Do Investors Really Value Corporate Governance? Evidence from the Hong Kong Market
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Do Investors Really Value Corporate Governance?
Evidence from the Hong Kong Market
Prof. Stephen Y. L. CheungCity University of Hong Kong
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1. Background
• Corporate governance (CG) reform in Asian market
• Various efforts from both regional (PECC, 2001) and international (OECD, 2004)
• In Hong Kong (Code of Best Practice, 1999, Hong Kong Code on Corporate Governance, 2004)
• Family-controlled firms and Anglo-Saxon legal system in Hong Kong market
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2. Research Question
• Do CG practices pay in Hong Kong market?
• What are the determining factors for good CG practices in Hong Kong?
• CG performance of China-related companies listed in Hong Kong
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3. Literature
• Testing results of whether CG leads to better performance are mixed (e.g. Weiss and Nikitin, (1998), Klein (1998))
• Limited studies on the association between overall corporate governance practice and firm value (e.g. Gillan et al.(2003))
• Board responsibilities and composition are the focus of CG studies (e.g. Fama and Jensen(1983), Black et al.(2003))
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4.1 Methodologies - Data• 168 largest companies are covered• Constituent stocks of four main indices in HK
market– Hang Seng Index (HSI)– Hang Seng Hong Kong Composite Index (HSHKCI)– Hang Seng China-Affiliated Corporations Index
(HSCCI), Red-chip– Hang Seng China Enterprises Index (HSCEI), H-
share
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4.1 Methodologies – Data (Cont’)
• H-share: incorporated in Mainland China• Red-chip: incorporated in Hong Kong but
controlled by organizations in Mainland China
• Based on publicly available information (e.g. annual reports, AGM minutes, articles of association), 2002.
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4.2 Methodologies – Survey Design
• Based on Revised OECD Principles (OECD, 2004) and Code of Best Practices (HKEx, 1999)
• Including five categories and 86 criteria • Overall CG index ranges from 0~100• Transparency index and non-transparency
index are constructed
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Scorecard Followed The Five OECD Corporate Governance Principles
OECD principleNumber of questions & sub-questions
A. Rights of shareholders
16
B. Equitable treatment of shareholders
10
C. Role of stakeholders
4
D. Disclosure and transparency
30
E. Board responsibilities
26
Total 86
• OECD is internationally recognized
• HKEx guidelines comprehensively covered
• 168 public companies surveyed
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4.2 Methodologies – Survey Design (cont’)
• Companies were ranked as good, fair and poor for each criterion
• Each company was rated by two different members
• The overall results were cross-checked by academics
• Avoids selection bias• Measure the CG Index quantitatively, give credit to
the “amount” of information for each of the criteria under study
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5.1 Results – Descriptive Statistics
• CG overall Index ranges from 32.86 to 76.34, average is 48.33.
• Perform well in Section B and D, poor in Section A relatively
• Highest scores for HSI stocks, lowest for H-share stocks
• Finance and utilities sectors are on the top, property sector is on the bottom
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Corporate Governance Performance by Categories
20
30
40
50
60
70
80
90
100
110
Scor
es
A42.96
B82.78
C69.54
D74.88
E60.7
Range
Mean
Weak
Strong
A: Rights of Shareholders B: Equitable Treatment of Shareholders C: Role of Stakeholders in Corporate GovernanceD: Disclosure and TransparencyE: Board Responsibilities
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Corporate Governance Performance by Indices
30
35
40
45
50
55
60
65
70
75
80
Scor
es
AllHSI
HSHKCI HSCCI
HSCEI
Range
Mean
Weak
Strong
• HSI (Hang Seng Index ) • HSHKCI (Hang Seng Hong Kong Composite Index ) • HSCCI (Hang Seng China-Affiliated Corporations Index )• HSCEI (Hang Seng China Enterprises Index )
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Corporate Governance Performance by Industries
30
35
40
45
50
55
60
65
70
75
80
Scor
es
Range
Mean
IndustrialAll Properties Finance Utilities ConsolidatedEnterprises
Hotel &Misc
Weak
Strong
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5.2 Correlation Matrix of All Variables
This table provides correlation coefficients between dependent variables, independent variables and control variablesStatistically significant correlations (at 5% level or better) are shown in bold.
1 2 3 4 5 6 7 8 9 10 11 12 13 14 151 Total CGI 1.0002 mtbv 0.131 1.0003 ln(TA) 0.196 -0.282 1.0004 roa 0.084 0.305 -0.056 1.0005 current -0.062 0.131 -0.386 0.139 1.0006 bexc -0.151 -0.248 0.258 0.020 -0.180 1.0007 bout 0.355 0.043 0.460 0.027 -0.067 -0.190 1.0008 top_5 -0.116 -0.093 0.097 0.005 -0.154 0.067 -0.190 1.0009 dummya 0.370 0.040 0.025 -0.056 0.082 -0.004 0.147 -0.118 1.000
10 dummyc 0.556 0.135 0.203 0.138 -0.091 -0.203 0.186 -0.096 0.272 1.00011 dummycc -0.037 0.079 -0.048 0.016 -0.025 -0.130 -0.102 -0.016 -0.052 0.040 1.00012 dummymsc 0.227 0.169 0.392 0.088 -0.088 -0.072 0.402 -0.321 0.010 0.134 0.062 1.00013 dummyADR 0.107 -0.096 0.436 0.045 -0.130 0.025 0.314 0.002 -0.017 0.126 0.068 0.247 1.00014 dummyhr -0.179 -0.127 0.078 0.073 -0.043 0.255 -0.205 0.291 -0.164 -0.033 -0.089 -0.379 0.040 1.00015 D/E 0.085 0.302 0.245 -0.037 -0.025 -0.030 0.212 0.078 0.014 0.142 -0.150 0.066 -0.026 -0.049 1.000
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5.3 Results – Regression Results(1)
• Market-to-book ratio (MTBV) was used as proxy for company’s market value
• Positive and significant relationship between MTBV and CG Index was found
• Number of executive directors has negative impact
• The top 5 shareholders’ holding has negative impact
• The inclusion in the MSCI has positive impact
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Positive Correlation between Good Corporate Governance and
Company Valuation
30 35 40 45 50 55 60 65 70 75 800
1
2
3
4
5
6
7
8
9
10
Scores
Tobi
n's
QM
TBV
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OLS Results for CGI with Control Variables
MTBV
(1) (2) (3) (4) (5)
CGI 0.0330** 0.0428** 0.0475*** 0.0356** 0.0337**
ROA 2.5282** 3.0430*** 3.0431*** 2.2866**
Ln(TA) -0.3081*** -0.2043** -0.2209** -0.3583***
Current -0.042 -0.0317 -0.0209 0.0098
D/E -0.0441 -0.0190 0.0347 0.1423
BOUT -0.0249 -0.0070 -0.0193
BEXC -0.1089*** -0.0941** -0.0622
Top5 -0.0128*** -0.0126*** -0.0011
Dummy CEO & Chairman 0.1837 0.1738
Dummy Audit committee 0.1353 0.2321
Dummy Compensation 0.2794 0.3000
Dummy ADR -0.1421
Dummy MSCI 1.4939***
Dummy H Share & Red Chips 0.3374
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5.3 Results – Regression Results(2)
• Transparency index does matter• Non-transparency index become insigni
ficant when the number of executive director and top 5 shareholder’s share holding add into the model
• ROA has positive effect on MTBV
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OLS Results for Transparency Index with Control Variables
MTBV
(1) (2) (3) (4)
TINDEX 0.0371** 0.0414** 0.0373** 0.0388***
NONTINDEX 0.0179* 0.0202** 0.0136 0.0108
ROA 2.3482** 2.8850*** 2.8973*** 2.1137**
Ln(TA) -0.3414*** -0.2419*** -0.2540** -0.3850***
Current -0.0575 -0.0496 -0.0416 -0.0108
D/E -0.0589 -0.0319 0.0164 0.1205
BOUT -0.0277 -0.0106 -0.0267
BEXC -0.1046*** -0.0902** -0.0558
Top5 -0.0140*** -0.0138*** -0.0017
Dummy CEO & Chairman 0.2084 0.1935
Dummy Audit committee 0.1642 0.2637
Dummy Compensation 0.1997 0.2254
Dummy ADR -0.1382
Dummy MSCI 1.4847***
Dummy H Share & Red Chips 0.2346
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5.3 Results – Regression Results(3)
• For China-related firms, MTBV is positively related to CG Index
• For local firms, the relationship is not significant
• Investors have different criteria to value China-related firms and local firms
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Comparison of OLS Results between Mainland-related Firms and Local Firms
MTBV
China-related Firms Local Firms
CGI 0.0572** 0.0273
ROA 1.1930 4.5531***
Ln(TA) -0.0318 0.0662
Current 0.0704 0.1208
D/E 0.1192 0.1882***
BOUT -0.0309 -0.0601
BEXC -0.1327** -0.1401
Top5 -0.0051 -0.0111
Dummy CEO & Chairman 0.1984 0.1391
Dummy Audit committee -0.0322 0.5584*
Dummy Compensation 0.0791 0.3003
Dummy ADR -0.1142 -0.5526
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5.4 Results – Robustness Test
• Why we use 86 questions?
• Endogeneity
• Performance measurement (ROE)
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Spearman Ranking Correlation Test
• Spearman correlation coefficients between new and original rankings.
• All of the correlation coefficients below are significant at 1% level (P-value <0.0001)
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Endogeneity
• Use H-shares dummy as instrumental variable
• Durbin-Wu-Hausman Test (Two-stage-least- squares) for endogeneity
• No existence of endogeneity was found
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Performance Measurement
• Use Return on Equity (ROE) to measure operating performance
• Replace MTBV by ROE in OLS regressions
• Similar results were found • Confirm the robustness of the OLS results
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6. Conclusion (1)
• Construct a CG measure for HK listed firms• 10 points increase in CG Index implies a 33.7%
increase in MTBV. Worst-to-best change in CG Index implies 147% increase in MTBV
• Investors care more about CG performance of China-related firms
• Similar results were found in Thailand market (McKinsey & Company, Thailand IOD, 2002)
• Comparison among different markets • Policy Implication - encourage adoption of best practi
ce of corporate governance in Hong Kong
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7. Future Research
• Regional Comparison (Macro)– Regulatory framework– Market perception
• Regional Template (supported by the World Bank)
• Individual economies (Micro)– Thailand (3 times), China, the Philippines,
Indonesia (in progress)
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~ END ~