Does Corporate Governance Mechanism Improve Shareholder Value? A Panel Analysis of Malaysian Listed Companies

By Ibrahim, Mohd Yussoff; Ahmad, Ayoib Che et al. | Global Business and Management Research: An International Journal, January 2017 | Go to article overview

Does Corporate Governance Mechanism Improve Shareholder Value? A Panel Analysis of Malaysian Listed Companies


Ibrahim, Mohd Yussoff, Ahmad, Ayoib Che, Khan, Muhammad Anees, Global Business and Management Research: An International Journal


Introduction

The beginning of the first decade of the 21st century was marked by several scandals, fraud and manipulating all kinds of information by big firms like Enron (2001) and WorldCom (2002) in the United States, HIH and OneTel in Australia, and Perwaja Steel, Technology Resources Industries (TRI), Transmile, Megan, Malaysian Airlines System (MAS), Port Klang Free Zone (PKFZ) in Malaysia (Norwani et al., 2011, DeFond et al., 2007, Gonzalez and Garcia-Meca, 2014).

These, scandals are established in the presence of misdeeds committed by director belonging to the large companies and normally supposed to be trustworthy person. These poor practices by directors and failure of big firms are considered an evidence of the failure of corporate governance.

The issues of firm shareholder value, increasing rapidly during the last two decades throughout the world and especially in developed countries like UK, USA and Australia etc. Similarly, with the opening up of free trade concept and liberalization, the concern for shareholder value also spread to the developing and emerging countries like Malaysia. Malaysia as an emerging market issued its own code on corporate governance in (2000, 2007, 2012), for the betterment of the firm overall performance and individual shareholder wealth. Nonetheless, Malaysian-listed companies have been subject to criticism concerning their role in improving shareholder value and firm performance in the Malaysian economy(Panasian et al., 2003, Wahab et al., 2007). Moreover, the corporate governance mechanisms have been argued to affect the overall corporate performance (Chuanrommanee and Swierczek, 2007) and contribute to the improvement of shareholder value (Petra, 2007). The linkages between shareholder value and corporate governance mechanism is important because investors and creditors may wish to invest in firms with good corporate governance practices to reduce their costs of capital and to maximize their wealth (Ali Shah et al., 2009).

It is suggested that for gaining higher shareholder value and maximizing the owner wealth, the importance of corporate governance cannot be ignored. Most studies in developed countries investigated the impact of corporate governance mechanisms on firm financial performance and found a very effective role of corporate governance attributes for improving firm financial health (Beekes and Brown, 2006). Keeping in view the problem of firm financial performance, corporate governance mechanism plays a vital role in maximizing firm financial performance (Balsam et al., 2003).

The objective of this empirical paper is to analyze whether internal corporate governance mechanisms such as separate leadership, proportion of independent director, independent chairman and independence of nomination committee affect firm shareholder value. The underpinning theory for this study is agency theory because it can be used and applied in the area of value maximization and corporate governance mechanism (San Martin-Reyna and Duran-Encalada, 2012). Therefore, in this study, the monitoring role of separate leadership, proportion of independent director, independent chairman and independence of nomination committee are argued to reduce and constrain overall problems and maximize shareholder value and firm financial performance.

Literature Review

Shareholder Value

Shareholder value is the value delivered to shareholders due to successful business operation and management's ability to grow earnings, dividends and share price (Stout, 2013). Shareholder primacy theory state that corporations were owned by their shareholders; that directors and executives should do what the company's owners/shareholders wanted them to do; and that what shareholders generally wanted managers to do was to maximize "shareholder value," measured by earning per share (Hillman and Keim, 2001).

Improving the shareholder value is of prime importance for the management of a company. …

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