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Powerpoint slides of Group 10 - Ownership concentration,...

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Unformatted text preview: Ownership concentration, firm performance, and dividend policy in Hong Kong Hong Presented by: Chan Yuk Ling, Amy (04701852g) Maggie Chu Shuk Yin (04726477g) Kylie Wong Tsz Ling (04712320g) Jeff Chan (04736876g) Introduction Introduction Does ownership concentration affect firm Does performance and value? performance • Previous studies : Mixed Results a)Demsetz and Lehn (1975) a)Demsetz No significant relationship between ownership concentration and the firm’s return on equity b)Morack et al 1988, McConnell and Servaes 1990; Hermalin and Weisbach 1971 Hermalin Lower level of ownership: positive relationship due to alignment of managerial and shareholders’ interest shareholders’ Introduction Introduction Higher level of ownership: negative relationship Higher due to managerial entrenchment due c) Morck et al (2000), Hiraki et al (2003), Chen et al (2003) c) Positive relationship between managerial ownership and firm value in firms for all level of ownership in Japan firm d) Himmelberg et al (1999) Unobserved firm heterogeneity might affect both firm concentration and firm value -> No relationship between ownership concentration and firm value after estimating firm fixed effects. firm Introduction Introduction This paper aims at addressing the following 3 This questions: questions: 1. Does concentrated family ownership affect 1. firm operating performance and value? firm • The analysis does not show positive The relationship between family ownership and proxies for firm performance (ROA, ROE, and market-to-book ratio). market-to-book Introduction Introduction 2. What is the impact of corporate governance (CEO duality, the composition of board of directors, audit committees) on performance, value and dividend payout in family controlled firms? dividend . Negative relationship between performance and CEO Negative duality (same person holding positions of CEO and chairman of board of directors) • Composition of board of directors (proportion of Composition independent non-executive directors/presence of audit committee) has little impact on firm performance and dividend policy, which suggests weak corporate governance mechanisms. governance Introduction Introduction 3. Does ownership concentration affect dividend 3. policy? policy? • Significant positive relationship between family Significant ownership between 10 and 35% of total company shares outstanding and the dividend yield for small market capitalization firms. • These firms also exhibit low sensitivity of dividend These payouts to performance payouts Data, variables & methodology Data, Samples : 412 public listed HK firms during 1995 – 1998 i.e. 1,648 firm years i.e. • • • Firm Performance: ROA : net profit / total assets ROE : net profit / shareholders’ equity Market-to-book value (m.v. of equity / b.v of equity) • • Payout policy proxies: Firm dividend payout ratio : total dividends / net profit Dividend yield : dividend per share / share price Data, variables & methodology Data, Ownership concentration: Ownership • measured as fraction of total co. shares outstanding held measured by controlling family. by • Cutoff ownership level : Cutoff 10% (min. ownership level that necessitates disclosure of substantial shareholdings) substantial 35% (level triggers a mandatory general offer) 35% Proxies: • Board of directors proxies : CEO duality • Proxies for outsider dominated board : fraction of Proxies independent non-executive directors and presence of audit committee Data, variables & methodology Data, Additional firm characteristics : • Debt-to assets (L-t debt/total assets) Debt-to • Annual sales growth • Firm size Unobserved determinants: • Unrecorded intangible assets -> low book Unrecorded value of assets ->use of firm fixed effects estimation estimation Descriptive Analysis Descriptive Ownership concentration of 412 firms from 1995 to 1998 (1648 firm year) 10 20 10 00 80 0 60 0 40 0 Fa ily m o n rs ip we h 20 0 0 0 0 1 -2 % 2 -3 % o e -1 % 0 0 00 vr 3% 0 Findings: • Over 75.6% firm year have at least 10% family control • 61.1% firm year have more than 30% family control ►Majority of HK Firms are closely held Descriptive Analysis Descriptive Board of Directors of 412 firms from 1995 to 1998 (1648 firm year) Executive Directors Independent nonexecutive Others Total number of directors on average is No. of executive directors No. of independent non-executive directors 9.4 5.6 2.8 ►Number of independent directors are more than the SEHK requirement Descriptive Analysis Descriptive Limitations Remuneration Committee (1%) True outsiders Limitations Audit, committee (6.3%) CEO duality Descriptive Analysis Descriptive Operating performance ratios of 412 firms from 1995 to 1998 (1648 firm Operating year) year) HK Samples Market-to book ratio 1.42 Return on assets 1.6% Return on equity 4.2% Long-term debt to total assets 9.1% Dividend payout ratio Dividend yield 47.2% 4.8% Descriptive Analysis Descriptive Variables with large correlation coefficients of 412 firms from 1995 to Variables 1998 (1648 firm year) 1998 Correlation Coefficients Total assets & no. of directors on board 0.35 Total assets & debt-toassets ratio 0.26 Total assets & presence of audit committee 0.19 CEO duality & no. of directors on board 0.18 Relationship between Ownership Concentration, Corporate Governance & firm performance performance Findings (1) Weak relationship between ownership Weak concentration and firm performance concentration Findings (2) No consistent relationship between the No proportion of independent non-executive directors on the board and firm performance performance Relationship between Ownership Concentration, Corporate Governance & firm performance performance Findings (3) Negative relationship between CEO duality and the market-to-book ratio Dependent variable M arket-to-book ratio Estimation Method Pooled sample Industry fixed effects Firm fixed effects CEO duality (Whole Sample) -0.499 (0.01)* -0.508 (0.01)* -1.084 (0.07)* CEO duality (Large-cap Firms) -1.358 (0.02)* -0.856 (0.02)* -0.299 (0.67) Relationship between Ownership Concentration, Corporate Governance & firm performance performance Findings (4) Positive relationship between the presence of an audit committee and ROA Dependent variable ROA Estimation Method Pooled sample Industry fixed effects Firm fixed effects A udit committee 0.024 (0.12) 0.023 (0.14) 0.063 (0.01)* Dividend Payout Policies in HK Dividend Different Interpretation of coefficients of Different dividend payout regressions dividend a. the view “higher payouts from firms in a. countries with poor legal protection as a compensation to minority shareholders” compensation b. the view of higher payout as a way of b. shareholders’ expropriation of the firm’s resources resources Dividend Payout Policies in HK Dividend Findings (A1) No relationship between family ownership No and dividend payouts and Dividend Payout Policies in HK Dividend Findings (A2) Negative relationship between dividend yield and family ownership up to Negative 10% but positive relationship and family ownership in the 10% to 35% range for small-cap firms range Dependent variable Dividend yield Estimation Method Pooled sample Industry fixed effects Firm fixed effects Family ownership (0.00, 0.10) -0.197 (0.07)* -0.229 (0.04)* -0.097 (0.57) Family ownership (0.10, 0.35) 0.105 (0.01)* 0.100 (0.02)* 0.076 (0.24) Family ownership (0.35, 1.00) -0.007 (0.77) -0.014 (0.59) -0.005 (0.92) Small-cap firms Dividend Payout Policies in HK Dividend Measurement of the level of dividend Measurement income received by controlling shareholders shareholders (i) (ii) (iii) average CEO (not chairman) – 4:1 average average dual CEO – 14:1 average average chairman (not CEO) – 18:1 average Dividend Payout Policies in HK Dividend Findings (B1) Negative relationship between dividend yield, dividend payout ratio and the presence of an audit committee. However, weak in the analysis of small- & large-cap firms. Dependent variable Dividend payout ratio Dividend yield Estimation Method P.S. I.F.E. F.F.E. P.S. I.F.E. F.F.E. -0.298 (0.03)* -0.204 (0.13) -0.192 (0.35) -0.014 (0.01)* -0.012 (0.04)* -0.021(0.07)* Whole sample A udit Committee Dividend Payout Policies in HK Findings (B2) Findings Remaining corporate governance Remaining variables are not significant in explaining dividend policy. dividend Dividend Payout Policies in HK Findings (C) Positive relationship between ROA & dividend yield, driven by large-cap firms. Suggesting large firms dividend policy may be more sensitive to performance. Dependent variable Dividend yield Estimation Method Pooled sample Industry fixed effects Firm fixed effects ROA (Whole Sample) 0.039 (0.02)* 0.037 (0.03)* 0.026 (0.09)* ROA (Large-cap Firms) 0.172 (0.07)* 0.196 (0.06)* 0.221 (0.16) Conclusion Conclusion Key Findings: Concentrated ownership affect firm’s operating performance Weak relationship between family ownership and performance NEGATIVE relationship between CEO duality and performance Concentrated family ownership affect dividend policy NEGATIVE relationship between dividend yield and firms with family ownership less than 10% POSITIVE relationship between dividend yield and family ownership in the 10% to 35% range for small-cap firms ~ a way to extract resources out of the firms The composition of the board of directors has little impact on firm performance The presence of audit committee improve the firm performance Conclusion Conclusion Recommendations Strengthen the corporate governance Ensure the true independence of non-executive directors being able to perform adequate monitoring function Institutional investors help in raising the standards of corporate governance ...
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