Frameworks of study and variables in the economy - Free Essay Example

Hypothesis Development The importance of corporate governance for Asian countries was emerged in1997 when a financial crisis in Japan was expanded to the countries in Asia pacific region (Sueyoshi, Goto, and Yusuke, 2009). Since many researches were conducted to explore the relationship between corporate governance and company performance in Asia along with the USA. However, as mentioned before, one of the most important issues in corporate governance discussion is agency problem (Shakir, 2006) and it means when ownership and management team are separately from each other, agency problem will show its effects. This situation was explored in Zhuang, Edwards, and Capulong study (2001). They tried to find the effect of monitor managers and to implement control; therefore managers act in the best interest of companies owners (shareholders). According to Dalton, Daily, Ellstrand and Johnson (1998) agency problem is the most identified theoretical perspective which is explored in corporate governance studies. However, according to Bebczuk (2005), corporate governance can affect companies performance because of agency problem which is a result of an inconsistency of interest between shareholders and management. Hence, Bebczuk (2005) study went through the Argentinas companies to explore the role of corporate governance and its effects on corporate performance. Some of other researchers who worked on this relationship were Chen (2005) in Taiwan, and Che Haat et al. (2008) in Malaysia. Therefore, based on the priors study, the first hypothesis for this study can be developed as bellow: There is a significant relationship between corporate governance and performance of the Malaysian listed companies. In term of capital structure there are few studies not only in Malaysia, but also elsewhere that their purpose is to explore the corporate governance and capital structure. As a recent effort, Saad (2010) explored the commitments level of Malaysian listed companies to code of corporate governance in Malaysia; then, the effects of these commitments on the capital structure was examined. Existing the relationship between corporate governance and the capital structure was proved in Saad (2010) study. Priors to Saad (2010) study, Bhagat and Bolton found relationship between corporate governance and capital structure between companies in the USA. Following the previous studies, in this study the second hypothesis is defined as bellow. There is a significant relationship between corporate governance and capital structure of Malaysian listed companies. Sample Selection To achieve the best results, the companies listed in Bursa Malaysia were selected to find their level of commitments to the corporate governance code in Malaysia, and the effects of these commitments on their performance and the capital structure decisions. Secondary data will be used in this research and Bursa Malaysia website and companies annual reports can be sources of data for this research. This research will choose listed companies randomly from main and second board of Bursa Malaysia and financial firms and banks will be excluded as they have different natures and policies. Data Collection Different authors have different opinions and offer different guidelines for the appropriate number of sample size in multiple regression. Stevens (1996, p.72) says that for a social science research, about fifteen samples for each independent variable should be used to achieve a reliable equation (Pallant, 2005, p. 142). Hence, based on Stevens opinion, as this research has 3 independent variables, 45 samples can be enough for this research. Elsewhere, Tabachnick and Fidell (2001, p. 117) recommend a formula for sample size calculation and state that number of samples should be more than 50 + 8 * IV (where IV is number of independent variables). Therefore, 50 + 8 * 3 = 74 samples are enough for this research. However, this research employs G*Power 3.0.10 to calculate the sample size and according to the results of this software, as this research has three predictors including one independent variable and two control variables and the study will use Multiple Regression from F-Tests g roup, to achieve the desired results with error probability = 0.05, Power (1- error probability) = 0.95, Effect size = 0.2, sample size will be 90 and with this sample size, the actual power will be 0.950306. The output is shown in the following table. Effect size 0.2 Noncentrality Parameter 18 error probability 0.05 Critical F 2.710647 Power (1- error probability) 0.95 Numerator df 3 Number of Predictors 3 Denominator df 86 Total Sample Size 90 Actual Power 0.950306 Table3.5: G*Power results In figure 3.1 Total Sample size is drawn as a function of Power of the test and as shown with 90 sample size, power of the test reaches to 0.95 which is the desired amount for this research. Figure 3.2 draws as a function of total sample size and as shown, = 0.05 achieves with 90 sample size. Furthermore, the following figure (Fig 3.3) draws both of and power as functions of total sample size and as shown they crosses each other with 90 sample size. Therefore, the sample size of this research will be 90 companies that will be chosen from Bursa Malaysia website randomly. Measurement of Variables Independent Variables Researchers apply a conduct test to investigate effect and cause connections; it means that they arrange an experiment in order that changes to one entry lead to something else to differ in an unsurprising method. These modifies in quantities called variable. Term of variable can refer to any trait, factor, or condition that can be in various amount or types. The independent variable is the one that is varied by researchers in order to have a fair test or a good experiment. As shown in the figure 3.1 the corporate governance is the independent variable in this study. Corporate Governance: Although this variable is used in all previous studies with corporate governance base, all these studies used different methods to measure corporate governance such as Gov-Score (Brown and Caylor, 2004), GMI (Bhgat and Bolton, 2008), etc as mentioned in the literature review chapter. This research adopts Bebczuk (2005) method to measure corporate governance practices in the firms. Hence, Transparency and Disclosure Index (TDI) is used as an index to measure the corporate governance. In line with Bebczuk (2005) study the structure of TDI are demonstrated based on table 3.1. The TDI is used, in order to determine the strength of firms corporate governance. TDI is relied on public information of firms on their annual reports, and reveals the standard of transparency and disclosure in a corporation. TDI includes 25 binary items which can discover a wide range of corporate governance issues. The binary will be equal one if a firm acts based on the code of corporate governance, in contrary, it will be zero. The TDI are divided into three sub-indices. They are Board, Disclosure, and Shareholders. Board is measured the structure, progresses, and compensation of the board and top management members. Disclosure is measured to what extend the firm annual reports release corporate facts to the external shareholders. Shareholders is measured the superiority and value of data and information in related to alternative shareholders. To understand the TDI and its aspects, the study provides operational definitions of TDI items. Table 3.1 presents these operational definitions. Table 3.1: TDI items explanation Manager and director fees Usually firms publish only total amount of their managers and directors fees and knowing of each directors fee is not possible. However, the best corporate governance practices is publishing each director and managers fee separately. Hence, the value of this item for a firm will be one if the firm publishes the exact amount of its managers and directors fee. The information related to this item usually can be found in remuneration part of the annual report. Form of manager and director fee payment Each company pays its managers and directors by many ways and the best corporate governance practice is disclosing all payment forms that the company considers. For instance, it includes basic salary, fees, bonus gratuity, fees subsidiaries, allowance, employers EPF, Benefits in kind, stock options, stock. As a matter of fact, some companies divide the payment forms only in few categories and shareholders and investors do not know the details. Hence, the value of this item will be one if the company publishes all form of payments to managers and directors, otherwise, it will be zero. This information usually can be found in the remuneration part of annual reports or in financial statements. Information on whether manager and director fees are performance-based Performance-based fees can be a method to decrease agency costs and the companies that want to follow the best corporate governance practices publish this information and mention whether their manager and directors fees are tied to their performance or not. This information can be found in directors remuneration part of annual report. Bio of main company officers/ Bio of directors These items disclose vary information about board. Age, race, education, years commitments with firm, information about directors in board. Financial Indicator for last five years Some of companies publish details of their last five years financial information and some companies only publish some of key financial indicators. Others do not give any information about their past financial statements in the current annual reports. Calendar of future events The lack of information about future events of companies will be disclosed through this item. If the company publishes the calendar of its future events this item will be one, otherwise zero. English-translated corporate website If the company has English-translated corporate website this item will be one and if it provides the information only in Malay or Chinese language it will be zero. Strategic plan and projections for the following years In todays competitive world, all companies must have details strategies and plans for future and usually they publish a brief of them in outlook and prospects parts of the annual reports. Some companies only gives a short review of the future economy and some publish detailed information about their companies strategies to encompass with the future challenges and use opportunities. Details on the appointment process of new directors Some of companies publish this information in a separate part which is titled Appointment procedure and some only mention a few lines in the nomination part of the annual report. Unfortunately, some of the firms dont publish anything related to this item. Therefore, this item for companies that follow the best corporate governance practice will be one, otherwise zero. Details on attendance of minority and controlling shareholders at shareholders meetings If the company keeps and publishes information related to minority and controlling shareholders in Annual general Meeting this item will be one; otherwise, it will be zero. Report of the external auditor Based on regulations all companies should put their auditors report in Annual Report. Therefore, it is expected that all firms get one for this item in Malaysia. Details of corporate ownership (principal shareholders) According to the listing requirement for Malaysian corporations, they should expose data and information associated to their shares and major shareholders. Malaysian companies respect to this law and it is expected that all companies that have been listed on Bursa Malaysia get one for this item. Type and amount of outstanding shares According to the listing requirement for Malaysian corporations, they should expose data and information associated to their shares and major shareholders. Malaysian companies follow these regulations. Hence, it is expected that all companies that are listed on Bursa Malaysia get one for this item. Dividend policy in the past five years If a company publishes its gross dividend, net dividend, or dividend per share for the past five years in its current annual report, this item will be one; otherwise zero. Projected dividend policy for the following years The information of this item can be found in Dividend part and some of companies reveal the following years dividend policy in the current annual report. As a matter of fact, informative more data about dividend policy can lead to raise investors confidence and convince them for more investment. Dependent Variables Researchers will focus on dependent variable in order to observe how this variable reaction to the change made to the independent variable. The value of dependent variable is the result of independent variable, and depends on independent variable too. Performance and capital structure are dependant variables in this study. It means this study will examine the effect of the independent variable, as mentioned above; on the performance and capital structure. Performance In order to measure the performance of firms, this study adapts measure used by Wei et al. (2000), Bebczuk (2005), and Bhagat and Bolton (2008). Performance is measured using different proxies as stated bellow: Return on Assets Bhagat and Bolton (2008), Wei et al. (2000), Aman and Nguyen (2008), Bebczuk (2005) Tobins Q Aman and Nguyen (2008) Return on Sales Bebczuk (2005) Wei et al. (2000) Return on Equity Bebczuk (2005) Table 3.2: performance In order to clarification each item, a briefly explanation is necessary as bellow: Return on assets: net income/ total assets Return on assets (ROA): Earnings before interest and taxes to total assets. Return on sales (ROS): Earnings before interest and taxes to sales. Return on equity (ROE): Earnings before interest and taxes to total equity. Tobins Q: The market value of a firms asset divided by the book value of its assets. Capital Structure Capital structure is measured by using the ratio of debt to assets. This measure is used by prior studies as Bebczuk (2005) and Bhagat and Bolton (2008). Debt to Asset Bebczuk (2005), Bhagat and Bolton (2008) Table 3.3: capital Structure Control variables To increase the reliability of the findings, the study considers firm size and firm growth as control variables. Although it is believed that size may create negative influence in a condition that size is related with the prostration of growth occasions, it defiantly have a positive effect on every occasion that size is associated with more diversification, superior economies of scale and scope, more management, and less rigorous financial restraints. Moreover, sales growth is a proxy for the product demand faced by the firm and its productivity. The firm size is measured as total assets ( logarithm of total assets ) as measured by Bebczuk (2005) and Chen (2004). Firm growth, on the other hand, is measured by a percentage of sales growth (Chen, 2004; Bebczuk,2005). Size Ln(assets) Logarithm of the companys total assets Growth Sales Growth Percentage sales growth Table 3.4: Control Variables Data Analysis Techniques This study employs Statistical Program for Social Science (SPSS) 18.0 for analyzing the data. After data collection and entering data into SPSS data sheet, two types of analyses are used to achieve the goals of the study. First, descriptive analysis is used for each variable. For instance, each item of TDI index which is the independent variable will be studied in details and by a descriptive analysis, the study wants to know how many percent of companies in Malaysian stock exchange market follow the best corporate governance practices. The result of this part will be a good guideline for firms that want to improve their corporate governance practices and also they can compare themselves with other companies and the mean of the market as well. Moreover, descriptive analysis is employed for dependent and control variables and the mean, standard deviation, frequency, and percentage of frequency of sectors, industries, size of firms, sales, and etc. of each company is achieved. In the second step of the analysis, the study tries to test the hypotheses of the research. For the first hypothesis which is finding the effect of corporate governance practices on the firms performance, three analyses are used which are correlation, ANOVA, and Multiple Regression. The aim of correlation analysis is to know there is any significant positive relationship between corporate governance practices and firms performance and then by ANOVA, the study wants to know whether this independent variable could use to predict the dependent variable or not. And finally, by regression analysis, an equation will be achieved and by R-square and coefficients, the results can be interpreted in details. The same analyses are used for the second hypothesis as well which is to study corporate governance practices can affect capital structure policies significantly or not. Therefore, again by correlation, ANOVA, and regression analysis this hypothesis will be tested.