BOARD OWNERSHIP AND MARKET VALUATION : AN EMPIRICAL STUDY OF SINGAPORE-MALAYSIA FIRMS

Abstract

The theory of firm has been researched and studied extensively, yet there is no unified theory formulated. In the modern literature, the theory branched into three areas of study, namely, the agency theory, the capital structure and the dividend policies. This study will concentrate on a sub-area under the agency theory, that is the behaviour of board of directors in reducing the agency problems. The objective of this study is to establish a relationship between the board ownership and characteristics and the market value of the firms. Three effects are examined to investigate the relationship stated and they are the convergence-of-interest, entrenchment / wealth-transfer effect and board control effects. Three indicators are used to measure the performance and market value of firms and they are; i) Modified Tobin's Q ratio ii) Beta of the firm's shares and iii) Excess returns of the firm's shares. These indicators are regressed against the board ownership and the various board and firm's characteristics using the WLS Piecewise Linear Regression and WLS Multiple Regression with dummy variables. The results shows that the relationship between the board ownership and the market value of the firm not in a simple positive linear instead the signs of the linear slopes change over the various ranges of ownership. The puzzling results can be due to the convergence-of-interest and the entrenchment / wealth transfer effects that are in operation simultaneously, depending on the dominant effect of the two. The differences in firm sizes and growth rates can also partially explain the results. This study also find that firms with CEO-duality tend to do better than those without CEO-duality. One possible explanation is that CEO-duality is associated with large ownership stakes by the board and because of the large stake involved, the CEO is pressured to perform by the board.