The Relationship between Board Characteristics, Ownership Structure and Firm Performance
Date Issued
2015
Date
2015
Author(s)
Liao, Ying-Hsiu
Abstract
This study provides an evidence of relationship between firm performance and board characteristics, as well as firm performance and ownership structure in Taiwan. The sample includes 706 firms that had been listed in Taiwan Securities Exchange before end of 2011. This study tries to explain how the two internal corporate governance mechanism, board of directors and ownership structure, affect firm performance. At the same time, this study uses dual indicators, financial performance indicator ROA and firm value indicator Tobin’s Q, to evaluate the effect of board characteristics and ownership structure. This study focuses on the effect of board tenure, ownership concentration and outside shareholder shareholdings. Control variables in this study include firm age, firm size, firm’s debt ratio, industry, shareholdings of institute, shareholdings of financial institute, and whether the firm is controlled by government. The study applies multiple linear regressions as the quantitative analysis method. The followings are the conclusion from the result of the analysis: 1) Board tenure has a U-shape relationship with firm’s financial performance, but the relationship does not exist between board tenure and firm value. This indicates that on one hand, with the increase of board tenure, the more the boards are familiar with the firm and the industry, which helps the boards to assist managers to make right decision. While on the on the hand, due to the over-familiarity within board members, the groupthink may come out, and the independence of board members are eliminated as a result, even to the extent that it overpass the benefit brought from accumulated knowledge with increasing tenure. With this finding, board of directors should adjust its composition adequately over time to avoid too-long board tenure. 2) The ownership concentration has no significant relationship with the firm’s financial performance, while it positively affects the firm value. This implies that capital market prefers companies with concentrated ownership structure even they don’t significantly outperform the companies with lower concentration of ownership. 3) The ratio of outside shareholder shareholdings influences the firm’s financial performance in a positive manner, while there’s no significant relationship between outside shareholder shareholdings and the firm value. The finding indicates that outside shareholders can supervise the major shareholders, and reduce the agency cost between major shareholders and minor shareholders, and as a result improve the quality of corporate governance. Thus, companies should introduce outside shareholders when designing the ownership structure.
Subjects
Board characteristics
Ownership structure
Board tenure
Ownership concentration
Outside shareholder shareholdings
Type
thesis
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