Complementarities in Corporate Governance Instruments in Affecting the Value of a

The complementarities in the corporate governance mechanism are tested to gauge their value enhancing ability in developing and developed financial markets. The details of these tests for both internal and external corporate governance mechanisms are as follows.

Table 5.9 and 5.10 present the results of tests for complementarities in the internal corporate governance mechanism and their effect on the value of a firm. In these tests the CEO duality is first removed from the model of developed and developing markets to test whether the CEO duality is the Edgeworth compliment of board size. The test (see Table 5.9) has resulted in no change in significance of board size, which shows that the CEO duality is not the Edgeworth complement of board size and do not affect the value of a firm. The test results in the rejection of the hypothesis (H3a).

Models Australia Malaysia Combined

R-squared (original) 0.87 0.75 0.77

Table 5.9

Effects on Board Size after the Removal of CEO Duality

Variables Australian Model Malaysian Model Combined Model

Constant 0.81 (8.73)** 0.02 (0.22) 0.23 (0.79)

Log Board Size -0.17

(-2.96)**

0.17 (3.31)**

0.12 (0.88)

Log Market Capitalisation 0.02

(2.72)** 0.03 (2.47)** Gearing -0.09 (-3.34)** -0.04 (-1.88)*

Price to Book Value Ratio 43.76

(27.49)**

43.36 (5.44)**

49.34 (13.29)**

Return on Total Assets 1.12

(1.82)* 1.12 (2.02)** Agency Cost 0.08 (1.07) -0.19 (-2.18)** R-squared 0.87 0.74 0.77 Adjusted R-squared 0.87 0.74 0.77 Durbin-Watson 1.42 1.48 1.09

Mean Dependent Variable 1.94 1.03 1.42

F-statistic (206.76)** (138.86)** (412.64)**

Notes: The values of the coefficients are in the first row. Below are the values for T statistics in parenthesis.

* Represents the significance of a variable at 10% significance level. ** Represents the significance of a variable at 5% significance level.

The second test about the role of complementarities of the internal corporate governance instruments in improving the value of a firm is reported in Table 5.10. In this test board size is removed from the regressions of developed and developing markets. The removal of board size has not affected the significance of CEO duality, which proves that the instruments do not improve the marginal benefit of each other in developing and developed financial markets. Furthermore, the instruments in combination do not improve the value of a firm in these financial markets resulting in the rejection of the hypothesis (H4a).

5.10 Complementarities in Corporate Governance Instruments in Affecting the Value of a Firm in the Cross-market Analysis

The tests about the complementarities among internal and external corporate governance mechanisms is performed to see whether the internal corporate

governance mechanisms (board size and CEO duality) improve the marginal benefit of each other and also whether the external (regulatory index) and internal corporate governance mechanism (board size and CEO duality) are the Edgeworth complements of each other. The tests enable us to understand the role of these instruments in affecting the value of a firm in developing and developed financial markets. The results are presented in tables 5.9, 5.10 and 5.11 and detailed discussion of these results is given below.

Table 5.10

Effects on CEO Duality after the Removal of Board Size

Variables Australian Model Malaysian Model Combined Model

Constant 0.59 (12.05)** 0.33 (4.54)** 0.46 (8.46)**

Log Market Capitalisation 0.007

(1.08) 0.03 (2.83)** CEO Duality 0.12 (1.06) 0.03 (1.20) 0.06 (1.02) Gearing -0.07 (-2.56)** -0.05 (-2.16)**

Price to Book Value Ratio 43.81

(27.21)**

43.51 (5.40)**

49.41 (13.37)**

Return on Total Assets 1.14

(1.81)* 1.09 (1.93)* Agency Cost -0.04 (-0.68) -0.18 (-2.12)** R-squared 0.87 0.74 0.77 Adjusted R-squared 0.87 0.73 0.77 Durbin-Watson 1.40 1.45 1.09

Mean Dependent Variable 1.94 1.03 1.42

F-statistic (202.69)** (135.08)** (412.13)**

Notes: The values of the coefficients are in the first row. Below are the values for T statistics in parenthesis.

* Represents the significance of a variable at 10% significance level. ** Represents the significance of a variable at 5% significance level.

The results about the role of complementarities in affecting the value of a firm in the cross-market analysis are presented in Table 5.9. In these tests, CEO duality is first removed from the model for cross-market analysis. We find that removal of CEO duality does not affect the significance of board size, which shows that CEO duality is not the Edgeworth complement of board size rejecting the hypothesis (H3a). The

result also suggests that CEO duality in combination with board size does not improve the value of a firm.

On the contrary, Table 5.10 shows that removal of board size from the model makes the CEO duality insignificant. In the original model, the value of the coefficient for CEO duality is 0.14 and is statistically significant at the 5% significance level. After the removal of board size, CEO duality becomes insignificant and the value of coefficient changes to 0.06 accepting the hypothesis (H4a).

Table 5.11

Effects on the Model after the Removal of Internal and External Corporate Governance Variables

Variables Remove Internal Corporate

Governance Mechanism

Remove External Corporate Governance Mechanism

Constant 0.76

(4.89)**

0.20 (0.72)

Log Board Size 0.12

(0.96) CEO Duality 0.07 (1.26) Gearing -0.06 (-3.91)** -0.04 (-1.83)*

Price to Book Value Ratio 49.08

(13.42)**

49.42 (13.31)**

Return on Total Assets 1.03

(1.90)* 1.09 (1.96)* Log Procedures -0.09 (-2.02)** R-squared 0.77 0.77 Adjusted R-squared 0.77 0.77 Durbin-Watson 1.09 1.09

Mean Dependent Variable 1.42 1.42

F-statistic (413.31)** (329.91)**

Notes: The values of the coefficients are in the first row. Below are the values for T statistics in parenthesis.

* Represents the significance of a variable at 10% significance level. ** Represents the significance of a variable at 5% significance level.

The result proves that board size is the Edgeworth complement of CEO duality in developing and developed markets and these instruments together improve the value of a firm in these markets. Table 5.11 shows the results of the tests about the complementarities of the internal and external corporate governance mechanisms.

The test of complementarities of external and internal corporate governance mechanism suggests that the external corporate governance mechanism (procedures) is the Edgeworth complement of the internal corporate governance mechanism (CEO duality) accepting the hypothesis (H1a). In the original model, CEO duality is statistically significant at the 5% significance level with a coefficient of 0.14. The removal of the procedures (regulatory index) from the model made the CEO duality insignificant and changed the value of coefficient to 0.07.

The removal of procedures has not affected the relationship of the board size with the value of a firm. This proves that these instruments are not the Edgeworth complements of each other and therefore hypothesis (H1a) must be rejected.

Table 5.11 also shows that the internal corporate governance mechanisms (board size and CEO duality) are not the Edgeworth complement of the external corporate governance instrument (procedures) in developing and developed markets. The test results in rejection of the hypothesis (H1b).

The removal of the internal corporate governance mechanism (board size and CEO duality) does not affect the significance or marginal benefit of the external corporate governance mechanism (procedures). The internal corporate governance mechanism does not improve the marginal benefit of external corporate governance mechanism in developing and developed financial markets. Combining these, the internal corporate governance mechanism (CEO duality and board size) with the external corporate governance mechanism (regulatory authority and judiciary), does not improve the value of a firm.