Corporate Governance and the Stock Market in Trinidad & Tobago

Varuna L. RamlalPhD. Candidate

SALISES, St. Augustine

Objectives

1. Construct a Corporate Governance (CG) Index for firms listed on the Trinidad & Tobago Stock Exchange (TTSE)

2. Examine relationship between CG and performance of TTSE firms

3. Policy implications & Conclusions

CG defined

• Many definitions…• Sir Adrian Cadbury (1992): “Corporate

Governance is the system by which companies are directed and controlled.”

• Cornelius (2005): “corporate governance can be defined as the stewardship responsibility of corporate directors to provide oversight for the goals and strategies of a company and foster their implementation.”

CG defined cont’d

• OECD (2010): corporate governance refers to “procedures and processes according to which an organisation is directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among the different participants in the organisation – such as the board, managers, shareholders and other stakeholders – and lays down the rules and procedures for decision-making.”

CG defined cont’d

• Fahy et al (2006): “Put in its simplest form, corporate governance is the systems and processes put in place to direct and control an organisation in order to increase performance and achieve sustainable shareholder value.”

• Kaen (2003): “Corporate Governance is about who controls corporations and why”

Assessment of CG• CG is relevant in the marketplace but one of the major

concerns of researchers - the measurement of CG• The literature has proposed the use of CG Indices

(Ananchotikul 2008, Black et al 2003, Cornelius 2005, Garay and Gonzalez 2008, Klapper and Love 2002, Leal and Carvalhal-da-Silva 2005, Mallin 2006.)

• However, most of these indices have two shortcomings – (i) they have been produced for developed countries only and (ii) they rely on questionnaires issued to the firm being assessed.

Assessment of CG cont’d• Researchers have found that when firms are asked to

respond to questionnaires they put in what information they think is the ‘right answer’ or what they intend to do instead of what actually happens in their firm: self-report bias.

• Or they may not respond at all: self-selection bias.• For this reason there has been some movement away

from reliance on questionnaires administered to firms to use questionnaires which use public information only.

Index creation

• Quantitative questionnaire used• Covers major aspects of CG– Board Responsibility – Board Structure – Shareholder Rights– Transparency and Disclosure– Audit Committee– Types of firms

Index creation cont’d

• Questions based on the CBTT’s CG Guideline and generally accepted CG procedures.

• Yes – 1, No – 0 • Missing values not counted except for

Transparency section where the absence of a value is equivalent to a lack of transparency

• Final index value weighted to be between 0 and 1 for ease of firm comparison

Index Creation cont’d

• Total – 143 questions• Board Responsibility – 38• Board Structure – 25• Shareholder Rights – 10• Transparency & Disclosure – 53• Audit Committee – 17 • Sub-indices as well as total CG index

calculated

Financial Ratios - Performance

• Many calculated…• Earnings per share• Price/Earnings• Dividend per share• Dividend yield• Dividend cover• ROA• ROE• Stock return

Data

• Firms on first and second tier of the TTSE used

• CGITT used as the dependent variable• Ratios – main explanatory variables of interest• Control variables included – sector dummies,

age, size

Method of analysis

• Dependent variable lies between 0 and 1, inclusive.

• Fractional logit analysis used due to this (Wooldridge 2001)

• CGITT = β1AGE + β2SIZE + β3PERF • Maximum CG value – 0.78• Minimum CG value – 0.25

Results

• Marginal effects calculated to interpret the coefficients since fractional logit is non-linear so no direct quantitative interpretation

• Likelihood Ratio test and Wald test used to determine usefulness of performance variables in predicting CG in T&T

Results cont’d

• Significant performance indicators

Indicator Marginal effect P-value

ROE 0.495 0.002

EPS -0.058 0.004

DPS 0.115 0.029

DCOV 0.003 0.01

ROA -0.405 0.024

Results cont’d

• Negative marginal effects unexpected• Further investigation of correlation matrix

shows high correlations between ROE & ROA and between EPS & DPS.

• ROA & ROE – 0.775• EPS & DPS – 0.644

Results cont’d

• Sub-indices were also used as dependent variables• For all the models SIZE and ROE were significant. • In all the models ROE had a positive marginal

effect • In some models ROA was used instead, also

positive effect• LR and Wald tests show models with performance

indicators are better than without

Results cont’d

• Sector effects

Sector Dummy Marginal Effect P-valueBanking 0.143 0.000

Conglomerate -0.438 0.000

Manufacturing 1 0.164 0.000

Manufacturing 2 0.402 0.000

Trading 0.208 0.000

Results cont’d

• Financial performance positively affects CG• Sector classifications significant • Some sectors more prone to higher governance

Policy implications & Conclusions

• Financial performance has a positive effect on CG

• Encourage good performance• Certain sectors have a tendency towards good

governance• Formal CG regulation needed – may need

sector-specific regulation as well

The End