do investors really value corporate governance? evidence from the hong kong market
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Do Investors Really Value Corporate Governance? Evidence from the Hong Kong Market. Prof. Stephen Y. L. Cheung City University of Hong Kong. 1. Background. Corporate governance (CG) reform in Asian market Various efforts from both regional ( PECC, 2001 ) and international ( OECD, 2004 ) - PowerPoint PPT PresentationTRANSCRIPT
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Do Investors Really Value Corporate Governance?
Evidence from the Hong Kong Market
Prof. Stephen Y. L. CheungCity University of Hong Kong
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1. Background
• Corporate governance (CG) reform in Asian market
• Various efforts from both regional (PECC, 2001) and international (OECD, 2004)
• In Hong Kong (Code of Best Practice, 1999, Hong Kong Code on Corporate Governance, 2004)
• Family-controlled firms and Anglo-Saxon legal system in Hong Kong market
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2. Research Question
• Do CG practices pay in Hong Kong market?
• What are the determining factors for good CG practices in Hong Kong?
• CG performance of China-related companies listed in Hong Kong
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3. Literature
• Testing results of whether CG leads to better performance are mixed (e.g. Weiss and Nikitin, (1998), Klein (1998))
• Limited studies on the association between overall corporate governance practice and firm value (e.g. Gillan et al.(2003))
• Board responsibilities and composition are the focus of CG studies (e.g. Fama and Jensen(1983), Black et al.(2003))
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4.1 Methodologies - Data• 168 largest companies are covered• Constituent stocks of four main indices in HK
market– Hang Seng Index (HSI)– Hang Seng Hong Kong Composite Index (HSHKCI)– Hang Seng China-Affiliated Corporations Index
(HSCCI), Red-chip– Hang Seng China Enterprises Index (HSCEI), H-
share
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4.1 Methodologies – Data (Cont’)
• H-share: incorporated in Mainland China• Red-chip: incorporated in Hong Kong but
controlled by organizations in Mainland China
• Based on publicly available information (e.g. annual reports, AGM minutes, articles of association), 2002.
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4.2 Methodologies – Survey Design
• Based on Revised OECD Principles (OECD, 2004) and Code of Best Practices (HKEx, 1999)
• Including five categories and 86 criteria • Overall CG index ranges from 0~100• Transparency index and non-transparency
index are constructed
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Scorecard Followed The Five OECD Corporate Governance Principles
OECD principleNumber of questions & sub-questions
A. Rights of shareholders
16
B. Equitable treatment of shareholders
10
C. Role of stakeholders
4
D. Disclosure and transparency
30
E. Board responsibilities
26
Total 86
• OECD is internationally recognized
• HKEx guidelines comprehensively covered
• 168 public companies surveyed
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4.2 Methodologies – Survey Design (cont’)
• Companies were ranked as good, fair and poor for each criterion
• Each company was rated by two different members
• The overall results were cross-checked by academics
• Avoids selection bias• Measure the CG Index quantitatively, give credit to
the “amount” of information for each of the criteria under study
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5.1 Results – Descriptive Statistics
• CG overall Index ranges from 32.86 to 76.34, average is 48.33.
• Perform well in Section B and D, poor in Section A relatively
• Highest scores for HSI stocks, lowest for H-share stocks
• Finance and utilities sectors are on the top, property sector is on the bottom
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Corporate Governance Performance by Categories
20
30
40
50
60
70
80
90
100
110
Scor
es
A42.96
B82.78
C69.54
D74.88
E60.7
Range
Mean
Weak
Strong
A: Rights of Shareholders B: Equitable Treatment of Shareholders C: Role of Stakeholders in Corporate GovernanceD: Disclosure and TransparencyE: Board Responsibilities
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Corporate Governance Performance by Indices
30
35
40
45
50
55
60
65
70
75
80
Scor
es
AllHSI
HSHKCI HSCCI
HSCEI
Range
Mean
Weak
Strong
• HSI (Hang Seng Index ) • HSHKCI (Hang Seng Hong Kong Composite Index ) • HSCCI (Hang Seng China-Affiliated Corporations Index )• HSCEI (Hang Seng China Enterprises Index )
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Corporate Governance Performance by Industries
30
35
40
45
50
55
60
65
70
75
80
Scor
es
Range
Mean
IndustrialAll Properties Finance Utilities ConsolidatedEnterprises
Hotel &Misc
Weak
Strong
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5.2 Correlation Matrix of All Variables
This table provides correlation coefficients between dependent variables, independent variables and control variablesStatistically significant correlations (at 5% level or better) are shown in bold.
1 2 3 4 5 6 7 8 9 10 11 12 13 14 151 Total CGI 1.0002 mtbv 0.131 1.0003 ln(TA) 0.196 -0.282 1.0004 roa 0.084 0.305 -0.056 1.0005 current -0.062 0.131 -0.386 0.139 1.0006 bexc -0.151 -0.248 0.258 0.020 -0.180 1.0007 bout 0.355 0.043 0.460 0.027 -0.067 -0.190 1.0008 top_5 -0.116 -0.093 0.097 0.005 -0.154 0.067 -0.190 1.0009 dummya 0.370 0.040 0.025 -0.056 0.082 -0.004 0.147 -0.118 1.000
10 dummyc 0.556 0.135 0.203 0.138 -0.091 -0.203 0.186 -0.096 0.272 1.00011 dummycc -0.037 0.079 -0.048 0.016 -0.025 -0.130 -0.102 -0.016 -0.052 0.040 1.00012 dummymsc 0.227 0.169 0.392 0.088 -0.088 -0.072 0.402 -0.321 0.010 0.134 0.062 1.00013 dummyADR 0.107 -0.096 0.436 0.045 -0.130 0.025 0.314 0.002 -0.017 0.126 0.068 0.247 1.00014 dummyhr -0.179 -0.127 0.078 0.073 -0.043 0.255 -0.205 0.291 -0.164 -0.033 -0.089 -0.379 0.040 1.00015 D/E 0.085 0.302 0.245 -0.037 -0.025 -0.030 0.212 0.078 0.014 0.142 -0.150 0.066 -0.026 -0.049 1.000
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5.3 Results – Regression Results(1)
• Market-to-book ratio (MTBV) was used as proxy for company’s market value
• Positive and significant relationship between MTBV and CG Index was found
• Number of executive directors has negative impact
• The top 5 shareholders’ holding has negative impact
• The inclusion in the MSCI has positive impact
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Positive Correlation between Good Corporate Governance and
Company Valuation
30 35 40 45 50 55 60 65 70 75 800
1
2
3
4
5
6
7
8
9
10
Scores
Tobi
n's
QM
TBV
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OLS Results for CGI with Control Variables
MTBV
(1) (2) (3) (4) (5)
CGI 0.0330** 0.0428** 0.0475*** 0.0356** 0.0337**
ROA 2.5282** 3.0430*** 3.0431*** 2.2866**
Ln(TA) -0.3081*** -0.2043** -0.2209** -0.3583***
Current -0.042 -0.0317 -0.0209 0.0098
D/E -0.0441 -0.0190 0.0347 0.1423
BOUT -0.0249 -0.0070 -0.0193
BEXC -0.1089*** -0.0941** -0.0622
Top5 -0.0128*** -0.0126*** -0.0011
Dummy CEO & Chairman 0.1837 0.1738
Dummy Audit committee 0.1353 0.2321
Dummy Compensation 0.2794 0.3000
Dummy ADR -0.1421
Dummy MSCI 1.4939***
Dummy H Share & Red Chips 0.3374
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5.3 Results – Regression Results(2)
• Transparency index does matter• Non-transparency index become insigni
ficant when the number of executive director and top 5 shareholder’s share holding add into the model
• ROA has positive effect on MTBV
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OLS Results for Transparency Index with Control Variables
MTBV
(1) (2) (3) (4)
TINDEX 0.0371** 0.0414** 0.0373** 0.0388***
NONTINDEX 0.0179* 0.0202** 0.0136 0.0108
ROA 2.3482** 2.8850*** 2.8973*** 2.1137**
Ln(TA) -0.3414*** -0.2419*** -0.2540** -0.3850***
Current -0.0575 -0.0496 -0.0416 -0.0108
D/E -0.0589 -0.0319 0.0164 0.1205
BOUT -0.0277 -0.0106 -0.0267
BEXC -0.1046*** -0.0902** -0.0558
Top5 -0.0140*** -0.0138*** -0.0017
Dummy CEO & Chairman 0.2084 0.1935
Dummy Audit committee 0.1642 0.2637
Dummy Compensation 0.1997 0.2254
Dummy ADR -0.1382
Dummy MSCI 1.4847***
Dummy H Share & Red Chips 0.2346
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5.3 Results – Regression Results(3)
• For China-related firms, MTBV is positively related to CG Index
• For local firms, the relationship is not significant
• Investors have different criteria to value China-related firms and local firms
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Comparison of OLS Results between Mainland-related Firms and Local Firms
MTBV
China-related Firms Local Firms
CGI 0.0572** 0.0273
ROA 1.1930 4.5531***
Ln(TA) -0.0318 0.0662
Current 0.0704 0.1208
D/E 0.1192 0.1882***
BOUT -0.0309 -0.0601
BEXC -0.1327** -0.1401
Top5 -0.0051 -0.0111
Dummy CEO & Chairman 0.1984 0.1391
Dummy Audit committee -0.0322 0.5584*
Dummy Compensation 0.0791 0.3003
Dummy ADR -0.1142 -0.5526
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5.4 Results – Robustness Test
• Why we use 86 questions?
• Endogeneity
• Performance measurement (ROE)
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Spearman Ranking Correlation Test
• Spearman correlation coefficients between new and original rankings.
• All of the correlation coefficients below are significant at 1% level (P-value <0.0001)
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Endogeneity
• Use H-shares dummy as instrumental variable
• Durbin-Wu-Hausman Test (Two-stage-least- squares) for endogeneity
• No existence of endogeneity was found
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Performance Measurement
• Use Return on Equity (ROE) to measure operating performance
• Replace MTBV by ROE in OLS regressions
• Similar results were found • Confirm the robustness of the OLS results
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6. Conclusion (1)
• Construct a CG measure for HK listed firms• 10 points increase in CG Index implies a 33.7%
increase in MTBV. Worst-to-best change in CG Index implies 147% increase in MTBV
• Investors care more about CG performance of China-related firms
• Similar results were found in Thailand market (McKinsey & Company, Thailand IOD, 2002)
• Comparison among different markets • Policy Implication - encourage adoption of best practi
ce of corporate governance in Hong Kong
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7. Future Research
• Regional Comparison (Macro)– Regulatory framework– Market perception
• Regional Template (supported by the World Bank)
• Individual economies (Micro)– Thailand (3 times), China, the Philippines,
Indonesia (in progress)
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