Academic journal article Australasian Accounting Business & Finance Journal

Finance, Ownership, Executive Remuneration, and Technical Efficiency: A Stochastic Frontier Analysis (SFA) of Thai Listed Manufacturing Enterprises

Academic journal article Australasian Accounting Business & Finance Journal

Finance, Ownership, Executive Remuneration, and Technical Efficiency: A Stochastic Frontier Analysis (SFA) of Thai Listed Manufacturing Enterprises

Article excerpt

Abstract

This study employs a stochastic frontier analysis (SFA) to predict the technical efficiency of Thai listed manufacturing enterprises, using unbalanced panel data for 178 enterprises covering the years 2000 to 2008. The empirical findings indicate that these enterprises have been operating under "decreasing returns to scale", and rely heavily on labour input. Managerial ownership, controlling ownership, type of firm ownership, executive remuneration and firm size are found to have a significant and positive correlation with technical efficiency. Firm leverage is also found to be positively correlated with technical efficiency, but is not statistically significant, and liquidity is found to have a significant negative correlation with firm technical efficiency. Both internal and external financing have a significant negative correlation with technical efficiency, but external financing is less important. The paper also provides evidence-based policy recommendations to enhance the technical efficiency and competitiveness of Thai listed manufacturing enterprises.

Keywords: Finance; Ownership; Executive remuneration; Stochastic Frontier Analysis (SFA); Technical efficiency; Thailand

JEL Classification: D22, D24, G32, G34, O47

(ProQuest: ... denotes formulae omitted.)

1. INTRODUCTION

In recent years Thailand has faced the real challenge of sustaining its growth and escaping from its middle-income trap (World Bank Office, Thailand 2008). For Thailand to transition to higher income and quality growth in the long term, measures to improve productivity and competitiveness over the long term in all sectors (agriculture, industry and services) are urgently needed. The manufacturing sector has been one of the most important sectors in the East and Southeast Asian countries, as economic growth in this region since the early 1980s has resulted primarily from their rapid expansion in manufacturing exports (Jongwanich 2007). However, firm-level inefficiency was exposed by the 1997 Asian Financial Crisis, which highlighted lack of transparency in corporate governance and a corrupt and mismanaged banking system (i.e., excessive lending to non-productive assets, lack of adequate debt monitoring) among the crisis-affected countries in South East Asia, including Thailand.

The problem of weak corporate governance was related to factors such as the dominance of controlling shareholders, the separation of voting and cash-flow rights (or the disparity between control and ownership), and the limited protection of minority rights (Claessens et al. 2000; East Asia Analytical Unit 2000). Other firm-specific factors (inadequate firm size, lack of business experience, inefficient managerial skills and lack of internal competition) also contributed to the inefficiency of Thai listed manufacturing firms. After the 1997 Asian financial crisis, however, the corporate-governance system in Thai capital markets was strengthened by enhancing the institutional framework for accounting and auditing practices, improving listed companies' disclosure practices, encouraging best practices for directors of listed companies and relaxing foreign ownership controls (East Asia Analytical Unit 2000; Talerngsri & Vonkhorporn 2005; Sally 2007).

Firm-specific factors that affect firm performance, as measured by technical efficiency, have not, however, been empirically examined in the case of Thai listed manufacturing enterprises. Most previous studies have measured firm performance using profitability and financial ratios (Chang & Shin 2007;Cho 1998; Claessens et al. 2000; Dewenter & Malatesta 2001; Joh 2003; Lee 2008; McConnell & Servaes 1990; Smith 1990; Xu & Wang 1999). Some empirical studies conducted in Thailand have specifically measured the performance of Thai listed manufacturing enterprises using profitability and financial ratios (Wiwattanakantang 2001; Yammeesri & Lodh 2003), but none of these has measured their performance in terms of technical efficiency. …

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