Determinants-of-corporate-ownership-and-board-stru

Ž.JournalofCorporateFinance72001235–256),YuanLiDepartmentofFinanceandAccounting,FacultyofBusinessAdministration,NationalUniÕersityofSingapore,FBA217LawLink,Singapore117591,SingaporeAccepted22June2001AbstractThisstudyexaminesthedeterminantsandinterrelationshipsamongcorporateownershipandboardstructurecharacteristicsusingasampleofSingaporelistedfirms.Theinstitu-tionalenvironmentinSingaporediffersfromthatinmanydevelopedWesterneconomiesinseveralimportantrespects,includingaweakmarketforcorporatecontrol,moreconcen-tratedstockownership,andsignificantgovernmentownershipinmanyprivatesectorfirms.Threecharacteristics—boardcomposition,boardleadershipstructureandboardsize—areusedtocapturethemonitoringabilityoftheboard.Theseboardcharacteristicsareassumedtobeendogenouslydetermined,togetherwithtwoownershipcharacteristics,managerialownershipandblockholderownership.Weusetwo-stageleastsquaresregressiontoestimatethedeterminantsofboardandownershipcharacteristics.Ourfindingsindicatethatcorporateownershipandboardstructuresarerelated,andthattherearesignificantinterrela-tionshipsamongboardstructurecharacteristics.Theproportionofoutsidedirectorsisnegativelyrelatedtomanagerialownership,boardsizeandgovernmentownership.Theuseofadualleadershipstructureispositivelyrelatedtoblockholderownership,andnegativelyrelatedtoregulationandtoCEOtenure.q2001ElsevierScienceB.V.Allrightsreserved.JELclassification:G32;D23Keywords:Corporategovernance;Boardofdirectors;Corporateownership;Simultaneousequations)Correspondingauthor.Tel.:q65-874-3032;fax:q65-779-2083.Ž.E-mailaddress:[e-mail].0929-1199r01r$-seefrontmatterq2001ElsevierScienceB.V.Allrightsreserved.Ž.PII:S0929-11990100021-9()Y.T.Mak,Y.LirJournalofCorporateFinance72001235–2562361.IntroductionTheseparationofownershipandcontrolinpubliclyownedfirmsinducesŽpotentialconflictsbetweentheinterestsofmanagersandstockholdersBerleand.Means,1932.Stockholdersareinterestedinmaximizingthevalueofthefirm,butmanagers’objectivesmayalsoincludeenhancingpersonalwealth,jobsecurity,Ž.andprestige.ManagerialownershipJensenandMeckling,1976andblockholderŽ.ownershipKaplanandMinton,1994aretwomajorgovernancemechanismsthatŽ.helpcontrolagencyproblems.Inaddition,Fama1980arguesthattheboardofdirectorsisthecentralinternalcontrolmechanismformonitoringmanagers.Threecharacteristicsthataffectthemonitoringpotentialofaboardareboardsize,boardŽ.compositionandboardleadershipstructureJensen,1993.Theroleofcorporateownershipandtheboardofdirectorsasgovernancemechanismshasbeensubjecttoconsiderableempiricalanalysis.OnelineofresearchexaminestheempiricalrelationshipbetweenownershipstructureandfirmŽ.value.Forexample,Morcketal.1988examinetherelationshipbetweeninsideŽ.equityownershipandfirmvalue,whileMcConnellandServaes1990considertheimpactofbothinsideequityownershipandblockholderownershiponfirmvalue.Whilebothstudiesfindsignificantrelationshipsbetweeninsideownershipandfirmvalue,thenatureoftherelationshipsaredifferent.McConnellandServaesfindapositiveandsignificantrelationshipbetweeninsideownershipandfirmvalueforownershipbetween0%and5%,apositivebutgenerallyinsignifi-cantrelationshipforownershipbetween0%and25%,andnorelationshipbetween25%and100%.Incontrast,Morcketal.findapositiveandsignificantrelation-shipbetween0%and5%,anegativeandsignificantrelationshipbetween5%and25%,andapositiveandsignificantrelationshipbetween25%and100%.AnotherlineofresearchhasexaminedtheassociationbetweenboardcharacteristicsandŽ.firmperformancee.g.,BaysingerandButler,1985;RechnerandDalton,1991,withmixedresults.Underlyingthesestudiesonownershipstructureandboardstructureistheassumptionthatcertainownershiporboardstructuresareoptimalforallfirms,andthatfirmsthatdonotpossessthesecharacteristicswillhavelowervalueorperformance.Analternativeviewisthatownershipstructureandboardstructureareendoge-nouslydeterminedandthatthecostsandbenefitsofdifferentownershipandboardstructuresvaryacrossfirms.Underthisperspective,thecorporategovernancemechanismsofaparticularfirmreflectthetradeoffsbetweencostsandbenefitsforthatparticularfirm.Consequently,appropriatecorporategovernancemechanismsvarysystematicallyacrossfirms.Underthisview,thereislikelytobenoempiricalrelationshipbetweenownershiporboardstructureandfirmvalue.StudiesthatŽ.haveadoptedthisviewincludeDemsetzandLehn’s1985studyofthestructureŽ.ofcorporateownership,andHermalinandWeisbach’s1988studyofboardcomposition.However,ingeneral,thesestudiesonlyconsideroneortwogover-nancecharacteristics,suchastheproportionofoutsidedirectorsorcorporate()Y.T.Mak,Y.LirJournalofCorporateFinance72001235–256237Ž.ownership.AnexceptionistherecentstudybyAgrawalandKnoeber1996whichconsidersmultiplemonitoringmechanisms.Thepresentstudyissimilarinspirittothesecondgroupofstudiesinthatweassumethatownershipandboardstructuresareendogenouslydeterminedbyparticularfirmcharacteristics.Usingasampleof147Singaporelistedfirms,weuseasimultaneousequationsframeworktoexaminethede