Ownership structure, board of directors and firm performance: evidence from Taiwan

• Pages: 189-216
• DOI: https://doi.org/10.1108/CG-04-2018-0144
• Published date: 08 October 2018
• Date: 08 October 2018
• Author: Mao-Feng Kao,Lynn Hodgkinson,Aziz Jaafar
• Subject Matter: Corporate governance,Strategy

Ownership structure, board of directors

and f‌irm performance: evidence

from Taiwan

Mao-Feng Kao, Lynn Hodgkinson and Aziz Jaafar

Abstract

Purpose –Using a data set of listedfirms domiciled in Taiwan, this paper aims to empiricallyassess the

effectsof ownership structure and board of directorson firm value.

Design/methodology/approach –Using a sample of Taiwanese listed firms from 1997 to 2015, this

study uses a panel estimation to exploit both the cross-section and time–series nature of the data.

Furthermore,two stage least squares (2SLS) regression model is used as robustness testto mitigate the

endogeneityissue.

Findings –The main resultsshow that the higher the proportion of independent directors,the smaller the

board size, together with a two-tierboard system and no chief executive officer duality, the stronger the

firm’s performance. With respect to ownership structure, block-holders’ ownership, institutional

ownership,foreign ownership and family ownershipare all positively related to firm value.

Research limitations/implications –Although the Taiwanese corporate governance reform

concerning the independent director system which is mandatory only for newly-listed companies is

successful, the regulatoryauthority should require all listed companies to appointindependent directors

to furtherenhance the Taiwanese corporate governance.

Originality/value –First, unlike most of the previous literature on Western developed countries, this

study examines the effects of corporate governance mechanisms on firm performance in a newly

industrialised country, Taiwan. Second, while a number of studies used a single indicator of firm

performance, this study examines both accounting-based and market-based firm performance. Third,

this study addresses the endogeneity issue between corporate governance factors and firm

performance by using 2SLS estimation, and details the econometric tests for justifying the

appropriatenessof using 2SLS estimation.

Keywords Firm performance, Board of directors, Ownership

Paper type Research paper

1. Introduction

Poor corporate governance has been cited as one of the major reasons that led to the

global financial crisis. Furthermore, prior to a number of corporate debacles, corporate

governance was not considered as an importantissue in many jurisdictions outside the USA

and Europe. In Taiwan, corporate governance became a major and controversial issue only

at the beginning of the twenty-first century when the Taiwanese authorities started to

introduce and implement a series of corporate governance reforms. These reforms are

aimed at strengthening Taiwan’s corporate governance, and amongst others include the

amendment of the Company Act, the Securities and Exchange Act and other related

regulations, the introduction of an independent director system and audit committee and

the promotion of shareholders’ rights. Using a data set of listed firms domiciled in Taiwan,

the main aim of this paper is to empirically assess the effects of ownership structure, board

of directors on firm value.

Mao-Feng Kao is an

Assistant Professor at the

Department of Accounting,

National Dong Hwa

University, Hualien, Taiwan.

Lynn Hodgkinson and

Aziz Jaafar both are

Professor at the Bangor

Business School, Bangor

University, Bangor, UK.

Received 11 April 2018

Revised 30 July 2018

Accepted 22 August 2018

DOI 10.1108/CG-04-2018-0144 VOL. 19 NO. 1 2019, pp. 189-216, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 189

The link between corporate governance and firm performance is important in formulating

efficient corporate management and public regulatory policies. However, prior literature

focuses mainly on the corporate governance practices in the UK, the USA and other

Western developed countries (Cavaco et al.,2016;Dahya and McConnell, 2007;Wintoki

et al.,2012

;Yermack, 1996). However, elsewhere, particularly in Asia, firms operate with a

different culture and in a distinctive legal and institutional framework, which may have a

material effect on corporate governance–firm performance relationships (Piesse et al.,

2007). Although some studies also looked at new growing economies (Mak and Kusnadi,

2005) in Malaysia and Singapore; Cho and Kim, 2007 and Black et al.,2015in Korea), the

focus of this research is on Taiwan, which is a newly industrialised economy that has

developed at an impressive rate, and which has a distinctive corporate governance

framework such as the supervisory system that is different from most countries. In addition,

it has now been several years since the corporate governance reforms were introduced in

Taiwan in early 2002. Accordingly, as these reforms which require public companies to

improve their corporate governance have now been enforced for a period of time, it is a

valuable research agenda to investigate whether the new policies are making Taiwanese

public companies perform better.

We use a data set from Taiwan which provides a suitable background as a newly

industrialised market for our empirical analysis to examine the effects of corporate

governance on firm performance. First, as an internal governance mechanism, the board of

directors plays an important role in monitoring the management and reducing the agency

problem between managers and shareholders (Drakos and Bekiris, 2010), and hence may

improve firm performance (Cho and Kim, 2007;Kiel and Nicholson, 2003;Setia-Atmaja

et al.,2009

;Weir et al., 2002). In particular, weassess the impact of board characteristics (i.

e. the proportion of independent directors and independent supervisors, board size and

role duality) on firm performance.Second, we focus on the external governance mechanism

of ownership structure (i.e. block-holders’ ownership, institutional ownership, foreign

ownership and family ownership), which may also display considerable change after the

corporate governance reform, and thus might be another determinant of firm performance

(Agrawal and Knoeber, 1996;Demsetz and Villalonga, 2001;Dwivedi and Jain, 2005;

Piesse et al., 2007). Our main results show that the higher the proportion of independent

directors, the smaller the boardsize, and together with a two-tier board system and no chief

executive officer (CEO) duality, the stronger the firm’s performance. These results are

consistent with those of Mak and Kusnadi (2005),Cho and Kim (2007),Guest (2009) and

Drakos and Bekiris (2010). With respectto ownership structure, in line with Filatotchev et al.

(2005),Maury (2006),Andres (2008) and Bonilla et al. (2010), block-holders’ ownership,

institutional ownership, foreign ownership and family ownership are all positively related to

firm value.

This study contributes to the corporate governance literature in several ways. First, unlike

much of the previous literature on Western developed countries (Andres, 2008;Bhagat and

Black, 2001;De Andres et al., 2005), this study examines the effects of corporate

governance mechanisms on firm performance in a newly industrialised country, Taiwan.

Second, while a number of studies used a single indicator of firm performance (Dahya and

McConnell, 2007;Wintoki et al.,2012;Yermack, 1996), this study examines both

accounting-based and market-based firm performance. Third, this study addresses the

endogeneity issue between corporate governance factors and firm performance by using

two stage least squares (2SLS) estimation, and details the econometric tests for justifying

the appropriateness of using 2SLSestimation.

The remainder of this paper is structured as follows. Section 2 provides a discussion of

corporate governance in Taiwan. Section 3 presents, in addition to the hypothesis

development, the literature as to whether corporate governance mechanisms have an

impact on firm performance. Section 4 explains the methodological aspects being used in

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