Academic journal article Journal of Southeast Asian Economies

The Influence of Ownership Structure on the Corporate Performance of Malaysian Public Listed Companies

Academic journal article Journal of Southeast Asian Economies

The Influence of Ownership Structure on the Corporate Performance of Malaysian Public Listed Companies

Article excerpt

I. Introduction

Shareholders have been grappling with the issue of corporate governance and transparency in the companies they have invested in for many years. Both factors are of great importance to shareholders as Bacon Report (1992) has shown that they are the catalysts for good corporate performance. This has stimulated interest from government policy makers, academia, regulators, and investors in the influence of shareholding structure on corporate performance. The study on ownership structure pioneered by Jensen and Meckling (1976) shows that the interest of directors must be aligned to that of the outside shareholders in order to solve principal agent problem. This can be achieved by increasing the insider equity ownership. Today it is normal for public listed companies to grant their directors stock options, discounted shares and free shares as part of their performance-oriented compensation package. (1) The implicit aim according to Jensen (1986) is to provide a disincentive to directors to allocate resources that do not maximize shareholders' wealth. (2) The latest study by Han and Suk (1998) provides additional evidence to support the above argument when they found that stock returns have a positive relationship with the level of insider and institutional ownership. (3) The former is due to the alignment of interest between directors and outside shareholders, while the latter is attributed to the growing influence of institutional shareholders on the firm's management. Besides that, the study also supported the findings of Stulz (1988) on entrenched management due to excessive insider ownership. (4) Nevertheless, entrenched management would be more difficult if institutional investors play an effective monitoring role as suggested by McConnell and Servaes (1990) who show that the Tobin q ratio is positively and significantly related to institutional shareholders.

However, there is a large body of finance literature which presents a different view. Fama and Jensen (1983) and Stulz (1988) argue that tightly controlled shareholding by a few directors lead to expropriation of corporate wealth through excessive compensation package. This further subjects a company to adverse selection problems. Instead of returning excess cash to shareholder in terms of higher dividend and share repurchase, these directors choose to deploy internally generated funds to finance non-productive projects.

An empirical study conducted by Tan and Hooy (2004) on the issue of ownership structure of Malaysian public listed companies models their regression framework after Han and Suk (1988) but utilizes cross-sectional data on 100 largest public listed companies (PLC) in terms of market capitalization on the Kuala Lumpur Stock Exchange (KLSE) for the year 2000. They conclude that in the case of Malaysia, insider ownership is insignificantly related to stock returns. This could be due to low equity ownership by directors. However, the institutional ownership is positively and significantly correlated to stock returns. This result is consistent with the findings of Han and Suk (1998) and Jarrel and Poulsen (1987).

Studies by Hermalin and Weisbach (1987) and Morck, Shleifer, and Vishny (1988) on the other hand used the Tobin q ratio as a dependent variable to proxy corporate performance while the independent variable was the percentage of shares owned by insiders. Hart and Suk (1998) replaced the q ratio with stock returns as the dependent variable and regressed it against two primary independent variables, namely insider and institutional ownership in percentage. Our study which modelled after Han and Suk (1998) using Malaysia as a case study for the period of 2002 until 2004 seeks to achieve the following objectives:

(i) To investigate if the principal agent problem can be solved by increasing directors' shareholding.

(ii) To assess the effectiveness of Malaysian institutional investors as a monitoring agent. …

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