Transcript Corporate Governance in Jamaica: A Risk

CORPORATE GOVERNANCE IN
JAMAICA:
A RISK MANAGEMENT
APPROACH
Dr. Twila Mae Logan
Dr. Doreen Gooden
Florida International University
Purpose of Study
 To examine:
 The impact of board composition and
ownership structure on the riskiness and value
of publicly traded non-financial firms in Jamaica
Background
 The late 1990’s financial crisis in Jamaica –
increased the awareness for appropriate governance
mechanism resulting in
- Tightening of banking laws and regulations
Company Act Legislation
-
-
Background
 Capital Market poorly developed
 Emergence of junior stock market
 Trading is relatively thin
 Corporate Bond market is virtually non-existent
 Jamaica Stock Exchange (JSE) established in 1968
- only 18 non-financial firms trading on the
main index
- 13 non-financial firms on the junior market
Background (Cont’d)
 Thus – need for research to determine
best practices in corporate governance:
- to enhance investors confidence
- further development of capital market.
 Few studies done on Jamaica publicly traded
firms.
LITERATURE REVIEW – Board
Composition and Risk
DAMODARAN (2008) – Risk taking behavior is related
to individual traits and characteristics
- women in senior positions less risk averse than male
counterparts
- more experienced persons are more risk averse than
naïve persons.
LITERATURE REVIEW – Board
Composition and Risk
 Rachdi and Ameur (2011) – 11 Tunisian Banks – smaller
boards associated with better performance and more risk
taking.
 Independent directors (outside, non-executive) had
lower performance and no significant effect on risk
taking.
LITERATURE REVIEW – Board
Composition and Risk
 Kyereboah-Coleman & Biekpe (2007)
– firm risk level decreased with outside directors
- firm risk increased with increasing board size.
Brick and Chidambaran (2008)
negative relationship between firm risk and the level of
board monitoring
LITERATURE REVIEW – Ownership
and Risk
 Jensen & Meckling (1976) Jensen & Murphy (1990)
- shareholders by corporate insiders result in greater
risk taking.

Gadhoum and Ayadi (2003)
positive relationship between firm risk taking and
insider holdings.
firm’s risk is negatively related to ownership structure
LITERATURE REVIEW –
Ownership
and Risk
 Wright et.al. (1996)
Increasing insider’s stake may represent a significant
portion of person wealth – hence less incentive for
reducing risk.
 Growth opportunities can influence risk taking.
LITERATURE REVIEW – Ownership
and Value
 Shliefer & Visny (1986)
 McConnell & Searves (1990) both found
Ownership structure affects the value of firms
 Turki & Sedrine (2012) found that
- increased ownership concentration is associated with
lower firm performance
- increased managerial ownership is consistent with
better firm performance.
Methods
 Uni-variate descriptive statistics
 Multiple regression with small samples
 Robust regression
 Reduces the influence of outliers
Data
 Publicly traded non-financial firms
 17 main exchange
 8 junior exchange
 Dependent variables : Weekly returns and standard
deviation from October 2010 – October 2012
 Independent variables: board and ownership
composition
Results – Board Composition
 Board Size – Average of 8.6 directors (median 8),
 On average 17% were female directors (median 17%)
 Average of 28% of board members were insiders
(median 29%)
Ownership Composition
 Top ten shareholders held on average 79% (median of 87%)
 Institutional investors held on average 12% (median 7%)
 Insiders held on average almost 30% of the shareholdings.
 The average board shareholding was 36% with a median of
20%.
 The average managerial shareholding was 19% while the
median was 1.5%,
Riskiness/Volatility of Returns
 Models R2 : 26% and 30%
 In addition to weekly returns, the riskiness of the firm
was increasing in insider percentage, and the largest
ten shareholders, but decreasing in board
shareholdings.
 Not significant
 Percentage of female directors
 listed on the junior market
Discussion
 Insiders are in a better to position to engage in riskier
projects. [Jensen & Meckling (1976) and Jensen &
Murphy (1990) Gadhoum and Ayadi (2003)]
 Increases in board shareholdings result in lower risk.
This is consistent with directors being risk averse - loss
of personal diversification [Wright et. al., 1996].
Returns/Value
 Model R2: 40% and 42%
 Increases in managerial share ownership resulted in
larger weekly returns (value).
 Positive but insignificant coefficients on
 Top ten block share holdings
 institutional shareholdings was positive but not significant.
 Number of insiders
Discussion
 Increases in managerial share ownership result in
larger weekly returns. [see Morck et.al., (1988),
Jensen and Meckling, (1976].
 The coefficient on institutional shareholdings was
positive but not significant [Ming &Gee, (2008)]
Discussion (cont’d)
 More insiders did not significantly increase the weekly
returns even though more insiders are associated with
increased risk.
Implications/Conclusions
 Managerial Ownership and Value
 Investing strategy
 Policy to encourage greater equity stakes.
Implications and Conclusions
 Inside Directors and value and risk
 Increased riskiness is only beneficial if this results in
greater returns
 Policy on proportion of inside directors for publicly traded
firms.