Enterprise Risk Management and Performance in Malaysia · highlight the relationship between board...

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INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS

COPY RIGHT © 2013 Institute of Interdisciplinary Business Research

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Enterprise Risk Management and Performance in Malaysia

Shima Nickmanesh1, Mahmood zohoori

2, Happy Andira Musriyama Musram

3, Akbar Akbari

4

1. MBA, Multimedia University, Malaysia

2. Master of environmental technology management, Faculty of engineering, UPM,

3. MBA, Multimedia University, Malaysia

4. Ph.D Student, Faculty of Management (FM), University Technology Malaysia (UTM)

Abstract

In former studies, the significant and basic roles of board of director‟s characteristics were

showcased, on the other hand, the role of board of directors in managing firm‟s risk, can

highlight the relationship between board of directors and enterprise risk management (ERM).

This relation has a definite effect on organizational performance measures. There are two

principal theories of corporate governance that can support relationship between board‟s

characteristics and organizational performance. These theories are agency theory and

stewardship theory that have a special focus on this relationship and in this study these

theories will be used as the anchor. This study attempts to identify critical factors that are

dependent to board of directors and enterprise risk management and finally will present a new

framework to show the relationship between those factors and output measures such as ROA

and turnover to show critical indicators for evaluating organizational performance. In this

research, these indicators are defined as the dependent variable and on the other hand, board

size, number of independent non-executive directors, Number of directors with Financial

expertise, existence of risk management committee, Size of risk management committee, and

Separateness of risk management and audit committee are independents variables and Age

of company, Total assets, Number of Foreign subsidiaries, and Type of Industry (Service

oriented, Manufacturing, Raw materials, and more than one industry) are control variables in

this study. The presented framework is defined according to those variables including two

dependent variables and six independentvariables; by using multiple regression, the

hypotheses were tested with 175 companies that are listed in Bursa Malaysia and the results

show that the Number of independent non-executive members and the size of the risk

management committee, have significant positive impacts on ROA. Besides, Board Size and

Number of independent non- executive directorshave positive and significant impacts on

LogTurnover. On the other hand, it is found that there is a significant and negative

relationship between the existence of risk management committee and ROA.

Keywords: Corporate Governance, ERM, ROA, Turnover, Risk, Board of Directors, Risk

Management Committee, Malaysia

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1. Background

Nowadays, researchers and managers evaluate any changes and activity based on its outcome,

so they try to measure these activities and their impacts on outcomes. Outcomes can be

equivalent to firm and organization performance. According to Kaplan and Norton (1992),

any organization can have four perspectives (Customers, Internal Process, Learning and

Growth, Financial) for its performance. Thus, any activity will show its impact in at least one

of these perspectives.

Organization‟ decisions are usually done according to objectives and goals. Furthermore,

Risk as a main part in financial decision has a vital role in many aspects. Enterprise Risk

Management (ERM) in todays‟ business is an issue that affects managing risks and seizing

opportunities based on organization‟s goals and objectives.

ERM concept was developed in the mid-1990s in industries, with a managerial focus. There

are eighty (80) risk management frameworks reported worldwide which include that of

Committee of Sponsoring Organizations of Treadway Commission (COSO) 2004 (Olsen and

Wu, 2008). COSO is a leading accounting standards organization, and focuses on aiming to

identify board supervision, evaluate and manage all major corporate risks in an integrated

framework (Dickinson, 2001).

The agency theory emphasizes on terms that could assist an organization to achieve its goal

and finally increase value of shareholders (Bowen, 2005; Nocco and Stulz, 2006). Some

companies which have the programs of risk–base or shareholder value management could

add extra value to shareholders‟ value (Bowen, 2005). According to Allayannis and Weston

(1998), active risk management is referred to the shareholders‟ value.

1.1. Enterprise Risk Management (ERM)

Based on Mikes (2005), Enterprise Risk Management (ERM) can be defined as a systematic

approach for managing risk. By effectively managing risk, companies and organizations

alike, could possibly achieve their corporate objectives and eventually create value for their

stakeholders. Besides, Shenkir& Walker (2006) suggested that an effective ERM

implementation requires an organization context that includes strong commitment from the

top management, Risk Management philosophy and risk appetite, integrity and ethical values,

and also the scope and infrastructure for ERM.

Enterprise Risk Management (ERM) has become a well-known context all around the world.

In fact, it is a new concept for businesses and industries to focus on. Nowadays, it has

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become the final term to impact Risk management. Particularly, ERM is considered to extend

the board and senior manager‟s capabilities to investigate general samples of risk that

confronts an enterprise (Beasley et al., 2006). Besides, Enterprise Risk Management covers a

particular competitive source for those groups of people with a high potentiality of ERM and

strength (Stoh, 2005).

It is believed that ERM system cannot be mentioned in a static regulation which is driven

from the general nature of risk. Some of the risks can be confronted with some changes of the

organization like macroeconomic, industry specific, country specific and firm specific.

Although these risks are going to be changed every time but the risk management would be

measured on the regular issues. This evaluation and review can happen in all of the

organizations specified due to the explanation of the ERM.

The internal environment can determine the ERM entity philosophy and can also affect the

risk driven from the employees and their decisions. Board of directors and management make

philosophies for risk management and help them to realize how they can control risks. So

much so, it is considered to construct the organizational interest for risk culture, and the

ERM‟s value (COSO book 2008).

The philosophy of the risk management is organized by the top managers and board of

director‟s risk management philosophies can be varied due to the organized outcomes of the

organization. For example, companies with the interest of venture capital are attracted to the

risk culture. These researches happen with some knowledge in particular risks but they

wonderif these risks are able to pay dividends in the upcoming future. On the other hand, a

majority of the matured organizations would determine risk aversion. Other companies may

be able to create a good profit by producing the same products with only a little change over a

long period of time like restaurants, soap products companies, and paper producers. We can

safely express thatthe risk management philosophy of the organizationcannot be mentioned

briefly but it can be a goal that is distributed to the employees inside all the parts of the

organization(COSO 2004).

The organizational structure is another factor of the internal environment. Some companies

like matrix and bureaucratic organizationsare present in the world but they must do

something to make the communication easier inside the organizations. Therefore, it can

permit managers to decide, plan, monitor, and evaluate the performance inside the

companies. Sometimes, the structure of the organization is the function due to its basic recent

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beliefs. From the time of growing and shrinking matters of the companies, these functions

may be changed to ensure the continuation of communications. In addition, organizational

structure can cover a vehicle for some responsibilities and powers‟ assignments. This could

lead to the basic factor of internal control as mentioned in COSO (2004).

Complexity of business nowadays has increased rapidly; firms have to find ways to manage

business risk. There are two questions; first, can be risk identified and managed? In addition,

the next question arises whether it can improve firm performance? This study seeks to

explore and respond to the above research questions.

A common challenge in most of the literature is the ERM system which will be useful for

developing the performance of a firm if it was applied (for instance, Stulz, 1996; COSO,

2004; Barton et al., 2002; Lam, 2003; Hoyt and Liebenberg, 2009). According to Hoyt and

Liebenberg (2009), the data can cover the argument which is derived from the insurance

company and applied Tobin‟s Q measurement for the evaluation of the performance. In fact,

the first one is referred to as the ERM system which is applied by many firms. For example,

Gates and Hexter, (2005) mentioned other facts to support the ERM system that can extend

the performance of the firms. However, basic proofs show that the relation between

performance of the firms and ERM is completely limited and it‟s not a measurement for

ERM. According to Lawrence et al (2009), the investigation of the relationship between

ERM and organizational performance (regarding proper match with contingency factor)

should not be limited to several specific years, and it should be investigated for other years as

well.

There are many studies in the past that have focused on investigating the implication of

corporate governance mechanism; it means the effect of board characteristics on firm

performance. Dalton, Daily,Ellstrand, and Johnson (1998), Laing and Weir (1999) and Weir,

Laing, and Mcknight(2002) found little evidence to suggest that board characteristics has

potential to influence firm performance.

Based on some studies by Bhagat& Black (1999), Kiel & Nicholson (2003), and Bonn

(2004), there is a relationship between mechanism of governance such as internal governance

related to board of directors and its characteristics and firm performance.

This study attempts to investigate the impacts of board characteristics (board size, number of

non-executive directors, and number of directors with financial expertise), nature of risk

management committee and firm performance. Nature of risk management can include

existence of risk management committee, separateness of risk management committee and

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audit committee, and size of committee. Undoubtedly, this issue is related to corporate

governance and especially ERM, and it seems that investigating the impact of risk

management committee characteristics on firm performance is a gap in previous studies. In

this regard, the scope of this study is all companies that are indexed in Bursa Malaysia.

Furthermore, they are categorized based on their industry including services, manufacturing,

raw materials, and more than one industry.

2. Literature Review

2.1. Traditional risk management and ERM

Generally, not only can risk management create value for a company but it can also cover the

general economic growth by decreasing the capital cost and activities related to commercial

uncertainty. Shenkir and Walker (2006) believed that the model of ERM needs executive

management commitment in order for accurate implementation, following the Committee of

Sponsoring Organizations of the Treadway Commission (COSO). It is highly believed that

executives of companies have the tendency to create a commitment to ERM as they have the

responsibility for general support, creation and growth of shareholder‟s value.

According to (COSO, 2004) there are some differences between traditional risk management

and ERM as summarized in the following table:

Table1: Differences between ERM and Traditional Risk Management (COSO, 2004)

Traditional Risk Management ERM

Risk as individual hazards Risk viewed in context of business strategy

Risk identification & assessment Risk portfolio development

Focus on discrete risks Focus on critical risks

Risk mitigation Risk optimization

Risks with no owners Defined risk responsibilities

Haphazard risk quantification Monitoring & measurement of risk

“Risk is not my responsibility” “risk is everyone’s responsibility”

2.2. Different Types of Risk

Based onHammond et al. (2007), risks can be considered as threats, but businesses exist to

cope with specific risks. Thus, if they encounter a risk that they are specialized in dealing

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with, the encounter is viewed as an opportunity. Risks have been categorized into five

groups:

1. Opportunities- events presenting a favorable combination of circumstances giving

rise to the chance for beneficial activity;

2. Killer risks-events presenting an unfavorable combination of circumstances leading

to hazard or major loss or damage resulting in permanent cessation;

3. Other Perils- events presenting an unfavorable combination of circumstances leading

to hazard or damage leading to disruption of operations with possible financial loss;

4. Cross functional risks-common risks leading to potential loss of reputation;

5. Business process unique risks- risks occurring within a specific operation or process,

such as withdrawal of particular product for quality reasons.

2.3. Corporate Governance

Corporate governance doesn‟t have any particular explanation as well. One of the approaches

that have been applied for corporate governance contributed to the association between

shareholders and companies.

So much so, corporate governance referred to finance issues and engaged merely with

managers and shareholders as contributed below:

Steps of monitoring and controlling intended to guarantee that management of companies

undertaken are due to the shareholders interest(Parkinson, 1994, p59).

Mechanism of corporate governance is divided into two types, basically. The first group

refers to the internal governance mechanism which is placed as equal to manager‟s interest to

shareholders inside the companies involving managerial incentive plans and board of

directors, structure owners and other system of control which is internal (Braga et al., 2011).

The second group refers to the mechanism of external governance. These groups occur when

companies are in a competitive atmosphere with various constraints, market forces and laws.

Therefore, it should involve an external mechanism to monitor the companies‟ systems

(Braga et al., 2011).

A variety of models in corporate governance emphasize on managers interest in shareholders‟

interest of each company. Subsequently, the method to encourage managers to have the

interest of shareholders is more crucial compared to their own interest to receive back the

profits for shareholders (Fama and Jensen, 1983).

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2.4. Development of Corporate Governance in Malaysia

Before the Financial Crisis, in most of the Asian countries as well as Malaysia, there was a

similarity between the British and Malaysian political, legal, institutional and administrative

basics and particularly in the capital market, corporate regulations and laws because of the

colonial link of Malaysia with Britain.

Looking at corporate governance, the effect of the British Colonial provides a framework for

Malaysian corporate governance in KLSE listing requirements, concentrating on transparency

and accountability in the firm‟s governance.

The table below shows a brief of governance initiatives from 1965 to 1997 before the crisis in

Malaysia

Table 2: Governance Initiative during 1965-1997

Year Initiative Established

1965 The Malaysian Companies Act

1973 The Securities Act

1987 Malaysian Code on Take-Overs and Mergers

1989 Banking and Financial Institution Act

1991 The Securities Industry (Central Depositories) Act

1993 Securities Commission Act

1993 The futures Industry Act

1995 Amendments to Securities Commission Act

1997 The Financial reporting Act

Sources: Securities Commission (2001) and Boo YeangKhoo (2003)

Various reforms were applied as a way of providing the transparency, accountability and

protection of shareholder's interest after the financial crisis (1997) in Malaysia.

In 1998, a High Level Finance Committee (HLFC) was established in order to start a detailed

study of corporate governance in Malaysia and based on the findings, make recommendations

for improvements. The Malaysian Institute of Corporate Governance was established to raise

awareness and practice of good corporate governance in Malaysia. In 1999, the Malaysian

Institute of Code and Takeovers and Mergers was amended to improve the standards of

corporate disclosure and behaviour for those involved in mergers and acquisitions for it to

reflect international best practices. In the same year, the Bursa Malaysia listing requirements

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were amended to require quarterly financial reporting of information which is prepared in

line with approved accounting standards of the Malaysian Standards Board.

The Malaysian Code on Corporate Governance was formed. On top of that, Securities

CommissionAct was settled in 2000; it was done to simplify the responsibilities of the

Security Commission and the Registrar of Companies in the area of prospectus regulation

thus resulting in greater legal and regulatory certainty. Moreover, the Minority Shareholders

Watchdog Group (MSWG) was incorporated in 2000 as a public company limited by

guarantee.

When the major revamp of the KLSE listing requirement was released in 2000, the focal

point was the enhancement of standard of corporate governance and investor protection

among listed companies by the introduction of new provisions and the strengthening of

existing provisions. In 2001, the financial Sector Master Plan was released in order to portray

the future direction of the financial system from 2001 to 2010. Its main objective was to

make a competitive, dynamic, flexible and financial system that is able to meet more

demands of consumers and business. In 2001, the Malaysian Capital Market Master Plan was

released in 2001 to further develop the Malaysian corporate governance reform agenda. It had

152 recommendations that dealt with developing institutional and regulatory framework for

the capital market from 2001 to 2010 and 10 of them are for corporate governance.

The Institute of Internal Auditors issued guidelines on the internal control function in 2002.

They were meant to help the board of directors in discharging their roles in relation to the

establishment of internal audit functions. The Corporate Law Reform Committee was

formed to spearhead the corporate law program. This was done in 2003 and the objective was

to undertake a comprehensive review of the corporate law in Malaysia.

The Securities Industry Act 983 was amended in 2004 to grant the Securities Commission a

variety of sanctions that it can impose for breach of the exchange of listing requirement. It

was done to introduce whistle blowing provisions. The provisions include duty for auditors

to report to the relevant authorities breaches of securities laws and listing requirements, and

protection against retaliation for CEO's, secretaries, auditors, and CFOs who report to the

authorities on company wrong doings.

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In order to improve the profile of Bursa Malaysia‟s competitive edge and to instill discipline,

transparency and efficiency at the exchange, Bursa Malaysia Berhad was listed on the Main

Board of Bursa Malaysia Securities in 2005.

Moreover, Bank Negara Malaysia issued Guidelines on Corporate Governance for Licensed

Institutions in 2005. It was done to promote high standards of practices by licensed

institutions and bank/ finance holding companies. Prospectus Guidelines were revised in

2005 to expedite processing corporate proposals and boost efficiency of raising funds. In

2005, the shareholder's Pro Term Committee was formed to make recommendations and

decide on best practices and standards for Institutional Shareholders. The Malaysian Code on

Corporate governance was revised in 2007 to strengthen practices geared towards

developments in the domestic and international capital market.

The amendments made in 2008 regarding corporate governance related to the effectiveness

of the audit committee and the mandatory internal audit function.

2.1.2. Malaysian Code on Corporate Governance

The Malaysian Code on Corporate Governance was first developed by the public and private

sectors and was later approved by the High Level Finance committee (HLFC).

HLFC has considered 3 approaches for governance practices. The first one is perspective sets

standards on corporate governance practices. The second is the non-perspective which

focuses on disclosure of corporate governance practices and selection of practices according

to organizational needs. The third is a hybrid of the two, meaning that it adopts both

approaches.

There are four sections of the Malaysian Code on Corporate Governance:

1) Corporate Governance Principles

(a) Board of Directors

The board has to consist of executive directors and non-executive directors including

independent and non-independent.

(b) Directors‟ remuneration.

There must be a limitation for the level of remuneration. Firms have to provide a transparent

platform for the remuneration policies and the firm‟s annual report had to have the directors‟

remuneration details.

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(c) Shareholders

The firm must communicate with its shareholders through the Annual General Meeting

(AGM).

(d) Accountability and Audit

The board of directors must show unbiased and logical evaluation of firm‟s position and

visions and also maintain a proper relationship with firm‟s auditor.

This Code urges all the firms on Bursa Malaysia to prepare a description on their annual

reports in order to show how the applied codes is perceived enough for shareholder to

evaluate the firms.

2) Best Practice in Corporate Governance

This section identifies a set of guidelines intended to assist the companies on designing their

approach to corporate governance. An example may be determining the structure of the board

the relationship of the board with the management.

3) Principles and Best Practices for other corporate participants

This section of the code the responsibilities of the corporate investors and auditor‟s

responsibilities in developing corporate governance.

4) Explanatory notes

These are descriptive notes for the earlier parts of the Code.

Four other developments were designed to the regulatory and governing institutions so that

they can complement any oversight arrangements that have to do with corporate governance

in Malaysia. They include:

1. The formation of the companies commission of Malaysia

2. The introduction of the capital Market Plan.

3. The establishment of the Financial Sector master Plan by Bank Negara Malaysia.

4. The demutualization of Bursa Malaysia.

2.5. The Revised Code on Corporate Governance

The Malaysian Code Corporate Governance was revised in 2007. The revised MCG made no

changes to part 1, but made 11 changes to part 2. These changes raised the standard of

corporate governance for companies listed on the main Board, Second Board and MESDAQ

Market while increasing the investors‟ confidence.

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2.6. Board of Directors

From the organizational perspective, the board can be defined as a team brought together to

work toward achieving organizational goals(Langton & Robbins 2006).

Different studies emphasize on the importance of board of directors and also to see how the

strategic role of boards can affect the firm‟s performance.

Kajola and Sunday 2008 put emphasis on the control on the board of directors. They state

that the board of directors assigns to the CEO and other management staff, the day to day

management of the interactions of the firm.

Others like Van der Walt and Ingley2001, say that top tasks of a board contain setting policy,

vision, monitoring performance and other financial issues.

Clearly the board composition and characteristics are important pioneers to effective group

decision making and firm‟s performance.

2.7. Committee of Sponsoring Organizations of the Treadway Commission

(COSO)

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) is

considered as the private industries that are completely voluntary. It was constructed in the

United States and struggles to lead the executive management, business ethics, internal

monitoring, governmental entities on basic attributes of the government organization, ERM,

fraud and finance. COSO would be able to create a model related to the internal monitoring

to prevent firms and organizations eager to investigate the control system.

COSO has been established in 1985 to support the national commission on fraudulent

financial reporting. This segment is private which studied the overall matters referred to the

financial reporting of fraudulent. Furthermore, it suggested some recommendations for public

firms for the SEC, independent auditors and educational institutions.

National commission covered by five basic professional association has headquarters in

United States; the financial executives international (FEI), the American accounting

association (AAA), the American institute of certified public accountants (AICPA). On the

whole, the independence is contributed to protect the company. The Commission includes

industry, public accounting, investment companies, and lastly, stock exchange in New York.

James C. Treadway,JR was the first chairman in the national commission. However,

currently, David Landsittlehas taken over his place as the chairman.

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COSO‟s objective is to support those thought and ideas which involve three issues. First one

is ERN, second is fraud deterrence and third one is internal control.

Based on ERM, COSO is considered as the public Enterprise Risk Management. Besides, it

has also published some studies that are related to ERM in 2009. A majority of them can be

used free by downloading from the “Guidance tab”.

Lastly, COSO published two papers based on fraud deterrence. First one is issued in 1999

with the topic of “Fraudulent Financial Reporting: 1987 to 1997”. Second one is issued in

2010 and the title is Fraudulent Financial Reporting 1998 to 2007.

(http://www.coso.org/)

2.8. Theoretical Perspective

Different theoretical frameworks are used to assess the cooperate governance from various

views. Though this may be the case, the aim of various theories has been to come up with a

link between various board characteristics and firm performances (Kiel & Nicholson, 2003).

Agency theory and Stewardship theory are two theoretical frameworks which discuss the

cooperate governance, board of directors and the importance of board characteristics on firm

performance from a different but close way by using different words, terminologies and point

of views. These views differ meaningfully in light of what directors do, which board

attributes affect and influence the company performance and utilization, and which criteria

should be implemented to assess the board contribution to company performance (Zahra and

Pearce, 1989)

In a nutshell, Agency theory focuses on rivaling interests between the principals and agents

while Stewardship theory views managers as stewards and suggests the alignments and

conjoining of interests between of steward and organizational objectives. Even though the

two theories and have different perspectives, they can both be correct and implemented in

different environmental conditions (Boyd,1995).

2.8.1. Agency Theory

Agency theory is based on modern corporations, when there is a separation of ownership and

management i.e., where the management with superior knowledge and skill on the firm

decide to go after their own agendas rather than the shareholders‟ (Famaand Jensen, 1983;

Boatright, 1999).

As a result, there would be a departure from the shareholders maximization and conflicts of

interest between managers and shareholders. This is known as Agency theory;the managers

http://www.coso.org/

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being the agents and the shareholders being the principals (Berle and Means, 1932). This

problem may be adverse or it may be of moral hazard. Adverse selection occurs when the

agents do not have the proper skills and ability to perform their responsibilities which were

given to them for their specific skill. Moral hazard is when they underperform with their

certain skill set (Eisenhardt, 1989).

The divergence of agents and principals can create information asymmetry and result in

agency costs (Farrer and Ramsay,1998). This includes the costs of structuring the contracts,

costs of monitoring and controlling the behaviour of agents, and loss incurred because of sub-

optimal decisions taken by the management.

Agency theory is used to assess the roles and contributions of the board of directors in

relation to their performance in the organization they govern ((Fama and Jensen, 1983).

Therefore, the managers cannot be trusted so there is a need for them to be carefully

monitored so that the shareholders‟ interests are met (Fama and Jensen, 1983).

Two ways of monitoring the managers are board of directors and compensation schemes to

align the interests of the agents with the interests of the principal. Fama (1980) considered the

board of directors as a way of controlling managers in a low cost manner. This would less

costly than takeover for example. This would mean that aside from the low cost monitoring

and controlling of the managers, it will improve firm performance and reduce costs from

divergent management and shareholder objectives (Fama and Jensen, 1983).

The board of directors is therefore a link between the shareholders and the management and

make sure that both party‟s interests are met.

Agency theory is better suited for larger corporation because it reduces the domination and

power of the CEO in the board and provides better oversight of the manager work force in the

firm. (Singh and Harianto, 1989)

The board frequently meets so there more monitoring of the management and the work force.

They will also have the power to mitigate agency costs and asa result, there will be higher

performance in the firm. (Singh and Harianto, 1989)

This theory discusses the separation duties between the Chief Executive Officer and the

chairman in the monitoring of the agents. (Daily et al, 2003)

The theory also states that a higher level of monitoring is dependent on board independence.

This is because independent directors are more likely to be effective because valuable

incentives are given based on their services rendered. (Jensen and Meckling, 1976)

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2.8.2. Stewardship Theory

While The Agency theory states that there will be conflict between the managers and the

shareholders resulting from the managers having their own self-serving agendas, Stewardship

theory takes a directly opposite approach.

Stewardship theory states that there will be no such conflict because the managers will not

have any financial benefits if they do not meet the interests of the shareholders and carry

them out effectively. As such, the manager (steward) will have respect for authority, the need

to achieve his goals and responsibility in skill and the satisfaction that comes with the

completion of duties. (Donaldson and Davis, 1994).

The self-serving agendas are replaced with pro-organizational and collective behaviour that is

aligned with the interests of the shareholders. This theory sees the managers and the directors

and stewards of the firm and will thus be more likely to maximize the shareholders

wealth.(Daily et al, 1991). Stewards provide the higher utility from organizational goal

satisfaction rather than self-serving satisfaction. (Davis.et.al, 1997)

Agents act as stewards which mage the firm activities and improve the firm performance.

(Davis et al 1997). Managers will want to protect their reputations as expert decision makers

in a firm, so they will perform in a manner that maximize the firm financial performance and

like shareholders returns. The firm performance will reflect directly on the managers‟

performance, skill and expertise (Shliefer and Vishny 1997; Daily et al, 2003).

In this theory, inside directors are better suited to take the firm to higher performance level

and profit making margins since they already know a lot about the firm. Having more inside

directors will better the company performance. (Baghat and Black, 1999)

Donaldson and Davis (1991) also concur with this notion in that, if more insiders (executives)

are in the board,there is deeper knowledge about firm activities and so performance and

profitability will be maximized.

2.9. Performance of the Firm

Most of the times, ERM emphasizes on risk and return exchanges. The extra market return is

a measurement of adjusting the risk for the reason of being risk –adjusted in market return

(Kolodny et al., 1989; Gordon and Smith; 1992). Other issues of this risk- adjusted in the

ERM is economic income created (EIC), risk – adjusted return on capital (RAROC) and

shareholder value – added (SVA) but these measures face some problems. First of all, they

can explain the past performance and it has the shadow of accounting – based. Secondly, the

estimation of all these measures needs a subjective survey. (Lawrence et al., 2009)

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Besides, in some literature the strategy – oriented performance evaluation for ERM have been

postulated like the balance scorecard stated by the Beasley et al. (2006). Otherwise, it

emphasizes on strategy and uses a general issue of ERM, but the BSC ( balanced scorecard)

is not suitable for this research because of the large majority of measures and the problem

which make it difficult to find an appropriate view to match BSC‟s measures (Kaplan and

Norton, 2001).

In the financial perspectives (Kaplan and Norton 1992), Return on Assets (ROA), Return on

Equity, and Turnover are three outcomes of companies that can give good evidence for

financial performance, but this study considers ROA and Turnover.

2.10. Conceptual Framework and Hypotheses Development

There are some studies about the relationship between board of director characteristics and

firm performance (e.g. Bhagat& Black, 1999; Kiel & Nicholson, 2003; Bonn, 2004; Fan et

al., 2007), and also according to literature, existence of risk management committee and its

size are two other factors that may affect performance.

The independent variables are Size of boards, Number of independent non –executive

member, Number of financial expertise members, Having risk management committee, size

of risk management committee, separateness of risk management and audit committees.

Moreover, dependent variables are ROA, and Turnover.

2.10.1. Size of Board

Board size contributed to the overall number of non- executive and executive directors placed

on the board of directors (O‟Connell and Cramer, 2009).

Earlier researches referred to the influence of board size on performance of firms have

covered various outputs. Most of researches figured out that smaller groups of boards

improve performance of firms (Jensen 1993;Yermack, 1996). On the other hand, other

researches postulated that larger boards develop performance of firms (Jensen 1993;

Yermack, 1996).

According to Jensen, 1993, smaller groups of boards are assumed to produce easier

association and communication, cooperation and coordination. Lipton and Lorsch, 1992

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believed in preventing free riding and challenges of interest happening among members of

boards. Yermack (1996) and Eisenberg et al. (1998) also claimed that smaller boards have

better and greater performance of firms.

Larger boards would be able to control management beneficially, and improve performance

of firms by reducing cost of agency (Yermack, 1996; Eisenberg et al., 1998). It is all because

of boards. If the boards are larger, CEO domination is reduced and it causes controlling of

management more efficiency. All the conflict happened between CEO and board improve the

in sufficiency of the boards which help the board to be more beneficial (Hermalin and

Weishbach, 1998). Therefore, greater boards can give some benefits to firms while the

board‟s advice to CEO increased. Besides all of them require growth while the complexity of

firms develop (Klein, 1998).

Also, following (Singh &Harianto, 1989), thetheory of agency provides larger boards

efficiency based on the management controlling and reducing CEO domination on the board

to cover interest of shareholders.

Some researchers have managed to find the appropriate and accurate limitations and number

for board size. Jensen (1993) believed that board must have limited number of seven or eight

members to act more efficiency and beneficially. Lipton and Lorsch (1992) emphasized on

maximizing the boards‟ members to 10 people similarly.

As a result, larger boards are faced with some disadvantages due to the lack of cooperation

and coordination. Severely larger boards have advantages of various knowledge, expertise,

perspectives and information conversely havepositive influence on performance of

organization (Eisenberg et al., 1998). Therefore, based on the entire concept above, the

following hypotheses are proposed:

HA1: There is positive relationship between Board Size and ROA.

HB1: There is positive relationship between Board Size andLog(Turnover).

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2.10.2. Independent non-executive Chairman

One of the top people placed on the board is the chairman. He could be both executive or

non-executive in firms. These executive and non-executive term related to the chairman are

contributed to the inside and outside chairman (Uadiale, 2010).

Past researches have figured out the influence of non-executive and independent chairman on

performance of corporations. For instance, Baysinger and Butler (1985), monitored

organizations better with outsiders who are placed as independent and non-executive

dominated chairman fare financially well compared to insiders (executives) dominated, for

non- executive chairman can act a vital part in creating various strategic decisions in the

organization by keeping basic points. Outside independent chairman is assumed to act a vital

role in controlling management compared to inside chairman (Weisbach, 1988).

Non- executive chairman can investigate and review the CEO and Management deeply and

they can give opinion to management and CEO (Tyson Report, 2003).

Thus, management control would be able to be improved. Besides, cost of each agency will

be reduced all because of higher performance of firms (Uadiale, 2010). Therefore, the

hypotheses below will be mentioned according to this research:

HA2: Number of Independent non-executive Chairman has positive relationship with ROA.

HB2: Number of Independent non-executive Chairman has positive relationship with

LogTurnover.

2.10.3. Financial Expertise

The directors who have knowledge of accounting are placed in groups of people with

background knowledge in accounting or having certification on finance or accounting A.

Rose and J. Rose 2008).

Few researches tested the impact of background knowledge of board members on

performance efficiently.

Facing with lack of accounting knowledge can have an opposite influence on investigation of

directors of incomplete management explanations. While directors cannot realize and figure

out the accounting features, therefore, they would receive greater degree of risk related to

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management explanation which is accepted for these events due to the insufficiency or

incomprehensibility of explanations (A. Rose and J. Rose 2008).

Other researches claimed that directors who have knowledge of accounting lacked to figure

out and measure the information of accounting related to the underperformance of firms

(Powers et al., 2002). If members of board do not have enough knowledge of accounting,

then it will diminish their potentiality to create informed decisions and contribute to higher

cost of agency (Xie, Davidson, and DaDalt, 2003).

Accounting knowledge which leads to financial knowledge can improve the quality of

governance (A. Rose and J. Rose 2008). Besides, the director who has the responsibility to

measure the reports of accounting is handled by managers to get the knowledge of

accounting. Moreover, Abbott et al (2004) suggested that the board that is engaged with

greater knowledge of financial and accounting can enhance the effectiveness of board

contributed to better performance of firms. Therefore, the hypotheses below are determined

based on all the issues above:

HA3: Higher Number of directors with financial expertise is positively associated with ROA.

HB3: Higher Number of directors with financial expertise is positively associated with Log

Turnover.

2.10.4. Having risk management committee

Having a committee that follows the process contains of five methods (risk enumeration,

qualitative and quantitative analysis, applying the risk management strategy, and the

assessment of risk management strategy) is one of the strengths of a company. Therefore

investigating the effect of having a risk management committee may guide to better

understanding of its role.

Some researches (e.g. Minton et al., 2010) have investigated the role of the internal control as

a feature of corporate governance in different country. Those papers demonstrated that

developments in corporate governance reporting requirements offer opportunities for the

appropriation of risk and its management by groups wishing to advance their own interests.

Since, some of the financial outcomes would be affected by uncertainty; therefore risk

management commitment might have influence on financial performance.

HA4: Existence of risk management committee is positively related to ROA.

HB4: Existence of risk management committee is positively related toLog Turnover.

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2.10.5. Size of risk management committee

As a matter of fact, from the time that risk management impactstheperformance;the

upcoming factors will exist for investigating their size. Moreover, the question of how much

the commitment can be affected is provoking. Besides, companies should be concerned about

this issue. Furthermore, the risk management title is involved with top management, board of

directors‟ member and also size of board, therefore the possibilities of risk management‟s

size influence on performance would be increased.

HA5: Higher Size of risk management committee leads to higher ROA.

HB5: Higher Size of risk management committee leads to higher Log Turnover.

2.10.6. Separateness of risk management and audit committees

Risk assessment is based on auditors and the operating managers, C-level executives and

board members. Some scholars such as Minton et al., 2010 believes that separateness of risk

management committee and audit committees may affect performance.

Auditors are going to evaluate risks at the time of examination performance. In this stage, an

auditor should choose a mix of information from a massive structure of proofs that will make

limitations on some of the risks of those misstatement goods. Operating managers should

measure metrics start to determine that each organization is trying to receive its mission. C –

level executives test risks to the planned strategy of each organization from both internal and

external threats. Beside it can be mentioned within the board of directors.

HA6: Separateness of risk management and audit committees is positively related to ROA.

HB6: Separateness of risk management and audit committees is positively related to Log

Turnover.

3. Method and Results

To study the relationship among the mentioned variables, it was needed to measure all

variables. For this purpose, all variables arepresented based on their definitions.

ROA: Return on assets equals profit (before tax) divided by total assets of the company

(O‟Connell and Cramer, 2009).

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Turnover: It is the number of times an asset is replaced during a financial period (O‟Connell

and Cramer, 2009).

Size of boards (BS): It is the total number of directors sitting on the board of directors

(O‟Connell and Cramer, 2009).

Number of independent non –executive member (IND):It is the number of independent

non-executive directors engaged in board of directors (Hambrick and Jackson, 2000).

Number of financial expertise members (NFE): It is the number of directors with

accounting certificate or background in finance (Carpenter and Westphal, 2001)

Having risk management committee (HRM): Based on Mikes (2005), ERM is a systematic

approach for managing risk. Some companies have committees to manage risk but some

companies do not have this.

Size of risk management committee (RMS): It is the number of directors involved in risk

management committee.

Separateness of risk management and audit committees (SRMA): Based on of Malaysian

corporation annual reports (Bursa Malaysia 2010), in some of them risk management

committee is separate from audit committee.

As a result, this study concludes the function of model as follows:

Model 1:

ROA= α + β1 (BS) + β2 (IND) + β3 (NFE) + β4 (HRM) + β5 (RMS) + β6 (SRMA)

Model 2:

Log Turnover= α + β1 (BS) + β2 (IND) + β3 (NFE) + β4 (HRM) + β5 (RMS) + β6

(SRMA)

The sample companies selected in this study are from firms listed on the main market of

Bursa Malaysia in the year 2010. Random sampling was used for collecting 175 companies

among other companies from different sectors with acceptable market capitalizations. All

necessary data were gathered from annual reports downloaded from KLSE website and Bursa

Malaysia website.

Table 3: Sample categorizing based on industry

Industry Frequency Percentage

Services 93 53.1

Manufacturing 40 22.9

Raw material 22 12.6

More than one industry 20 11.4

Total 175 100

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Information regarding mentioned independent and dependent variables are provided from

annual reports. This information includes Board characteristics, Risk management, etc.

Furthermore, some information were not available from the companies‟ websites.

Three statistical analyses are used to test mentioned developed hypotheses, and they are:

1. Descriptive statistics to provide a general overview on independent and dependent

variables

2. Pearson correlation to test the general relationship between any two variables

3. Regression analysis is based on Ordinary Least Squares (OLS) to model and analyze

various variables when the relationship between independent and dependent is

analyzed.

Besides, there were some software for analyzing data, but SPSS 19 was an appropriate choice

among them.

3.1. Descriptive Statistics

Tables 4 and table5 provide descriptive statistics of variables (independent, dependent, and

control) for 175 firms in Malaysia from main market and different sectors. In relation to

independent variables, sample companies has the minimum number of 5, maximum number

of 21, and average number 9 directors (Mean=9.05) sitting on the board.

In terms of number of independent non-executive members, board has maximum number 9

and minimum number 1, and also the average is 4.21.

With respect to board characteristics, minimum number of board members with background

in finance is 1 and maximum is 9. Moreover, average is 3.97.

In terms of risk management, the existence of risk management committee is a dummy

variable, i.e. as the number 1 shows company has risk management committee while 0 shows

that the firm does not have risk management committee. Based on Table4, 26.9 % of

companies do not have risk management committee and other companies have (73.1%).

Regarding the existence of risk management committee, size of this committee varies

between 0 to10. Furthermore, among companies that have risk management committee, the

minimum of number of committee members is 3.

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Another dummy variable is separateness of risk management and audit committees. Number

1 shows risk management committee is separate from the audit committee, and number 0

shows they are combined. Based on statistics, 64.6 % are combined and 35.4 are separate.

In this study, Total Assets has the maximum of RM 336,700,000,000 and minimum RM

840,000,000. Besides, average of total assets is RM 1,140,000,000.

During 2010, among all selected companies, the oldest company has 50 years experiences,

and the youngest has 1 year, and average age is 26.72.(Based on Initial Public Offering (IPO)

date)

In terms of foreign subsidiaries, among selected companies the maximum number is 65,

minimum is 0, and the average is 6.18.

Return on assets that is a performance measurement has average 7.68, minimum -2.401, and

maximum 46.593.

In terms of companies‟ turnover, results shows that the minimum turnover is RM 46,000,000,

maximum is 111,600,000,000, and average is 3,020,000,000.

Tables 6 and 7 (Appendix) report the correlation coefficient among each of the variables in

Model 1 & Model 2 respectively. The correlation matrix for both models indicate no

multicollinearity problem, as the correlations are relatively low, i.e. not exceeding 0.8

(Gujarati, 1999).

Besides, two Regression analyses were performed among firm performance (ROA, Log

Turnover) as dependent variables and BS, IND, NFE, HRM, RMS, and SRMA as

independent variables.(See Table 8 and 9 in Appendix)

Board characteristics including size of board, Number of independent non-executives

member, and Number of experts in finance, and after investigating the role of these three

mentioned elements, results are as follow:

Size of board has no significant impact on ROA, and it means that for every change in size of

board, serious changes are unpredictable. Although some previous research by Laing&Weir

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(1999) and Weir, Laing , and McNight (2002) showed that this impact can be significant, the

results did not support this relation in Malaysia.

On the other hand, Size of board has significant and positive impact on Log Turnover, so it

also has significant impact on Turnover. It means that Malaysian firms can improve their

turnover based on changes in size of their companies‟ board.

Results show that the number of independent non- executive members has significant impact

on ROA positively. Thus, by increasing the number of independent non-executive members

in board of directors, ROA will be improved.

Result asserted positive and significant relationship between IND and Log Turnover, so for

any unit increase in number of independent non-executive members of board of directors,

Log Turnover and thereby Turnover will increase.

This study showed that the relationship between numbers of financial experts in board (NFE)

does not have significant effect on ROA and Turnover in Malaysia. Although before this

study it was expected that this factor may affect positively, results showed differently. The

reason could be all board members because of high experiences in their background carry

financial knowledge.

Existence of risk management committee in chosen sample companies showed significant

effects on ROA, but its effect wasn‟t significant on turnover. Thus, initiating risk

management committee in other companies which do not have this committee can be useful

for them to increase their ROA. But there is not enough evidence to motivate Malaysian

companies for initiating risk management committee in order to increase their turnover.

Based on the results, risk management size has negative significant impact on ROA; it means

that Malaysian firms with bigger size of risk management committee have less success in

improvement ROA. On the other hand, this size does not have significant effect on Turnover.

Separateness of risk management committee and audit committee was another issue

investigated in the current Bursa Malaysia condition. Results showed that combination or

separateness of mentioned committees have no significant impact on ROA and Turnover.

4. Conclusions

Enterprise Risk Management (ERM) has become a well-known concept all around the world.

In fact, it is a new concept for businesses and industries to focus on. Nowadays, it has

become the final term to impact Risk management. Particularly, ERM is considered to extend

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the board and senior manager‟s capabilities to investigate general samples of risks that

confront an enterprise (Beasley et al., 2006). Besides, Enterprise Risk Management covers a

particular competitive source for those groups of people with a high potentiality of ERM and

strength (Stoh, 2005).

It is believed that the ERM system cannot be mentioned in a static regulation which is driven

from the general nature of risk. Some of the risks can be confronted with some changes of the

organization like macroeconomic, industry specific, country specific and a firm specific.

Although these risks are going to change every time but the risk management would be

measured on the regular issues. This evaluation and review can happen in all of the

organizations specified due to the explanation of the ERM.

The philosophy of the risk management is organized by the top managers and board of

director‟s risk management philosophies that can be varied due to the organized outcomes of

the organization. For example, the companies with the interest of venture capital are attracted

to the risk culture. The researches with some knowledge, particularly in risks wonder if these

risks are able to pay dividends in the upcoming future. On the other hand, a majority of the

matured organizations would determine risk aversion. Other companies may be able to create

a good profit by producing the same products with only a little change for a long period of

time like restaurants, soap products companies, and paper producers. We can mentionthe risk

management philosophy of the organization briefly but it can be a goal that is distributed to

the employees inside all the parts of the organization(COSO 2004).

Regarding the important role of board of directors in managing risk, the effects of board

characteristics, existence of risk management committee, size of risk management committee,

and separateness of risk management and audit committees on firm performance (ROA and

Turnover) were measured and the results are as follows:

Size of board has no significant impact on ROA

Size of board has positive and significant impact on LogTurnover

Number of independent non-executive members has significant impact on ROA

positively.

Number of independent non- executive members has significant impact on

LogTurnover positively.

There is no significant relationship between Number of board members with

background in finance and ROA.

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There is no significant relationship between Number of board members with

background in finance and LogTurnover.

There is significant and negative relationship between the existence of risk

management committee and ROA.

There is no significant relationship between the existence of risk management

committee and LogTurnover.

There is positive and significant relationship between size of risk management

committee and ROA.

There is no significant relationship between RMS and LogTurnover.

Separateness or combination of audit committee and risk management committee has

no significant impact on ROA.

Separateness of risk management and audit committees has no significant impact on

LogTurnover.

There are several contributions that come out from this research. Firstly, it contributes to

better understanding of board-performance link by investigating the traditional variables such

as size of board, number of independent non-executive, number of board with financial

expertise. This method suggests a newer light into operation and of creation top management

teams as strategic decision making groups (Forbes and Miniken, 1999).

Second, this study is one of the few studies that has bridged the nature of risk management

committee and firm performance, and also the role of other characteristics were discussed.

The findings showed that existence of risk management committee can increase ROA of firm,

but size of risk management committee has negative effect on ROA.

Thirdly, this study showed that any study on relationship between ERM and risk management

would be better if it is narrowed on specific industries because level of risk in any industry

could be different.

4.1. Limitation of study

This study has limitations as well; the data provided by companies in Bursa Malaysia,

didn't follow unique standards and in the case of some companies, data wasn‟t updated in the

Bursa web site for instant provided data related to 2009 and we couldn't use those in this

study. Second is the period of investigation which was only for 2010 and the results can be

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improved if data was chosen over a longer period. The third issue is relevant to the sample

size that was 200 companies in the first section and because of shortage of data this size was

reduced to 150 companies and in the third step for improving results, we had to choose 25

more companies and enter those data to study. The fourth issue is relevant to the limitations

of data collection because the data was collected from recognized public databases. In

addition, if there were any problems related to the disclosure of data, this could create some

limitations in the validity of the findings. Moreover, thefinal limitation that was recognized as

relevant was the transparency of information that was provided by companies, especially in

the sector of corporate governance and committees. In this section, in some reports, it didn‟t

mentioned clearly about the risk management committee and members in an organized

manner, and we had to review different sections to find out how many members there are in

the Risk management committee.

4.2. Future Studies

In this section of future studies, some points will be highlighted that may make researchers

eager to continue this work or result of studies may show new routes to future studies.

According to the limitation mentioned, companies selected in this study were distributed to

several industries with different Risk factors, and it is suggested that according to the risk

factor of industry and outcomes of company, to retest the variables and factors. For instance,

we can categorize companies to low risk, medium risk and high risk companies and then

identify the role of the risk committee on turnover and ROA.

The second suggestion is to use this framework to other types of stock markets such as Hong

Kong, Singapore, Dubai and other stock exchange markets that may have similarities with

Bursa Malaysia.

In the case of companies that have Risk management Committee,it is better to investigate

those companies with risk committee from before initiation of risk committee and impact of

this initiation on turnover and ROA.

In this study, secondary data was used which was provided by companies listed in theBursa

Malaysia; for future studies it is suggested to use interview and surveys to combine primary

data as well as to support arguments; on the other hand in interviews one can ask about the

amount of coverage of Risk committee and other details of this issue.

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Appendix

Table4: Descriptive statistics for variables used in model 1 & model2 (Numeric)

Numeric variables No. Minimum Maximum Mean Std.

Deviation

SIZE OF BOARD (BS) 175 9 21 9.05 2.441

NO IND.NON EXEC (IND) 175 1 9 4.21 1.507

NO FINANCE EXPE (NFE) 175 1 9 3.97 1.68

RM SIZE (SRM) 175 3 10 3.16 2.165

TOTALLASSETS (TA) 175 RM 840 million RM 336.7 billion RM 1.14 billion RM 3.9 billion

Foreign Subsidiaries 175 0 65 6.18 11.03

Age 175 1 50 26.7 14.43

Dependent Variables

ROA 175 -2.401 46.593 7.68199 6.918980

TURNOVER 175 RM 46 million RM 111.6 billion RM 3.02 billion RM 792 million

Table 5: Frequency of Dummy Variables

Having RM

Committee

Have=1

Do not have=0

128 companies

47 companies

73.1%

26.9%

Separateness RM

committee and Audit

Separate=1

Combined=0

62 companies

113 companies

35.4%

64.6%

Type of Industry

Service oriented=1

Manufacturing=2

Raw Materials=3

More than one industry=4

93 companies

40 companies

22 companies

20 companies

53.1%

22.9%

12.6%

11.4%

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Table 6: Pearson Correlation 1

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)

ROA (1) 1.00

BS (2) -0.014 1.00

IND (3) 0.203 0.427 1.00

NFE (4) 0.167 0.276 0.479 1.00

HRM (5) 0.025 -0.056 -0.009 0.88 1.00

RMS (6) 0.205 0.071 0.129 0.213 0.75 1.00

SRMA

(7)

0.105 0.053 -0.025 0.079 0.395 0.438 1.00

Log TA

(8)

0.251 0.162 0.018 -0.166 -0.046 -0.02 0.066 1.00

NFS (9) -0.118 -0.042 0.017 -0.005 0.078 -0.023 0.008 0.067 1.00

Ln Age

(10)

-0.139 0.075 0.33 -0.057 0.114 -0.089 0.118 0.026 0.147 1.00

TI (11) 0.219 -0.166 0.24 -0.026 -0.066 -0.061 -0.046 -0.116 0.065 -0.046 1.00

Table 7:Pearson Correlation 2.

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)

Log Turnover

(1)

1.00

BS (2) 0.306 1.00

IND (3) 0.19 0.427 1.00

NFE (4) -0.024 0.276 0.479 1.00

HRM (5) -0.021 -0.056 -0.009 0.88 1.00

RMS (6) 0.060 0.071 0.129 0.213 0.75 1.00

SRMA (7) 0.003 0.053 -0.025 0.079 0.395 0.438 1.00

Log TA (8) 0.458 0.162 0.018 -0.166 -0.046 -0.02 0.066 1.00

NFS (9) -0.199 -0.042 0.017 -0.005 0.078 -0.023 0.008 0.067 1.00

Ln Age (10) -0.042 0.075 0.33 -0.057 0.114 -0.089 0.118 0.026 0.147 1.00

TI (11) -0.073 -0.166 0.24 -0.026 -0.066 -0.061 -0.046 -0.116 0.065 -0.046 1.00

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Table 8: OLS Regression Results for Model 1 (ROA)

Hypothesis Expected sign Beta Std. Error t-value p-value VIF

Constant 18.285 5.504 3.322 0.00 1.753

Hypothesis Variables

BS HA1 + -0.2 0.226 -0.884 0.378 1.108

IND HA2 + 0.785 0.396 2.274 0.037 1.380

NFE HA3 + -0.044 0.342 -0.033 0.973 1.445

HRM HA4 + -3.6 1.743 -2.175 0.039 1.753

RMS HA5 + 1.008 0.372 2.777 0.007 1.432

SRMA HA6 + 1.445 1.134 1.274 0.205 1.302

Control Variables

Log TA -1.582 0.041 6.199 0.001 1.085

Ln Age -0.668 0.057 -0.008 0.382 1.054

TI 1.313 0.039 -0.556 0.005 1.033

NFS -0.045 0.004 2.237 0.286 1.076

R Square 0.222

Adjusted R Square 0.18

F-Ratio 4.78

Significance F 0.00

N 175

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Table 9: OLS Regression Results for Model 2 (LogTurnover)

Hypothesis Expected sign Beta Std. Error t-value p-value VIF

Constant 6.405 13.751 14.409 0.00 1.753

Hypothesis Variables

BS HB1 + 0.054 0.226 2.917 0.005 1.108

IND HB2 + 0.082 0.396 1.397 0.01 1.380

NFE HB3 + -0.024 0.342 -1.201 0.231 1.445

HRM HB4 + -0.119 1.743 -0.820 0.412 1.753

RMS HB5 + 0.023 0.372 1.390 0.289 1.432

SRMA HB6 + -0.069 1.134 -0.793 0.476 1.302

Control Variables

Log TA -1.582 0.041 6.199 0.00 1.085

Ln Age 0.001 0.057 0.028 0.993 1.054

TI -0.022 0.039 -.0.56 0.579 1.033

NFS 0.008 0.004 2.58 0.027 1.076

R Square 0.312

Adjusted R Square 0.238

F-Ratio 6.78

Significance F 0.00

N 175

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