits (Copeland 1979), large block transactions (Holthausen, Leftwich, and Mayers 1987; Kraus and Stoll 1972), repurchase tender offers (Lakonishok and Vermaelen 1990), and other public announcements (Kim and Verrecchia 1991a,b).

Hypothesis: Historical Returns Follow a Random Walk

Method of Analysis

The Box-Jenkins method of forecasting is different from other methods in that it does not assume any particular pattern in the historical data of the series to be forecast. Instead, it uses an iterative approach to identify the underlying pattern. The model is deemed to fit the series well if the residuals between the forecasting model and the historical data points are small, randomly distributed (as white noise), and independent. If the specified model is not satisfactory, the process is repeated by using another model designed to improve upon the original one.

Variable:

YT = dependent variable,

YT-1,YT-2,YT-p = lagged variables,

B1,B2,Bp = regression coefficients,

eT = residual term.

W1,W2,Wq = weights,

eT-1,eT-2,eT-q = previous values or residuals.

Conclusion

Historical stock returns are analyzed to test the efficiency of the NYSE from 1885 through 1962, the period before the CRSP tapes were available. The Box-Jenkins methodology was employed in an attempt to identify patterns which could be used to predict stock returns.

The confidence intervals associated with each of the three tables are consistently and significantly widened with each successive forecasting period indicating that changes in historical stock prices are completely random. Although monthly and weekly return patterns were found to be significant, they were still unsuccessful in predicting future stock price movements. Since changes in stock prices are random, we can do no better than to predict that the next period’s price will be somewhere around where it was the last time we knew it. This conclusion is not surprising, and moreover, is consistent with modern efficient market studies.

Ownership, Control, and Compensation

ARTICLE 1

TITLE

OWNERSHIP STRUCTURE, INVESTMENT, AND THE CORPORATE VALUE: AN EMPIRICAL ANALYSIS

TOPIC

Ownership, Control, and Compensation

THEORY USED BY ARTICLE RESEARCH

Morck et al (1988) and Mc Connell (1990) about non linear relation between ownership structure and corporate value.

1. Exploring how ownership structure affects corporate value.
2. Testing whether it is appropriate to treat ownership structure as exogenous.

Demsetz and Lehn (1985) about OLS (Ordinary Least Square) will generate inconsistent parameter estimates which can lead to misinterpretation of regression results and incorrect management decisions.

Morck et al.(1988) significant relation between insider ownership and corporate value. A similar non monotonic relation between insider ownership and investment, where investment is measured by both capital expenditures and research and development expenditures.

Theoretical predictions focusing whether ownership structure affects investment.

Jensen and Meckling (1976) and Stulz (1988) ownership structure affects corporate value.

Jensen and Meckling (1976) Find ownership structure affects corporate value by its affect on investment.

Morck et al.(1988) and Mc Connell (1990) and Servaes (1990) empirically explore the overall relation between ownership structure and corporate value using Tobin’s Q as a proxy for corporate value. Tobin’s Q may serve as a proxy for other things such as corporate quality or corporate opportunities.

Morck et al (1988) and Mc Connell (1990) treat ownership structure as exogenous in exploring the relation between ownership structure and corporate value.

Demsetz and Lehn (1985) ownership structure is endogenously determined in equilibrium.

Kole (1994) reversal of causality in ownership corporate value relation, suggesting that corporate value could be a determinant of the ownership structure rather than being determined by ownership structure.

HYPOTHESIS OF RESEARCH

1. Hypothyze Ownership structure affects investment which, in turn, affects corporate value.
   1. The possibility that ownership structure, investment, and corporate value are endogenously determined rather than assuming that ownership structure is exogenous.

VARIABLE USED

• Insider ownership (INS1,INS2, INS3)
• Replacement cost of assets
• Tobin’s Q (1990, 1991)
• Capital expenditure
• R&D expenditure
• Cash flow

METHOD OF ANALYSIS

OLS regression analysis

1. Fix this level, then search for the second ownership level that yields the most significant slope coefficient on the second and third insider ownership variables in the regression.
2. Using an iterated search technique around the two initial point, seek to find the two levels of ownership that provide the most significant slope coefficients on the three insider ownership variables simultaneously.

Simulatneous equation regression analysis

to address the potential endogencity effect, a simultaneous equations system of ownership structure, investment, and corporate value using the two stage least squares (2SLS)

RESULT OF THE ANALYSIS RESEACRH

Investment regression result a significant non monotonic relation between the level of investment and insider ownership. The relation between insider ownership and investment is significant for ownership levels between 0% and 38%, but is insignificant for level above 38%.

Simultaneous equation regression analysis a higher level of insider ownership are expected at firm with high corporate value. A higher level of investment may lead to a greater corporate value which induces a higher level of insider ownership.

Simultaneous equation regression result a investment affects corporate value, affects ownership structure.

Robustness test a relation between corporate value and debt is negative for high growth firms and positive for low growth firms.

This paper shows that endogencity significantly affects the inferences one can draw regarding the relation among ownership structure, investment, and corporate value. OLS regression suggests that ownership structure affects investment and therefore corporate value. However. Simultaneous regression reveals that investment affects corporate value which, in turn, affects ownership structure, but not vice versa. The finding also brings into question the result in previous studies, such as Morck et al. (1988) that treat ownership structure as exogenous.This also offers an important managerial implication. In particular, the main finding that investment affects corporate value which, in turn, affects ownership structure, but not reverse suggests that ownership may not be an effective incentive mechanism to induce managers to make value maximizing investment decisions.

ARTICLE 2

TITLE

How Do Family Ownership, Control, and Management Affect Firm Value?

TOPIC

Ownership, Control, Management and Firm Value

THEORY USED BY ARTICLE RESEARCH

family firms are at least as common among public corporations around the world as are widely held and other nonfamily firms (Shleifer and Vishny, 1986; La Porta et al., 1999; Claessens et al., 2000; Faccio and Lang, 2002; Anderson and Reeb, 2003).

Holderness and Sheehan (1988) find that family firms have a lower Tobin’s q than nonfamily firms, while Anderson and Reeb (2003) find the opposite. In other economies, the evidence is scarce but also mixed (Morck et al., 2000; Claessens et al, 2002; Cronqvist and Nilsson, 2003; Bertrand et al., 2004).

Berle and Means (1932)

suggest that ownership concentration should have a positive effect on value because it alleviates

the conflict of interests between owners and managers

Demsetz (1983)

argues that ownership concentration is the endogenous outcome of profit-maximizing decisions by current and potential shareholders, so that as a result, it should have no effect on firm value.

Three recent studies focus more narrowly

on the effect of ownership in the hands of families and other large shareholders: Claessens et al. (2002), Anderson and Reeb (2003), and Cronqvist and Nilsson (2003)

Individual- and family-controlled firms are the foremost example of the corporation modeled by Shleifer and Vishny (1986), one with a large shareholder and a fringe of small shareholders. In such a corporation, the classic

owner-manager conflict described by Berle and Means (1932) or Jensen and Meckling (1976) (to which we shall refer as “Agency Problem I”) is mitigated due to the large shareholder’s greater incentives to monitor the manager. However, a second type of conflict appears (“Agency Problem II”): The large shareholder may use its controlling position in the firm to extract private benefits at the expense of the small shareholders.

Claessens et al. (2002) and Lins (2003) show that in East Asian economies, the excess of large shareholders’ voting rights over cash flow rights reduces the overall value of the firm, albeit not enough to offset the benefits of ownership concentration.

Cronqvist and Nilsson (2003) find that in Sweden it is cash flow ownership, not

excess voting rights, that has a negative impact on value.

Morck et al. (1988), Palia and Ravid (2002), Adams et al. (2003), and Fahlenbrach (2004) find that founder-CEO firms trade at a premium relative to other firms.

Smith and Amoako-Adu (1999) and Pérez-González (2001) find that the stock market reacts negatively to the appointment of family heirs as managers.

For firms with multiple classes of tradable shares, the procedure is the same for each class of stock and only requires adding the market value of all classes (Zingales, 1995, Nenova, 2003).

Palia and Ravid (2002), Adams et al. (2003), and Fahlenbrach (2004) find the founder-CEO premium to be robust to a variety of self-selection tests.

The Governance Index is the measure of corporate governance developed by Gompers,

Ishii, and Metrick (2003) based on the Investor Responsibility Research Center (IRRC) data.

Both dividends and debt can play a role in limiting minority shareholder expropriation by removing corporate wealth from family control (Jensen, 1986; Faccio, Lang, and Young, 2001).

The theoretical debate about the relative importance of each agency problem (see, e.g., Burkart et al., 2003).

HYPOTHESIS OF RESEARCH

Family Ownership, Control, and Management Affect Firm Value

VARIABLE USED

1 Family firm

Firm whose founder or a member of the family by either blood or marriage is an officer, a

director, or the owner of at least 5% of the firm’s equity, individually or as a group. Table 10

considers alternative definitions. Source: Proxies.

2 Founder

Individual responsible for the firm’s early growth and development. Founders have to be

identified as such in at least two public data sources and have no other source mention a

different person as the founder. Sources: Proxies and other SEC documents, Hoover’s,

corporate websites, and web searches about company histories and family relationships.

3 Firm age

Number of years since the founding of the firm or the oldest of its predecessor companies.

Sources: Same as for founder.

4 Family ownership stake

Ratio of the number of shares of all classes held by the family to total shares outstanding. The

numerator includes all shares held by family representatives (e.g., cotrustees, and familydesignated

directors). It includes all shares over which any family member has shared

investment or voting power with a family member (which are only counted once), but none of

the shares over which the investment or voting power is shared with a nonmember of the

family. Source: Proxies.

5 Controlenhancing mechanisms

Voting or control structures that enable the family’s voting rights to exceed its cash flow

rights. These structures include: multiple share classes, pyramids, cross-holdings, and voting

agreements. Multiple share classes are voting structures where the firm has issued two or more

classes of stock with differential voting rights. Pyramids are control structures where the

family holds shares in the firm through one or more intermediate entities such as trusts, funds,

foundations, limited partnerships, holdings or any other form of corporation of which the

family owns less than 100%. Cross-holdings are control structures where the firm owns shares

in a corporation that belongs to the family’s chain of control in the firm. Voting agreements are

pacts among shareholders that result in the family’s holding voting power over a larger number

of shares than what it owns with investment power. Source: Proxies.

6 Family voteholdings in excess of shares owned

Difference between the percentage of all votes outstanding held by the family and the

percentage of all shares outstanding owned by the family. The family’s holdings include all

shares and votes held by family representatives (see [4]). The number of votes held by each

family member/representative is the product of the number of shares with voting power of each

class, times the number of votes per share of that class. Source: Proxies.

7 Governance index

Number of governance provisions in the firm’s charter, bylaws, or SEC filings that reduce

shareholder rights (Gompers-Ishii-Metrick (2003) measure). Source: IRRC.

8 Nonfamily blockholder ownership

Ratio of the number of shares (of all classes) held by all nonfamily blockholders to the total

shares outstanding. Blockholders are individuals or institutions listed in the proxy as beneficial

owners of at least 5% of the firm. Source: Proxies.

9 Nonfamily outside directors

Number of nonfamily outside directors (i.e., directors that are not managers as well, either

active or retired), divided by the total number of directors on the Board. Source: Proxies.

10 Tobin’s q

Ratio of the firm’s market value to total assets. For firms with nontradable share classes, the

nontradable shares are valued at the same price as the publicly traded shares. Sources:

Compustat and Proxies.

11 Industryadjusted q

Difference between the firm’s Tobin’s q and the asset-weighted average of the imputed qs of

its segments, where a segment’s imputed q is the industry average q. Industry averages are

computed at the most precise SIC level for which there is a minimum of five single-segment

firms in the industry-year. Sources: Compustat and Proxies.

12 ROA

Ratio of operating income after depreciation to total assets. Source: Compustat.

13 Market risk (beta)

Estimate from market model in which the firm’s monthly returns over the past five years are

regressed on the S&P 500 monthly returns. Source: CRSP.

14 Idiosyncratic risk

Standard error of estimate from market model in which the firm’s monthly returns over the

past five years are regressed on the S&P 500 monthly returns. Source: CRSP.

15 Diversification

Equals one if the firm has two or more segments in Compustat, zero otherwise.

METHOD OF ANALYSIS

The results are generally robust to the use of alternative specifications and econometric techniques, including multivariate OLS regressions of q and industry-adjusted q on continuous and categorical measures of family ownership and control, fixed and random-effects panel data models, and treatment effect models to control for endogeneity.

RESULT OF THE ANALYSIS RESEACRH

Although family firms play a vital role in the world economy, this sector has received relatively little attention, partly because of the difficulty of obtaining reliable data on these firms. Using this data, we examine the impact of family ownership, control, and management on firm value. Our results highlight the differential contribution to value of each of these elements, individually and in combination with one another. The overall conclusion is that whether family firms are on average more or less valuable than non family firms depends on how these three elements enter the definition of a family firm.

We find that family ownership creates value only when it is combined with certain forms of family control and management. Family control in excess of ownership is often manifested in the form of multiple share classes, pyramids, cross-holdings, or voting agreements. These mechanisms reduce shareholder value, with the reduction in value being proportional to the excess of voting over cash-flow rights. Family management adds value when the founder serves as the CEO of the family firm or as its Chairman with a nonfamily CEO, but destroys value when descendants serve as Chairman or CEO. The interaction between family control and management also generates significant value differences across firms.

Moreover, as Jensen and Meckling (1976) note, agency problems may not impose agency costs on minority shareholders if they were already capitalized into their purchase prices. In descendant-CEO firms, control-enhancing mechanisms have a mildly positive impact on value. This positive impact suggests that the mechanisms play a different role in these firms or at least send a weaker signal to the market: If control-enhancing mechanisms are put in place by descendants, it may be perceived as a defensive move on their part to counter the dilution of their ownership stake that comes with firm or family growth. Nevertheless, nonfamily shareholders in descendant-CEO firms are worse off than they would have been in a nonfamily firm.

Finally, we note that our estimates of the relative importance of family firms are likely be conservative because the firms in our sample are among the largest in the world, are listed on an exchange in a country with a high degree of shareholder protection, are frequent investment targets for index funds, and are generally old and thus more difficult to maintain under family control.

Analysis of KAEF company stock and business portfolio

Company Profile

History

Kimia Farma is a pioneer in the pharmaceutical industry of Indonesia. On August 16, 1971 changed its legal form into Limited Liability Company, a PT Kimia Farma (Persero). Since the date of July 4, 2001 Kimia Farma as a public company listed on the Jakarta Stock Exchange and Surabaya Stock Exchange.

Armed with a long industrial tradition for over 187 years and the name synonymous with quality, today Kimia Farma has grown into a major healthcare company in Indonesia is increasingly playing an important role in development and nation building and community.

Vision: Commitment to improving the quality of life, health and the environment.

Mission: Develop chemical and pharmaceutical industries to perform research and development of innovative products.

Develop an integrated health service businesses (health care providers) based distribution network and a network pharmacy.

Improving the quality of human resources and developing enterprise information systems.

Holding

PT. Kimia Farma Tbk.

Formed: August 16, 1971

Line of Business: Health Services

As well as state-owned public companies, Kimia Farma fully committed to implementing corporate governance both as a necessity and obligation as mandated by Law No.. 19/2003 on State Enterprises.

PT. Kimia Farma Tbk. Is a privately owned integrated health services, moving from upstream to downstream, namely: industry, marketing, distribution, retail, clinical laboratories and health clinics.

The production is made by both companies Pharmaceutical Factory products of chemical drugs, and herbal formulations, divided into 6 (six) lines of ethical production, free drugs, generic drugs, licensing and raw materials.

Almost all therapeutic classes accommodated by the company’s products consist of more than 260 items and products are marketed throughout Indonesia as well as exported to several countries through distribution companies or networks that have agreements with the company.

Subsidiaries

PT. Kimia Farma Trading and Distribution

Line of Business: Distribution of Drugs and Medical Devices

PT. Kimia Farma Trading & Distribution, which has 40 branches that distributes drugs and medical devices that are manufactured or produced by third parties with perpegang in principle to meet customer needs and satisfaction.

PT. Kimia Farma Apotek (Kimia Farma pharmacy)

Line of Business: Pharmacy

PT. Kimia Farma Apotek Apotek manage as many as 340 scattered throughout the country, which led the market with the acquisition field perapotekan market for 19% of total pharmacy sales in Indonesia.

Analysis of company stock risk and market risk

1. a. Analysis of average and standard deviation of stock return, market return and beta of company stock.

IHSG

average return	-0,0002%
standard deviation	0,02184241	2,1842%

KAEF

Average return	-0,0780%
std. Dev.	0,04353864	4,3539%

Market risk and stock risk

Basically, stocks are subject to two types of risk – market  risk and nonmarket risk. Nonmarket risk, also called specific risk, is the risk that events specific to a company or its industry will adversely affect the stock’s price. For instance, an increase in the cost of oil would be expected to adversely affect the stock prices of the entire oil industry, while a major management change would only affect that company. Market risk, on the other hand, is the risk that a particular stock’s price will be affected by overall stock market movements.

Nonmarket risk can be reduced through diversification. By owning several different stocks in different industries whose stock prices have shown little correlation to each other, you reduce the risk that nonmarket factors will adversely affect your total portfolio.

No matter how many stocks we own, you can’t totally eliminate market risk. However, we can measure a stock’s historical response to market movements and select those with a level of volatility you are comfortable with. Beta and standard deviation are two tools commonly used to measure stock risk

Standard Deviation

Standard deviation, which can also be found in a number of published services, measures a stock’s volatility, regardless of the cause. It basically tells you how much a stock’s short-term returns have moved around its long-term average return.. Higher standard deviations represent more volatility. In this case the standard deviation of KAEF is  4,3539% and standard deviation of ihsg is 2,1842%. So KAEF stock is more volatile than its indices.

These two measures can provide important information about a stock’s volatility. If your portfolio is riskier than you realized, you might want to take steps to reduce that risk. When investing, you might want to take a look at a stock’s risk first.

Beta

	Coefficients	Standard Error
Intercept	3,50141E-05	0,001059493
X Variable 1	0,05504994	0,024359543

Beta, which can be found in a number of published services, is a statistical measure of the impact stock market movements have historically had on a stock’s price. By comparing the returns of IHSG to a particular stock’s returns, a pattern develops that indicates the stock’sexposure to stock market risk.

Beta is calculated using regression analysis, and you can think of beta as the tendency of a security’s returns to respond to swings in the market. A beta of 1 indicates that the security’s price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security’s price will be more volatile than the market. For example, if a stock’s beta is 1.2, it’s theoretically 20% more volatile than the market.

The IHSG is an index generally considered representative of the Indonesia stock market and has a beta of 1. A stock with a beta of 1 means that, onaverage, it moves parallel with the IHSG – the stock should rise 10% when the IHSG rises 10% and decline 10% when the IHSG declines 10%. A beta greater than 1 indicates the stock should rise or fall to a greater extent than stock market movements, while a beta less than 1 means the stock should rise or fall to a lesser extent than the IHSG. Since beta measures movements on average, you cannot expect an exact correlation with each market movement.

In this case the beta of KAEF is 0,05504994 or 5,5049 %. It shows that this stock is almost risk free. means that, although all listed stocks average price change (up or down) the stock has a beta of 0 is no change  in price at all. Because the beta of thsi stock is almost zero if IHSG change the stock will has a very little change. so the stock has a beta of 0 is not affected by the stock market situation in general.

This Kimia Farma shares viewed from the beta of its shares belong to the income shares of stock, the stock tends to has a beta of less than one. These stocks are usually able to pay higher dividends than dividends paid in previous years. investors who own shares of this type are usually not thinking about the potential growth of stock market prices.

The risk inherent to the entire market or entire market segment. Risk which is common to an entire class of assets or liabilities. The value of investments may decline over a given time period simply because of economic changes or other events that impact large portions of the market. Asset allocation and diversification can protect against market risk because different portions of the market tend to underperform at different times. also called systematic risk.

First i think that the holding company is on the cash cows position. Cash cows are units with high market share in a slow-growing industry. These units typically generate cash in excess of the amount of cash needed to maintain the business. They are regarded as staid and boring, in a “mature” market, and every corporation would be thrilled to own as many as possible. They are to be “milked” continuously with as little investment as possible, since such investment would be wasted in an industry with low growth. The holding company has the largest profit but with low growth.

The second i analyze about the PT. Kimia farma apotek, the SBU of PT kimia farma.it should be include in star matrix. Stars are units with a high market share in a fast-growing industry. The hope is that stars become the next cash cows. Sustaining the business unit’s market leadership may require extra cash, but this is worthwhile if that’s what it takes for the unit to remain a leader. When growth slows, stars become cash cows if they have been able to maintain their category leadership, or they move from brief stardom to dogdom. In this case they growth fastly in profit and market share. We can look in the annual report that the profit is increase year by year.

The third matrix is question mark. Question marks (also known as problem child) are growing rapidly and thus consume large amounts of cash, but because they have low market shares they do not generate much cash. The result is a large net cash consumption. A question mark has the potential to gain market share and become a star, and eventually a cash cow when the market growth slows. If the question mark does not succeed in becoming the market leader, then after perhaps years of cash consumption it will degenerate into a dog when the market growth declines. Question marks must be analyzed carefully in order to determine whether they are worth the investment required to grow market share. I think that PT. KFTD include in this matrix. They dont generate much cash, and need large net cash consumption. We can look on the annual report that they suffer some losses in 2009.