The Impact of Corporate Governance Structures on the Corporate Investment Performance in Turkey

• Author: B. Burcin Yurtoglu,Hakan Orbay
• Date: 01 July 2006
• Published date: 01 July 2006
• DOI: http://doi.org/10.1111/j.1467-8683.2006.00511.x

THE IMPACT OF CORPORATE GOVERNANCE STRUCTURES ON THE CORPORATE INVESTMENT PERFORMANCE

349

© 2006 The Authors

Journal compilation © 2006 Blackwell Publishing Ltd, 9600 Garsington Road,

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Volume 14 Number 4 July 2006

Blackwell Publishing IncMalden, USA

CORGCorporate Governance: An International

Review0964-8410Blackwell Publishing Ltd. 2006

2006144••••ORIGINAL ARTICLES

THE IMPACT OF

CORPORATE GOVERNANCE STRUCTURES ON THE

CORPORATE INVESTMENT PERFORMANCECOPRORATE

GOVERNANCE

*Address for correspondence:

Department of Economics,

Center for Business Studies,

University of Vienna, Room

222BWZ, Brünner Str. 72, A-

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The Impact of Corporate Governance

Structures on the Corporate

Investment Performance in Turkey

Hakan Orbay and B. Burcin Yurtoglu*

In spite of the fact that most research has concentrated on the typical agency problem between

managers and dispersed shareholders, in many countries large shareholders are much more

frequently observed than firms with dispersed ownership structures. While large shareholders

are perceived as a potential solution to the typical agency problem between managers and

dispersed shareholders, less research has been done on the costs of large shareholders. One

important issue in this literature is that deviations of cash flow rights from voting rights

often result in substantial value discounts. In this paper we test for the impact of such

deviations on corporate investment performance in Turkey. To measure corporate investment

performance we estimate returns on investment relative to company costs of capital, a

methodology that overcomes the endogeneity problem, which is known to contaminate results

in the empirical corporate governance literature. Consistent with existing studies, we find that

the average Turkish listed company has a return on investment which is less than its cost of

capital. We also report significantly better investment performance for companies that do not

deviate from one share–one vote by using pyramidal ownership structures, dual-class shares

and other devices that enhance the control power of large shareholders beyond their cash flow

rights. We also find that business group membership improves the investment performance

and relative market valuation of companies.

Keywords: Corporate governance, investment performance, marginal

q

, Turkey

Introduction

ecent years have witnessed a growing

interest in differences in the corporate

governance structures of countries.

1

One

important strand of this literature has been

concerned with the impact of the identity and

degree of concentration of ownership and

the institutional mechanisms through which

insiders and outsiders of companies interact.

Starting with Berle and Means (1932), most of

this literature has been concerned with the

conflicts of interest between shareholders and

managers of the type that is found in “Anglo-

R

Saxon” institutional environments. A firm’s

shares are widely dispersed, so that no outside

shareholder has a strong incentive to monitor

managers carefully; managers do not hold

large fractions of their companies’ shares, and

thus do not have the same financial interest in

the firm as the shareholders. Starting with the

seminal contribution of Jensen and Meckling

(1976), the consequences of this typical agency

problem have been studied extensively.

In their influential survey, Shleifer and

Vishny (1997) argue that large shareholders

address this agency problem due to their

incentives and ability to exert control over the