Post on 27-May-2019
THE IMPACT OF OWNERSHIP STRUCTURE ON CORPORATE DEBT POLICY OF BANKING INDUSTRY IN MALAYSIA
Wong Siik Ching
Bachelor of Finance (Honours) 2012
Pusat Khidmat Maklumat Akademik UNIVEltSm MALAYSIA SARAWAK
PKHIDMAT MAKLUMAT AKADEMIK
111111111111[111111111111000245017
THE IMPACT OF OWNERSHIP STRUCTURE ON CORPORATE DEBT POLICY OF BANKING INDUSTRY IN MALAYSIA
WONG SIlK CHING
This project is submitted in partial fulfillment of the requirements for the degree of Bachelor of Finance with Honours
(Finance)
Faculty of Economic and Business UNIVERSITY MALAYSIA SARA WAK
2012
Statement of Originality
The work described in this Final Year Project entitled
The Impact of Ownership Structure on Corporate Debt Policy of Banking
Industry in Malaysia
is to the best of the authors knowledge that of the author except
where due reference is made
ckt- 7- J b 101 V
Wong Siik Ching Date 25401
ABSTRACT
The Impact of Ownership Structure on Corporate Debt Policy of
Banking Industry in Malaysia
By
Wong Siik Ching
This study was conducted to investigate the impact of ownership structure on
corporate debt policy of banking industry in Malaysia It also identifies the
detenninants of the ownership structure in banking Malaysia 8 local banks which are
listed in Bursa Malaysia between 2005 and 20 I 0 were selected as the sample of the
study A pooled Ordinary Least Square COLS) analysis was used to examine the
relationship between ownership structure and corporate debt policy in banking
Malaysia The findings indicate that there is an insignificant relationship between
profitability and debt ratio However the results find that finn size growth
opportunityand institutional ownership have a positive and significant relationship
with the debt ratio In contrast the firm risk and managerial ownership have a
significant and negative effect on the debt ratio These findings are consistent with
the pecking order theory and agency theory Hence the corporate debt policy can be
used as a mechanism to mitigate the agency conflict in banking Malaysia
-
ABSTRAK
Kesan struktur pemilikan mengikut dasar hutang korporat industri perbankan
di Malaysia
Oleh
Wong Siik Ching
Kertas kerja ini mengkaji kesan struktur pemilikan mengikut dasar hutang
korporat industri perbankan di Malaysia Kajian ini juga mengenal pasti penentu
struktur pemilikan dalam perbankan Malaysia Sampel kajian ini memberi tumpuan
kepada 8 bank-bank tempatan yang disenaraikan di Bursa Malaysia antara tahun 2005
hingga tahun 2010 Suatu dikumpulkan persegi biasa (OLS) analisis digunakan untuk
melihat hubungan antara struktur pemilikan dengan dasar hutang korporat dalam
perbankan Malaysia Hasil kajian menunjukkan bahawa terdapat hubungan yang
signifikan antara keuntungan dengan nisbah hutang Walau bagaimanapun keputusan
mendapati bahawa saiz firma peluang pertumbuhan dan pemilikan institusi
mempunyai hubungan positif yang signifikan dengan nisbah hutang Sebaliknya
risiko yang kukuh dan pemilikan pengurus mempunyai kesan yang signifikan negatif
ke atas nisbah hutang Penemuan ini adalah selaras dengan teori pesanan combinasi
dan teori agensi Oleh sebab itu dasar hutang korporat boleh digunakan sebagai
mekanisme untuk mengurangkan konflik agensi dalam perbankan Malaysia
ACKNOWLEDGEMENT
This thesis was completed with the supports and assistance from many people
who are important in my life Firstly I would like to thank my supervisor Associate
Professor Dr Puah Chin Hong for his guidance and support throughout the study He
is kind to provide invaluable advices and comments in enhancing my knowledge to
write a good scientific research He has helped me greatly to solve the problem in the
study
Besides I want to take the opportunity to extend my gratitude to all my lectures
at Universiti Malaysia Sarawak especially for those who have helped me and given
me the supports and encouragements in the study I appreciate the lecturers who were
willing to share their experiences and knowledge for helping me to complete my
thesis
Furthermore I would like to express my appreciation to my family members for
providing me their support when I was suffering and stressful They are good
listeners and assist me to increase my confidence for completing my thesis on time
Last but not the least I would like to thank my friends who have given their support
inspiration understanding and advice that has helped me to complete my final year
project
I
List of Tables
List of Figures
CHAPTER 1
10
11
12
13
14
15
16
17
18
19
Pusat Khidmat MakJumat Akademik UNlVERSm MALAYSIA SARAWAK
TABLE OF CONTENTS
Xl
Xll
INTRODUCTION
Overview of the Study 1
Background of the Study 3
Definition ofOwnership Structure 7
121 The Types of Ownership Strucutre 8
Definition of Corporate Debt Policy 10
The Detenninants of Capital Structure 11
The Impact ofCorporate Ownership on Corporate 14
Debt Policy
Problem Statement 15
Objective of the Study 17
171 General Objective 18
172 Specific Objective 18
Significance of the Study 19
Scope of the Study 20
vii
I
CHAPTER 2 LITERATURE REVIEW
20 Introduction 21
21 Ownership Structure and Corporate Perfonnance 21
22 Corporate Debt Policy and Dividend Policy 24
23 Determinants ofCapital Structure and Ownership 28
Structure
24 Ownership Structure and Banking Industry 30
25 Ownership Structure and Corporate Governance 32
26 Ownership Structure and Agency Theory 35
CHAPTER 3 METHODOLOGY
30 Introduction 43
31 Theoretical Framework 43
311 Agency Theory 44
312 Pecking Order Theory 46
32 Conceptual Framework 47
33 Definition and Measurement ofthe Variables 49
331 Dependent Variable 50
tI 332 Independent Variables 50
333 Hypothesis of the Study 52
334 Summary ofthe Measurement Variables 53
34 Data and Sample 55
35 Data Analysis 56
351 Pooled Ordinary Least Square (OLS) Regression 56
viii
352 Estimation Model 58
36 Diagnostic Checking Tests and Stability Tests 59
361 Histogram and Normality Test 59
362 Breush-Godfrey Serial Correlation LM Test 60
363 Heteroskedasticity 61
364 Ramseys RESET Test 62
365 CUSUM Test 63
366 CUSUM of Squares Test 64
CHAPTER 4 EMPIRICAL RESULTS AND DISCUSSIONS
40 Introduction 66
41 Descriptive Analysis 66
42 Pooled OLS Reslllts 68
421 Profitability of Return on Asset 69
422 Firm Risk 70
423 Firm Size 71
424 Growth Opportunity 71
425 Managerial Ownership 72
426 Institutional Ownenhip 73
43 Diagnostic Checking Tests and Stability Tests Results 73
431 Normality Test Results 74
432Breush-Godfrey Serial Correlation LM Test 75
Results
433Heteroskedasticity Test Resuts Based on ARCH 75
ix
44
CHAPTERS
50
51
52
53
54
REFERENCES
364 Ramseys RESET Test Results
365 CUSUM Test Results
366 CUSUM of Squares Test Results
Chapter Remark
CONCLUSION AND RECOMMENDATION
Introduction
Conclusion Remark
Policy Implication
Recommendation
Limitation of the Study
76
77
78
80
83
83
86
87
88
90
x
1
2
3
4
5
6
7
8
LIST OF TABLES
Table Title Page
Summary of the Literature Review 38
Summary of the Measurement Variables 54
Descriptive Statistics ofDependent and Independent Variables 67
Correlation Matrix of the Debt Ratio and Explanatory Variables 68
Pooled OLS Regressions Results of Debt Ratio Analysis 69
Breush-Godfrey Serial Correlation LM Test Results 75
ARCH Test Results 76
Ramseys RESET Test Results 77
xi
LIST OF FIGURES
Figure Title Page
1 Conceptual Framework ofthe Impact of Ownership Structure 48
on Debt Policy
2 The Normality Test Results 74
3 CUSUM Test Results 78
4 CUSUM of Squares Test Results 79
xii
CHAPTER
INTRODUCTION
10 Overview of the Study
Corporate governance is an important aspect ofthe corporate environment It is
related to corporate control and ownership structure of a firm in a corporation
According to Hitt et aI (1999) strategic management and performance of firms are
regulated and controlled by corporate governance Besides it is used in
organization to establish command between firms owners and its top-level
managers whose interests may be in conflict Hence the separation of interests
among stakeholders in corporation csm lead to agency problem
In Malaysia corporate governance is highly concentrated in the hands of large
shareholders or controlling shareholders The shareholders are given the rights to
provide incentives that can affect decision-making in the corporation and exercise
the voting control over shares which may diverge significantly in cash flow rights
(Ishak amp Napier 2006) According to Ghazali (2007) family-owned and
government-owned companies are the common types of ownership structure in
Malaysia Generally Malaysia has five largest shareholders which own 60 or
more of the public listed companies equity The top largest shareholders are the
nominee companies followed by non-financial companies and the government
Nor et al (2010) stated that corporate governance in Malaysia vanes
according to the ownership structure of the corporate sector Tne dispersed
ownership situation in Malaysia is observed to be similar in United States of
America (USA) and United Kingdoms (UK) common law legal system The
ownership is observed from two perspectives which are ownership concentration
and the components of ownership concentration They are used as a proxy for
corporate governance mechanisms Besides the ownership can be categorized into
institutional ownership government ownership and the nominees as well as the
individuals who own the companies As further added by Ayoib et al (2003) the
government has established the Finance Committee on Corporate Governance and
the Malaysian Institute ofCorporate Governance (MICG) to review and strengthen
corporate governance in Malaysia In addition the Malaysian Institute of
Accountants (MliA) the Kuala Lumpur Stock Exchange (KLSE) and the Securities
Commission (SC) were fonned to enhance the corporate governance in Malaysia
Moreover the Malaysian government has changed the merged banking groups
compositionof ownership structure in the post-crisis years When the bank merger
programme was completed to consolidate the number of domestic commercial
banks were reduced from 20 in 1999 to lOin 2001 (Lum amp Koh 2007) Hence the
study concluded that the consolidation programme has resulted in larger and better
capitalised domestic banking institutions but do not have any significant impact on
the composition ofownership structure in the banking industry
2
11 Background of the Study
Agency problem is a popular issue that exists commonly in a corporation
There are several studies which provide evidence on the effects of agency conflicts
on corporate governance Rimbey (1998) found that the distribution of shares
among the outside shareholders is a device to mitigate agency costs and affect the
fIrms capital structure Therefore ownership represents a power that can be used
either to support or oppose existing management that is related to the concentration
or dispersion of the power
On the other hand managerial ownership is an important internal monitoring
force as a determinant of risk The risk is a central theme in financial economics
which is related to managerial ownership corporate debt and dividend policies
(Chen amp Steiner 1999) The determinants ofmanagerial ownership include the risk
debt and dividends which are treated as endogenous variable in the model Many
previous studies have found that managerial ownership has a signifIcant impact on
the levels of risk
Nevertheless Andreyeva (2001) claimed that the role of privatization in the evolution of a transparent private ownership structure is important to establish a
successful market The organizational financial structures and managerial behavior
of privatization transforms are the goals for the fIrm to maximize the profIt The
corporate governance system is a way to determine the ultimate success of
3
privatization to get the gains The ownership structure and corporate governance
systems from privatization will give impact on company performance This
provides existing knowledge for the policy implications of the transition
economies
The ownership structure of a corporation is considered as an endogenous
outcome ofdecisions that reflect the influence ofshareholders and oftrading on the
market for shares (Demsetz amp Villallonga 2001) The firms ownership structure
reflects the decisions made by the shareholders The ownership structure should be
influenced by the profit-maximizing interests of shareholders As a result there is
no systematic relation between variations in ownership structure and firm
performance Hence ownership structure is treated as an endogenous variable and
gives no evidence of a relation between profit rate and ownership concentration
The measurement of firm performance and ownership structure is not endogenous
in the estimation of the effect of ownership on performance It models ownership
structure as an endogenous variable and it examines two dimensions of this
structure to represent conflicting interests by the five largest shareholding interests
However Chu and Cheah (2004) argued that the ownership structures have an
effect on the development and performance of capital and debt market It is a high
concentration structure to distribute capital allocation in an efficiency economy
The ownership structure in capital market activeness can be promoted as investors
4
Pusat Khidruat Maklumat Akademik UNlVERSm MALAYSIA SARAWAK
can gam entry and exit easily In addition to that managers can control the
ownership and adjust the proportion ofdebt and equity to invest the capital and get
the gain Hence ownership structure plays an important role in the governance and
performance of firms
Craswell et al (1997) proved that the influence ofmanagerial and institutional
equity ownership is highly related to corporate performance They examined the
effects of both insider and institutional ownership of Australian corporate
performance Australian firms have significantly different legal and econOmIC
circumstances as compared to the firms in the US The fmdings indicate that there is
a weak relationship between institutional ownership and corporate performance
The result is found to be temporaly unstable and confined to large Australian
companies The evidence is not consistent with corporate performance related to
the level of institutional ownership A significant relationship between equity
ownership structure and corporate performance implies corrective transfers of
equity between insiders outsiders and the successful survival of firms with
effectively non-optimal ownership structures which casts doubt on the existence of
any generalized equilibrium Ifthe o~nership structure is endogenous the firms are
systematically related to equity ownership
5
In Malaysia the ownership concentration is weaker than other developed
countries and the institutional ownership is less than 20 ofthe outstanding shares
(Joher et aI 2006) The three ownership structures of corporation are institutional
ownership managerial ownership and individual ownership These three types of
ownership structures can affect ftrm performance and value by mitigating agency
costs of the firm Therefore the impact of institutional ownership on insider
ownership and corporate debt policy in Malaysia is investigated to provide
empirical evidence on corporate control in developed market
Various issues regarding the efficiency and the safety ofbanking industries are
increasing due to the financial crisis in 1997 (Barry et aI 2008) After the financial
crisis the banking system is reforme~ by bank regulators and they also carried out
several measures to provide efficient banking services to sustain the economy One
ofthe measures is when the government decided to change management ownership
and governance to avoid closure ofdistressed banks Moreover Asian governments
encouraged safe banks to merge with distressed banks to restore the financial
viability ofdmiddotistressed banks After the 1997 financial crisis the ownership structure
and the governance of banks are moified by bank restructuring program Hence
this study attempts to examine the impact ofownership structure on corporate debt
policy in Malaysian banking industry between from 2005 and 201 O
6
12 Definition of Ownership Structure
Generally ownership structure is defined as the identity of the equity owners
and distribution of equity regarding votes and capital These structures are
important in corporate governance to detennine the incentives of managers and
manage the economic efficiency of the corporations (Ownership Structure 2011)
Gursoyand Aydogan (1998) stipulated that ownership structure is categorized
into two dimensions which are ownership concentration and ownership mix
Ownership concentration refers to the distribution of the shares owned by a certain
number of individuals institutions and families On the other hand ownership mix
is related to the presence of certain institutions or groups such as government or
foreign partners among the shareholders These two categories of measures
incorporate both the influence power of shareholders as well as identity of owners
with their unique incentive mechanisms and preferences
7
121 The Types of Ownership Structure
Ownership structures are commonly divided into several types namely
managerial ownership family ownership and institutional ownership
(a) Managerial Ownership
According to Joher et al (2006) managerial ownership is an ownership which
consists of directors managers and other members in management to hold the
shares directly in a corporation The managerial ownership of equity can mitigate
the moral hazard problem between managers and shareholders Jensen and
Meckling (1976) argued that agency problem can reduce to moral hazard between
manager and owners if there were no debt contracts This is because managerial
ownership can be effective in aligning the managerial interest with outside
shareholders to mitigate the agency problems Datta et al (2004) also discovered
that the managers with high equity ownership prefer short maturity debt for
facilitating the agency conflicts of managerial discretion However Hashim and
Devi (2008) pointed out that the correlation between managerial and inside
ownership is a high positive relationship which is operated by the inside
management
8
(b) Family Ownership
Family ownership is a type ofownership that is owned entirely by the members
of a single family in a corporation The family ownership of corporate governance
is mostly operated by Asian firms According to Hashim and Devi (2008) family
ownership provides incentives to reduce the agency cost by aligning shareholders
and managerial interest They found that there is a positive and significant
relationship between family ownership and earnings quality They also proved that
family members who have greater expertise on firms operations can operate the
firms activities effectively to reduce the agency cost Nevertheless Villalonga and
Amit (2006) argued that family ownership makes profits for corporation when the
founder is active in the firm as the Chi~fExecutive Officer (CEO) or Chairman with
a hired CEO They also found that the agency conflicts exist between minority
shareholders and managers when the corporate government is performed by
descendant-CEO
(c) Institutional Ownership
Institutional ownership is an ownership of flllancial institution which includes
pension funds mutual funds closed-end fund life insurance companies savings
institutions and trust department of commercial banks (Joher et aI 2006)
According to Hashim and Devi (2008) the participation of institutional investors in
9
corporate governance plays an important role to protect minority shareholders
interest and mitigate the agency problem It is noted that there is a positive and
significant relationship between institutional ownership and earnings quality Thus
it indicates that the institutional have greater incentives to monitor firms activities
and the corporate government practices are improved by the involvement of
institutional investors participation
13 Definition of Corporate Debt Policy
Corporate debt policy is a non-government debt security which is divided into
short-term debt and long-term debt The short-term debt is issued as commercial
paper and long-term debt is issued as bonds It normally includes the council tax
housing rents business rates benefit overpayments legal costs and debtors
Besides the corporate debt policy is responsible to collect debt form citizens and
provides advice and practical help in the management ofvarious debts (Leeds City
Council Corporate Debt Policy 2010) It sets out the principles to maximize
collection performance from collecting debt Therefore it is the provision of
support mechanisms to all customer~
10
14 The Determinants of Capital Structure
According to the pecking order theory and agency theory the detenninants of
capital structure cover the profitability finn size tangibility growth opportunity
and firm risk These determinants of ownership structure will affect the firms
leverage or debt ratio
Banchuenvijit (2011) defined profitability as the determinant of capital
structure The pecking order theory prefers internal financing in which profitable
fInns will employ higher retained earning with higher profitability to hold less debt
Many empirical studies have found that there is a negative relationship between
~
profitability and leverage The fInn uses its own cash flow instead ofusing debt to
fmance its operations and investment opportunities when there is a negative sign
However Cespedes et al (2008) proved that the relationship between profitability
and leverage is a positive based on trade-off theory This is because the trade-off
theory is expected to show a positive sign when the firms debt level is higher It
implies that the higher the firms profitability the higher the potential tax shields
Pandey (2001) argued that the finn will employ high debt to gain tax benefits to get
higher profits based on interest tax sliield hypothesis proposed in the theory by
Modigliani and Miller (1963)
11
Besides firm size is found to be a positive detenninant of capital structure as
indicated in many previous studies However it implies a negative relation between
size and leverage when larger firms are expected to have less information
asymmetries in issuing debt or equity (Banchuenvijit 20 11) Chu and Cheah (2004)
pointed out that large firm size indicates the firm will share the risk and less asset
will be shared specificity between the firms founders On the other hand smaller
firm size and net cash flow will share the risk with large concentrated ownership
As stated by Pandey (200 I) large firms will employ higher amount of debt than
small firms because smaller firms would have less long-term debt and more
short-term debt due to the shareholders-lenders conflict Lamba and Stapledon
(2009) mentioned that larger firms tend to issue more shares than smaller finns and
are less likely to have a controlling shareholder
The term tangibility refers to tangible assets act as collateral and provides
security to lenders iffmancial distress based on trade-off hypothesis The firms are
expected have a high level of debt because of the higher tangible assets (Pandey
2001) Furthermore Banchuenvijit (2011) stated that there is a positive relationship
between tangibility and leverage when the firms are expected to issue high level of
debt can borrow on favorable terms with tangible assets that can be used as
collateral However there is a negative relationship between tangibility and
leverage when the firm has lower information asymmetries with tangible assets
Therefore it will cause equity issue to be less costly and lower the leverage ratios
12
Pusat Khidmat Maklumat Akademik UNIVEltSm MALAYSIA SARAWAK
PKHIDMAT MAKLUMAT AKADEMIK
111111111111[111111111111000245017
THE IMPACT OF OWNERSHIP STRUCTURE ON CORPORATE DEBT POLICY OF BANKING INDUSTRY IN MALAYSIA
WONG SIlK CHING
This project is submitted in partial fulfillment of the requirements for the degree of Bachelor of Finance with Honours
(Finance)
Faculty of Economic and Business UNIVERSITY MALAYSIA SARA WAK
2012
Statement of Originality
The work described in this Final Year Project entitled
The Impact of Ownership Structure on Corporate Debt Policy of Banking
Industry in Malaysia
is to the best of the authors knowledge that of the author except
where due reference is made
ckt- 7- J b 101 V
Wong Siik Ching Date 25401
ABSTRACT
The Impact of Ownership Structure on Corporate Debt Policy of
Banking Industry in Malaysia
By
Wong Siik Ching
This study was conducted to investigate the impact of ownership structure on
corporate debt policy of banking industry in Malaysia It also identifies the
detenninants of the ownership structure in banking Malaysia 8 local banks which are
listed in Bursa Malaysia between 2005 and 20 I 0 were selected as the sample of the
study A pooled Ordinary Least Square COLS) analysis was used to examine the
relationship between ownership structure and corporate debt policy in banking
Malaysia The findings indicate that there is an insignificant relationship between
profitability and debt ratio However the results find that finn size growth
opportunityand institutional ownership have a positive and significant relationship
with the debt ratio In contrast the firm risk and managerial ownership have a
significant and negative effect on the debt ratio These findings are consistent with
the pecking order theory and agency theory Hence the corporate debt policy can be
used as a mechanism to mitigate the agency conflict in banking Malaysia
-
ABSTRAK
Kesan struktur pemilikan mengikut dasar hutang korporat industri perbankan
di Malaysia
Oleh
Wong Siik Ching
Kertas kerja ini mengkaji kesan struktur pemilikan mengikut dasar hutang
korporat industri perbankan di Malaysia Kajian ini juga mengenal pasti penentu
struktur pemilikan dalam perbankan Malaysia Sampel kajian ini memberi tumpuan
kepada 8 bank-bank tempatan yang disenaraikan di Bursa Malaysia antara tahun 2005
hingga tahun 2010 Suatu dikumpulkan persegi biasa (OLS) analisis digunakan untuk
melihat hubungan antara struktur pemilikan dengan dasar hutang korporat dalam
perbankan Malaysia Hasil kajian menunjukkan bahawa terdapat hubungan yang
signifikan antara keuntungan dengan nisbah hutang Walau bagaimanapun keputusan
mendapati bahawa saiz firma peluang pertumbuhan dan pemilikan institusi
mempunyai hubungan positif yang signifikan dengan nisbah hutang Sebaliknya
risiko yang kukuh dan pemilikan pengurus mempunyai kesan yang signifikan negatif
ke atas nisbah hutang Penemuan ini adalah selaras dengan teori pesanan combinasi
dan teori agensi Oleh sebab itu dasar hutang korporat boleh digunakan sebagai
mekanisme untuk mengurangkan konflik agensi dalam perbankan Malaysia
ACKNOWLEDGEMENT
This thesis was completed with the supports and assistance from many people
who are important in my life Firstly I would like to thank my supervisor Associate
Professor Dr Puah Chin Hong for his guidance and support throughout the study He
is kind to provide invaluable advices and comments in enhancing my knowledge to
write a good scientific research He has helped me greatly to solve the problem in the
study
Besides I want to take the opportunity to extend my gratitude to all my lectures
at Universiti Malaysia Sarawak especially for those who have helped me and given
me the supports and encouragements in the study I appreciate the lecturers who were
willing to share their experiences and knowledge for helping me to complete my
thesis
Furthermore I would like to express my appreciation to my family members for
providing me their support when I was suffering and stressful They are good
listeners and assist me to increase my confidence for completing my thesis on time
Last but not the least I would like to thank my friends who have given their support
inspiration understanding and advice that has helped me to complete my final year
project
I
List of Tables
List of Figures
CHAPTER 1
10
11
12
13
14
15
16
17
18
19
Pusat Khidmat MakJumat Akademik UNlVERSm MALAYSIA SARAWAK
TABLE OF CONTENTS
Xl
Xll
INTRODUCTION
Overview of the Study 1
Background of the Study 3
Definition ofOwnership Structure 7
121 The Types of Ownership Strucutre 8
Definition of Corporate Debt Policy 10
The Detenninants of Capital Structure 11
The Impact ofCorporate Ownership on Corporate 14
Debt Policy
Problem Statement 15
Objective of the Study 17
171 General Objective 18
172 Specific Objective 18
Significance of the Study 19
Scope of the Study 20
vii
I
CHAPTER 2 LITERATURE REVIEW
20 Introduction 21
21 Ownership Structure and Corporate Perfonnance 21
22 Corporate Debt Policy and Dividend Policy 24
23 Determinants ofCapital Structure and Ownership 28
Structure
24 Ownership Structure and Banking Industry 30
25 Ownership Structure and Corporate Governance 32
26 Ownership Structure and Agency Theory 35
CHAPTER 3 METHODOLOGY
30 Introduction 43
31 Theoretical Framework 43
311 Agency Theory 44
312 Pecking Order Theory 46
32 Conceptual Framework 47
33 Definition and Measurement ofthe Variables 49
331 Dependent Variable 50
tI 332 Independent Variables 50
333 Hypothesis of the Study 52
334 Summary ofthe Measurement Variables 53
34 Data and Sample 55
35 Data Analysis 56
351 Pooled Ordinary Least Square (OLS) Regression 56
viii
352 Estimation Model 58
36 Diagnostic Checking Tests and Stability Tests 59
361 Histogram and Normality Test 59
362 Breush-Godfrey Serial Correlation LM Test 60
363 Heteroskedasticity 61
364 Ramseys RESET Test 62
365 CUSUM Test 63
366 CUSUM of Squares Test 64
CHAPTER 4 EMPIRICAL RESULTS AND DISCUSSIONS
40 Introduction 66
41 Descriptive Analysis 66
42 Pooled OLS Reslllts 68
421 Profitability of Return on Asset 69
422 Firm Risk 70
423 Firm Size 71
424 Growth Opportunity 71
425 Managerial Ownership 72
426 Institutional Ownenhip 73
43 Diagnostic Checking Tests and Stability Tests Results 73
431 Normality Test Results 74
432Breush-Godfrey Serial Correlation LM Test 75
Results
433Heteroskedasticity Test Resuts Based on ARCH 75
ix
44
CHAPTERS
50
51
52
53
54
REFERENCES
364 Ramseys RESET Test Results
365 CUSUM Test Results
366 CUSUM of Squares Test Results
Chapter Remark
CONCLUSION AND RECOMMENDATION
Introduction
Conclusion Remark
Policy Implication
Recommendation
Limitation of the Study
76
77
78
80
83
83
86
87
88
90
x
1
2
3
4
5
6
7
8
LIST OF TABLES
Table Title Page
Summary of the Literature Review 38
Summary of the Measurement Variables 54
Descriptive Statistics ofDependent and Independent Variables 67
Correlation Matrix of the Debt Ratio and Explanatory Variables 68
Pooled OLS Regressions Results of Debt Ratio Analysis 69
Breush-Godfrey Serial Correlation LM Test Results 75
ARCH Test Results 76
Ramseys RESET Test Results 77
xi
LIST OF FIGURES
Figure Title Page
1 Conceptual Framework ofthe Impact of Ownership Structure 48
on Debt Policy
2 The Normality Test Results 74
3 CUSUM Test Results 78
4 CUSUM of Squares Test Results 79
xii
CHAPTER
INTRODUCTION
10 Overview of the Study
Corporate governance is an important aspect ofthe corporate environment It is
related to corporate control and ownership structure of a firm in a corporation
According to Hitt et aI (1999) strategic management and performance of firms are
regulated and controlled by corporate governance Besides it is used in
organization to establish command between firms owners and its top-level
managers whose interests may be in conflict Hence the separation of interests
among stakeholders in corporation csm lead to agency problem
In Malaysia corporate governance is highly concentrated in the hands of large
shareholders or controlling shareholders The shareholders are given the rights to
provide incentives that can affect decision-making in the corporation and exercise
the voting control over shares which may diverge significantly in cash flow rights
(Ishak amp Napier 2006) According to Ghazali (2007) family-owned and
government-owned companies are the common types of ownership structure in
Malaysia Generally Malaysia has five largest shareholders which own 60 or
more of the public listed companies equity The top largest shareholders are the
nominee companies followed by non-financial companies and the government
Nor et al (2010) stated that corporate governance in Malaysia vanes
according to the ownership structure of the corporate sector Tne dispersed
ownership situation in Malaysia is observed to be similar in United States of
America (USA) and United Kingdoms (UK) common law legal system The
ownership is observed from two perspectives which are ownership concentration
and the components of ownership concentration They are used as a proxy for
corporate governance mechanisms Besides the ownership can be categorized into
institutional ownership government ownership and the nominees as well as the
individuals who own the companies As further added by Ayoib et al (2003) the
government has established the Finance Committee on Corporate Governance and
the Malaysian Institute ofCorporate Governance (MICG) to review and strengthen
corporate governance in Malaysia In addition the Malaysian Institute of
Accountants (MliA) the Kuala Lumpur Stock Exchange (KLSE) and the Securities
Commission (SC) were fonned to enhance the corporate governance in Malaysia
Moreover the Malaysian government has changed the merged banking groups
compositionof ownership structure in the post-crisis years When the bank merger
programme was completed to consolidate the number of domestic commercial
banks were reduced from 20 in 1999 to lOin 2001 (Lum amp Koh 2007) Hence the
study concluded that the consolidation programme has resulted in larger and better
capitalised domestic banking institutions but do not have any significant impact on
the composition ofownership structure in the banking industry
2
11 Background of the Study
Agency problem is a popular issue that exists commonly in a corporation
There are several studies which provide evidence on the effects of agency conflicts
on corporate governance Rimbey (1998) found that the distribution of shares
among the outside shareholders is a device to mitigate agency costs and affect the
fIrms capital structure Therefore ownership represents a power that can be used
either to support or oppose existing management that is related to the concentration
or dispersion of the power
On the other hand managerial ownership is an important internal monitoring
force as a determinant of risk The risk is a central theme in financial economics
which is related to managerial ownership corporate debt and dividend policies
(Chen amp Steiner 1999) The determinants ofmanagerial ownership include the risk
debt and dividends which are treated as endogenous variable in the model Many
previous studies have found that managerial ownership has a signifIcant impact on
the levels of risk
Nevertheless Andreyeva (2001) claimed that the role of privatization in the evolution of a transparent private ownership structure is important to establish a
successful market The organizational financial structures and managerial behavior
of privatization transforms are the goals for the fIrm to maximize the profIt The
corporate governance system is a way to determine the ultimate success of
3
privatization to get the gains The ownership structure and corporate governance
systems from privatization will give impact on company performance This
provides existing knowledge for the policy implications of the transition
economies
The ownership structure of a corporation is considered as an endogenous
outcome ofdecisions that reflect the influence ofshareholders and oftrading on the
market for shares (Demsetz amp Villallonga 2001) The firms ownership structure
reflects the decisions made by the shareholders The ownership structure should be
influenced by the profit-maximizing interests of shareholders As a result there is
no systematic relation between variations in ownership structure and firm
performance Hence ownership structure is treated as an endogenous variable and
gives no evidence of a relation between profit rate and ownership concentration
The measurement of firm performance and ownership structure is not endogenous
in the estimation of the effect of ownership on performance It models ownership
structure as an endogenous variable and it examines two dimensions of this
structure to represent conflicting interests by the five largest shareholding interests
However Chu and Cheah (2004) argued that the ownership structures have an
effect on the development and performance of capital and debt market It is a high
concentration structure to distribute capital allocation in an efficiency economy
The ownership structure in capital market activeness can be promoted as investors
4
Pusat Khidruat Maklumat Akademik UNlVERSm MALAYSIA SARAWAK
can gam entry and exit easily In addition to that managers can control the
ownership and adjust the proportion ofdebt and equity to invest the capital and get
the gain Hence ownership structure plays an important role in the governance and
performance of firms
Craswell et al (1997) proved that the influence ofmanagerial and institutional
equity ownership is highly related to corporate performance They examined the
effects of both insider and institutional ownership of Australian corporate
performance Australian firms have significantly different legal and econOmIC
circumstances as compared to the firms in the US The fmdings indicate that there is
a weak relationship between institutional ownership and corporate performance
The result is found to be temporaly unstable and confined to large Australian
companies The evidence is not consistent with corporate performance related to
the level of institutional ownership A significant relationship between equity
ownership structure and corporate performance implies corrective transfers of
equity between insiders outsiders and the successful survival of firms with
effectively non-optimal ownership structures which casts doubt on the existence of
any generalized equilibrium Ifthe o~nership structure is endogenous the firms are
systematically related to equity ownership
5
In Malaysia the ownership concentration is weaker than other developed
countries and the institutional ownership is less than 20 ofthe outstanding shares
(Joher et aI 2006) The three ownership structures of corporation are institutional
ownership managerial ownership and individual ownership These three types of
ownership structures can affect ftrm performance and value by mitigating agency
costs of the firm Therefore the impact of institutional ownership on insider
ownership and corporate debt policy in Malaysia is investigated to provide
empirical evidence on corporate control in developed market
Various issues regarding the efficiency and the safety ofbanking industries are
increasing due to the financial crisis in 1997 (Barry et aI 2008) After the financial
crisis the banking system is reforme~ by bank regulators and they also carried out
several measures to provide efficient banking services to sustain the economy One
ofthe measures is when the government decided to change management ownership
and governance to avoid closure ofdistressed banks Moreover Asian governments
encouraged safe banks to merge with distressed banks to restore the financial
viability ofdmiddotistressed banks After the 1997 financial crisis the ownership structure
and the governance of banks are moified by bank restructuring program Hence
this study attempts to examine the impact ofownership structure on corporate debt
policy in Malaysian banking industry between from 2005 and 201 O
6
12 Definition of Ownership Structure
Generally ownership structure is defined as the identity of the equity owners
and distribution of equity regarding votes and capital These structures are
important in corporate governance to detennine the incentives of managers and
manage the economic efficiency of the corporations (Ownership Structure 2011)
Gursoyand Aydogan (1998) stipulated that ownership structure is categorized
into two dimensions which are ownership concentration and ownership mix
Ownership concentration refers to the distribution of the shares owned by a certain
number of individuals institutions and families On the other hand ownership mix
is related to the presence of certain institutions or groups such as government or
foreign partners among the shareholders These two categories of measures
incorporate both the influence power of shareholders as well as identity of owners
with their unique incentive mechanisms and preferences
7
121 The Types of Ownership Structure
Ownership structures are commonly divided into several types namely
managerial ownership family ownership and institutional ownership
(a) Managerial Ownership
According to Joher et al (2006) managerial ownership is an ownership which
consists of directors managers and other members in management to hold the
shares directly in a corporation The managerial ownership of equity can mitigate
the moral hazard problem between managers and shareholders Jensen and
Meckling (1976) argued that agency problem can reduce to moral hazard between
manager and owners if there were no debt contracts This is because managerial
ownership can be effective in aligning the managerial interest with outside
shareholders to mitigate the agency problems Datta et al (2004) also discovered
that the managers with high equity ownership prefer short maturity debt for
facilitating the agency conflicts of managerial discretion However Hashim and
Devi (2008) pointed out that the correlation between managerial and inside
ownership is a high positive relationship which is operated by the inside
management
8
(b) Family Ownership
Family ownership is a type ofownership that is owned entirely by the members
of a single family in a corporation The family ownership of corporate governance
is mostly operated by Asian firms According to Hashim and Devi (2008) family
ownership provides incentives to reduce the agency cost by aligning shareholders
and managerial interest They found that there is a positive and significant
relationship between family ownership and earnings quality They also proved that
family members who have greater expertise on firms operations can operate the
firms activities effectively to reduce the agency cost Nevertheless Villalonga and
Amit (2006) argued that family ownership makes profits for corporation when the
founder is active in the firm as the Chi~fExecutive Officer (CEO) or Chairman with
a hired CEO They also found that the agency conflicts exist between minority
shareholders and managers when the corporate government is performed by
descendant-CEO
(c) Institutional Ownership
Institutional ownership is an ownership of flllancial institution which includes
pension funds mutual funds closed-end fund life insurance companies savings
institutions and trust department of commercial banks (Joher et aI 2006)
According to Hashim and Devi (2008) the participation of institutional investors in
9
corporate governance plays an important role to protect minority shareholders
interest and mitigate the agency problem It is noted that there is a positive and
significant relationship between institutional ownership and earnings quality Thus
it indicates that the institutional have greater incentives to monitor firms activities
and the corporate government practices are improved by the involvement of
institutional investors participation
13 Definition of Corporate Debt Policy
Corporate debt policy is a non-government debt security which is divided into
short-term debt and long-term debt The short-term debt is issued as commercial
paper and long-term debt is issued as bonds It normally includes the council tax
housing rents business rates benefit overpayments legal costs and debtors
Besides the corporate debt policy is responsible to collect debt form citizens and
provides advice and practical help in the management ofvarious debts (Leeds City
Council Corporate Debt Policy 2010) It sets out the principles to maximize
collection performance from collecting debt Therefore it is the provision of
support mechanisms to all customer~
10
14 The Determinants of Capital Structure
According to the pecking order theory and agency theory the detenninants of
capital structure cover the profitability finn size tangibility growth opportunity
and firm risk These determinants of ownership structure will affect the firms
leverage or debt ratio
Banchuenvijit (2011) defined profitability as the determinant of capital
structure The pecking order theory prefers internal financing in which profitable
fInns will employ higher retained earning with higher profitability to hold less debt
Many empirical studies have found that there is a negative relationship between
~
profitability and leverage The fInn uses its own cash flow instead ofusing debt to
fmance its operations and investment opportunities when there is a negative sign
However Cespedes et al (2008) proved that the relationship between profitability
and leverage is a positive based on trade-off theory This is because the trade-off
theory is expected to show a positive sign when the firms debt level is higher It
implies that the higher the firms profitability the higher the potential tax shields
Pandey (2001) argued that the finn will employ high debt to gain tax benefits to get
higher profits based on interest tax sliield hypothesis proposed in the theory by
Modigliani and Miller (1963)
11
Besides firm size is found to be a positive detenninant of capital structure as
indicated in many previous studies However it implies a negative relation between
size and leverage when larger firms are expected to have less information
asymmetries in issuing debt or equity (Banchuenvijit 20 11) Chu and Cheah (2004)
pointed out that large firm size indicates the firm will share the risk and less asset
will be shared specificity between the firms founders On the other hand smaller
firm size and net cash flow will share the risk with large concentrated ownership
As stated by Pandey (200 I) large firms will employ higher amount of debt than
small firms because smaller firms would have less long-term debt and more
short-term debt due to the shareholders-lenders conflict Lamba and Stapledon
(2009) mentioned that larger firms tend to issue more shares than smaller finns and
are less likely to have a controlling shareholder
The term tangibility refers to tangible assets act as collateral and provides
security to lenders iffmancial distress based on trade-off hypothesis The firms are
expected have a high level of debt because of the higher tangible assets (Pandey
2001) Furthermore Banchuenvijit (2011) stated that there is a positive relationship
between tangibility and leverage when the firms are expected to issue high level of
debt can borrow on favorable terms with tangible assets that can be used as
collateral However there is a negative relationship between tangibility and
leverage when the firm has lower information asymmetries with tangible assets
Therefore it will cause equity issue to be less costly and lower the leverage ratios
12
Statement of Originality
The work described in this Final Year Project entitled
The Impact of Ownership Structure on Corporate Debt Policy of Banking
Industry in Malaysia
is to the best of the authors knowledge that of the author except
where due reference is made
ckt- 7- J b 101 V
Wong Siik Ching Date 25401
ABSTRACT
The Impact of Ownership Structure on Corporate Debt Policy of
Banking Industry in Malaysia
By
Wong Siik Ching
This study was conducted to investigate the impact of ownership structure on
corporate debt policy of banking industry in Malaysia It also identifies the
detenninants of the ownership structure in banking Malaysia 8 local banks which are
listed in Bursa Malaysia between 2005 and 20 I 0 were selected as the sample of the
study A pooled Ordinary Least Square COLS) analysis was used to examine the
relationship between ownership structure and corporate debt policy in banking
Malaysia The findings indicate that there is an insignificant relationship between
profitability and debt ratio However the results find that finn size growth
opportunityand institutional ownership have a positive and significant relationship
with the debt ratio In contrast the firm risk and managerial ownership have a
significant and negative effect on the debt ratio These findings are consistent with
the pecking order theory and agency theory Hence the corporate debt policy can be
used as a mechanism to mitigate the agency conflict in banking Malaysia
-
ABSTRAK
Kesan struktur pemilikan mengikut dasar hutang korporat industri perbankan
di Malaysia
Oleh
Wong Siik Ching
Kertas kerja ini mengkaji kesan struktur pemilikan mengikut dasar hutang
korporat industri perbankan di Malaysia Kajian ini juga mengenal pasti penentu
struktur pemilikan dalam perbankan Malaysia Sampel kajian ini memberi tumpuan
kepada 8 bank-bank tempatan yang disenaraikan di Bursa Malaysia antara tahun 2005
hingga tahun 2010 Suatu dikumpulkan persegi biasa (OLS) analisis digunakan untuk
melihat hubungan antara struktur pemilikan dengan dasar hutang korporat dalam
perbankan Malaysia Hasil kajian menunjukkan bahawa terdapat hubungan yang
signifikan antara keuntungan dengan nisbah hutang Walau bagaimanapun keputusan
mendapati bahawa saiz firma peluang pertumbuhan dan pemilikan institusi
mempunyai hubungan positif yang signifikan dengan nisbah hutang Sebaliknya
risiko yang kukuh dan pemilikan pengurus mempunyai kesan yang signifikan negatif
ke atas nisbah hutang Penemuan ini adalah selaras dengan teori pesanan combinasi
dan teori agensi Oleh sebab itu dasar hutang korporat boleh digunakan sebagai
mekanisme untuk mengurangkan konflik agensi dalam perbankan Malaysia
ACKNOWLEDGEMENT
This thesis was completed with the supports and assistance from many people
who are important in my life Firstly I would like to thank my supervisor Associate
Professor Dr Puah Chin Hong for his guidance and support throughout the study He
is kind to provide invaluable advices and comments in enhancing my knowledge to
write a good scientific research He has helped me greatly to solve the problem in the
study
Besides I want to take the opportunity to extend my gratitude to all my lectures
at Universiti Malaysia Sarawak especially for those who have helped me and given
me the supports and encouragements in the study I appreciate the lecturers who were
willing to share their experiences and knowledge for helping me to complete my
thesis
Furthermore I would like to express my appreciation to my family members for
providing me their support when I was suffering and stressful They are good
listeners and assist me to increase my confidence for completing my thesis on time
Last but not the least I would like to thank my friends who have given their support
inspiration understanding and advice that has helped me to complete my final year
project
I
List of Tables
List of Figures
CHAPTER 1
10
11
12
13
14
15
16
17
18
19
Pusat Khidmat MakJumat Akademik UNlVERSm MALAYSIA SARAWAK
TABLE OF CONTENTS
Xl
Xll
INTRODUCTION
Overview of the Study 1
Background of the Study 3
Definition ofOwnership Structure 7
121 The Types of Ownership Strucutre 8
Definition of Corporate Debt Policy 10
The Detenninants of Capital Structure 11
The Impact ofCorporate Ownership on Corporate 14
Debt Policy
Problem Statement 15
Objective of the Study 17
171 General Objective 18
172 Specific Objective 18
Significance of the Study 19
Scope of the Study 20
vii
I
CHAPTER 2 LITERATURE REVIEW
20 Introduction 21
21 Ownership Structure and Corporate Perfonnance 21
22 Corporate Debt Policy and Dividend Policy 24
23 Determinants ofCapital Structure and Ownership 28
Structure
24 Ownership Structure and Banking Industry 30
25 Ownership Structure and Corporate Governance 32
26 Ownership Structure and Agency Theory 35
CHAPTER 3 METHODOLOGY
30 Introduction 43
31 Theoretical Framework 43
311 Agency Theory 44
312 Pecking Order Theory 46
32 Conceptual Framework 47
33 Definition and Measurement ofthe Variables 49
331 Dependent Variable 50
tI 332 Independent Variables 50
333 Hypothesis of the Study 52
334 Summary ofthe Measurement Variables 53
34 Data and Sample 55
35 Data Analysis 56
351 Pooled Ordinary Least Square (OLS) Regression 56
viii
352 Estimation Model 58
36 Diagnostic Checking Tests and Stability Tests 59
361 Histogram and Normality Test 59
362 Breush-Godfrey Serial Correlation LM Test 60
363 Heteroskedasticity 61
364 Ramseys RESET Test 62
365 CUSUM Test 63
366 CUSUM of Squares Test 64
CHAPTER 4 EMPIRICAL RESULTS AND DISCUSSIONS
40 Introduction 66
41 Descriptive Analysis 66
42 Pooled OLS Reslllts 68
421 Profitability of Return on Asset 69
422 Firm Risk 70
423 Firm Size 71
424 Growth Opportunity 71
425 Managerial Ownership 72
426 Institutional Ownenhip 73
43 Diagnostic Checking Tests and Stability Tests Results 73
431 Normality Test Results 74
432Breush-Godfrey Serial Correlation LM Test 75
Results
433Heteroskedasticity Test Resuts Based on ARCH 75
ix
44
CHAPTERS
50
51
52
53
54
REFERENCES
364 Ramseys RESET Test Results
365 CUSUM Test Results
366 CUSUM of Squares Test Results
Chapter Remark
CONCLUSION AND RECOMMENDATION
Introduction
Conclusion Remark
Policy Implication
Recommendation
Limitation of the Study
76
77
78
80
83
83
86
87
88
90
x
1
2
3
4
5
6
7
8
LIST OF TABLES
Table Title Page
Summary of the Literature Review 38
Summary of the Measurement Variables 54
Descriptive Statistics ofDependent and Independent Variables 67
Correlation Matrix of the Debt Ratio and Explanatory Variables 68
Pooled OLS Regressions Results of Debt Ratio Analysis 69
Breush-Godfrey Serial Correlation LM Test Results 75
ARCH Test Results 76
Ramseys RESET Test Results 77
xi
LIST OF FIGURES
Figure Title Page
1 Conceptual Framework ofthe Impact of Ownership Structure 48
on Debt Policy
2 The Normality Test Results 74
3 CUSUM Test Results 78
4 CUSUM of Squares Test Results 79
xii
CHAPTER
INTRODUCTION
10 Overview of the Study
Corporate governance is an important aspect ofthe corporate environment It is
related to corporate control and ownership structure of a firm in a corporation
According to Hitt et aI (1999) strategic management and performance of firms are
regulated and controlled by corporate governance Besides it is used in
organization to establish command between firms owners and its top-level
managers whose interests may be in conflict Hence the separation of interests
among stakeholders in corporation csm lead to agency problem
In Malaysia corporate governance is highly concentrated in the hands of large
shareholders or controlling shareholders The shareholders are given the rights to
provide incentives that can affect decision-making in the corporation and exercise
the voting control over shares which may diverge significantly in cash flow rights
(Ishak amp Napier 2006) According to Ghazali (2007) family-owned and
government-owned companies are the common types of ownership structure in
Malaysia Generally Malaysia has five largest shareholders which own 60 or
more of the public listed companies equity The top largest shareholders are the
nominee companies followed by non-financial companies and the government
Nor et al (2010) stated that corporate governance in Malaysia vanes
according to the ownership structure of the corporate sector Tne dispersed
ownership situation in Malaysia is observed to be similar in United States of
America (USA) and United Kingdoms (UK) common law legal system The
ownership is observed from two perspectives which are ownership concentration
and the components of ownership concentration They are used as a proxy for
corporate governance mechanisms Besides the ownership can be categorized into
institutional ownership government ownership and the nominees as well as the
individuals who own the companies As further added by Ayoib et al (2003) the
government has established the Finance Committee on Corporate Governance and
the Malaysian Institute ofCorporate Governance (MICG) to review and strengthen
corporate governance in Malaysia In addition the Malaysian Institute of
Accountants (MliA) the Kuala Lumpur Stock Exchange (KLSE) and the Securities
Commission (SC) were fonned to enhance the corporate governance in Malaysia
Moreover the Malaysian government has changed the merged banking groups
compositionof ownership structure in the post-crisis years When the bank merger
programme was completed to consolidate the number of domestic commercial
banks were reduced from 20 in 1999 to lOin 2001 (Lum amp Koh 2007) Hence the
study concluded that the consolidation programme has resulted in larger and better
capitalised domestic banking institutions but do not have any significant impact on
the composition ofownership structure in the banking industry
2
11 Background of the Study
Agency problem is a popular issue that exists commonly in a corporation
There are several studies which provide evidence on the effects of agency conflicts
on corporate governance Rimbey (1998) found that the distribution of shares
among the outside shareholders is a device to mitigate agency costs and affect the
fIrms capital structure Therefore ownership represents a power that can be used
either to support or oppose existing management that is related to the concentration
or dispersion of the power
On the other hand managerial ownership is an important internal monitoring
force as a determinant of risk The risk is a central theme in financial economics
which is related to managerial ownership corporate debt and dividend policies
(Chen amp Steiner 1999) The determinants ofmanagerial ownership include the risk
debt and dividends which are treated as endogenous variable in the model Many
previous studies have found that managerial ownership has a signifIcant impact on
the levels of risk
Nevertheless Andreyeva (2001) claimed that the role of privatization in the evolution of a transparent private ownership structure is important to establish a
successful market The organizational financial structures and managerial behavior
of privatization transforms are the goals for the fIrm to maximize the profIt The
corporate governance system is a way to determine the ultimate success of
3
privatization to get the gains The ownership structure and corporate governance
systems from privatization will give impact on company performance This
provides existing knowledge for the policy implications of the transition
economies
The ownership structure of a corporation is considered as an endogenous
outcome ofdecisions that reflect the influence ofshareholders and oftrading on the
market for shares (Demsetz amp Villallonga 2001) The firms ownership structure
reflects the decisions made by the shareholders The ownership structure should be
influenced by the profit-maximizing interests of shareholders As a result there is
no systematic relation between variations in ownership structure and firm
performance Hence ownership structure is treated as an endogenous variable and
gives no evidence of a relation between profit rate and ownership concentration
The measurement of firm performance and ownership structure is not endogenous
in the estimation of the effect of ownership on performance It models ownership
structure as an endogenous variable and it examines two dimensions of this
structure to represent conflicting interests by the five largest shareholding interests
However Chu and Cheah (2004) argued that the ownership structures have an
effect on the development and performance of capital and debt market It is a high
concentration structure to distribute capital allocation in an efficiency economy
The ownership structure in capital market activeness can be promoted as investors
4
Pusat Khidruat Maklumat Akademik UNlVERSm MALAYSIA SARAWAK
can gam entry and exit easily In addition to that managers can control the
ownership and adjust the proportion ofdebt and equity to invest the capital and get
the gain Hence ownership structure plays an important role in the governance and
performance of firms
Craswell et al (1997) proved that the influence ofmanagerial and institutional
equity ownership is highly related to corporate performance They examined the
effects of both insider and institutional ownership of Australian corporate
performance Australian firms have significantly different legal and econOmIC
circumstances as compared to the firms in the US The fmdings indicate that there is
a weak relationship between institutional ownership and corporate performance
The result is found to be temporaly unstable and confined to large Australian
companies The evidence is not consistent with corporate performance related to
the level of institutional ownership A significant relationship between equity
ownership structure and corporate performance implies corrective transfers of
equity between insiders outsiders and the successful survival of firms with
effectively non-optimal ownership structures which casts doubt on the existence of
any generalized equilibrium Ifthe o~nership structure is endogenous the firms are
systematically related to equity ownership
5
In Malaysia the ownership concentration is weaker than other developed
countries and the institutional ownership is less than 20 ofthe outstanding shares
(Joher et aI 2006) The three ownership structures of corporation are institutional
ownership managerial ownership and individual ownership These three types of
ownership structures can affect ftrm performance and value by mitigating agency
costs of the firm Therefore the impact of institutional ownership on insider
ownership and corporate debt policy in Malaysia is investigated to provide
empirical evidence on corporate control in developed market
Various issues regarding the efficiency and the safety ofbanking industries are
increasing due to the financial crisis in 1997 (Barry et aI 2008) After the financial
crisis the banking system is reforme~ by bank regulators and they also carried out
several measures to provide efficient banking services to sustain the economy One
ofthe measures is when the government decided to change management ownership
and governance to avoid closure ofdistressed banks Moreover Asian governments
encouraged safe banks to merge with distressed banks to restore the financial
viability ofdmiddotistressed banks After the 1997 financial crisis the ownership structure
and the governance of banks are moified by bank restructuring program Hence
this study attempts to examine the impact ofownership structure on corporate debt
policy in Malaysian banking industry between from 2005 and 201 O
6
12 Definition of Ownership Structure
Generally ownership structure is defined as the identity of the equity owners
and distribution of equity regarding votes and capital These structures are
important in corporate governance to detennine the incentives of managers and
manage the economic efficiency of the corporations (Ownership Structure 2011)
Gursoyand Aydogan (1998) stipulated that ownership structure is categorized
into two dimensions which are ownership concentration and ownership mix
Ownership concentration refers to the distribution of the shares owned by a certain
number of individuals institutions and families On the other hand ownership mix
is related to the presence of certain institutions or groups such as government or
foreign partners among the shareholders These two categories of measures
incorporate both the influence power of shareholders as well as identity of owners
with their unique incentive mechanisms and preferences
7
121 The Types of Ownership Structure
Ownership structures are commonly divided into several types namely
managerial ownership family ownership and institutional ownership
(a) Managerial Ownership
According to Joher et al (2006) managerial ownership is an ownership which
consists of directors managers and other members in management to hold the
shares directly in a corporation The managerial ownership of equity can mitigate
the moral hazard problem between managers and shareholders Jensen and
Meckling (1976) argued that agency problem can reduce to moral hazard between
manager and owners if there were no debt contracts This is because managerial
ownership can be effective in aligning the managerial interest with outside
shareholders to mitigate the agency problems Datta et al (2004) also discovered
that the managers with high equity ownership prefer short maturity debt for
facilitating the agency conflicts of managerial discretion However Hashim and
Devi (2008) pointed out that the correlation between managerial and inside
ownership is a high positive relationship which is operated by the inside
management
8
(b) Family Ownership
Family ownership is a type ofownership that is owned entirely by the members
of a single family in a corporation The family ownership of corporate governance
is mostly operated by Asian firms According to Hashim and Devi (2008) family
ownership provides incentives to reduce the agency cost by aligning shareholders
and managerial interest They found that there is a positive and significant
relationship between family ownership and earnings quality They also proved that
family members who have greater expertise on firms operations can operate the
firms activities effectively to reduce the agency cost Nevertheless Villalonga and
Amit (2006) argued that family ownership makes profits for corporation when the
founder is active in the firm as the Chi~fExecutive Officer (CEO) or Chairman with
a hired CEO They also found that the agency conflicts exist between minority
shareholders and managers when the corporate government is performed by
descendant-CEO
(c) Institutional Ownership
Institutional ownership is an ownership of flllancial institution which includes
pension funds mutual funds closed-end fund life insurance companies savings
institutions and trust department of commercial banks (Joher et aI 2006)
According to Hashim and Devi (2008) the participation of institutional investors in
9
corporate governance plays an important role to protect minority shareholders
interest and mitigate the agency problem It is noted that there is a positive and
significant relationship between institutional ownership and earnings quality Thus
it indicates that the institutional have greater incentives to monitor firms activities
and the corporate government practices are improved by the involvement of
institutional investors participation
13 Definition of Corporate Debt Policy
Corporate debt policy is a non-government debt security which is divided into
short-term debt and long-term debt The short-term debt is issued as commercial
paper and long-term debt is issued as bonds It normally includes the council tax
housing rents business rates benefit overpayments legal costs and debtors
Besides the corporate debt policy is responsible to collect debt form citizens and
provides advice and practical help in the management ofvarious debts (Leeds City
Council Corporate Debt Policy 2010) It sets out the principles to maximize
collection performance from collecting debt Therefore it is the provision of
support mechanisms to all customer~
10
14 The Determinants of Capital Structure
According to the pecking order theory and agency theory the detenninants of
capital structure cover the profitability finn size tangibility growth opportunity
and firm risk These determinants of ownership structure will affect the firms
leverage or debt ratio
Banchuenvijit (2011) defined profitability as the determinant of capital
structure The pecking order theory prefers internal financing in which profitable
fInns will employ higher retained earning with higher profitability to hold less debt
Many empirical studies have found that there is a negative relationship between
~
profitability and leverage The fInn uses its own cash flow instead ofusing debt to
fmance its operations and investment opportunities when there is a negative sign
However Cespedes et al (2008) proved that the relationship between profitability
and leverage is a positive based on trade-off theory This is because the trade-off
theory is expected to show a positive sign when the firms debt level is higher It
implies that the higher the firms profitability the higher the potential tax shields
Pandey (2001) argued that the finn will employ high debt to gain tax benefits to get
higher profits based on interest tax sliield hypothesis proposed in the theory by
Modigliani and Miller (1963)
11
Besides firm size is found to be a positive detenninant of capital structure as
indicated in many previous studies However it implies a negative relation between
size and leverage when larger firms are expected to have less information
asymmetries in issuing debt or equity (Banchuenvijit 20 11) Chu and Cheah (2004)
pointed out that large firm size indicates the firm will share the risk and less asset
will be shared specificity between the firms founders On the other hand smaller
firm size and net cash flow will share the risk with large concentrated ownership
As stated by Pandey (200 I) large firms will employ higher amount of debt than
small firms because smaller firms would have less long-term debt and more
short-term debt due to the shareholders-lenders conflict Lamba and Stapledon
(2009) mentioned that larger firms tend to issue more shares than smaller finns and
are less likely to have a controlling shareholder
The term tangibility refers to tangible assets act as collateral and provides
security to lenders iffmancial distress based on trade-off hypothesis The firms are
expected have a high level of debt because of the higher tangible assets (Pandey
2001) Furthermore Banchuenvijit (2011) stated that there is a positive relationship
between tangibility and leverage when the firms are expected to issue high level of
debt can borrow on favorable terms with tangible assets that can be used as
collateral However there is a negative relationship between tangibility and
leverage when the firm has lower information asymmetries with tangible assets
Therefore it will cause equity issue to be less costly and lower the leverage ratios
12
ABSTRACT
The Impact of Ownership Structure on Corporate Debt Policy of
Banking Industry in Malaysia
By
Wong Siik Ching
This study was conducted to investigate the impact of ownership structure on
corporate debt policy of banking industry in Malaysia It also identifies the
detenninants of the ownership structure in banking Malaysia 8 local banks which are
listed in Bursa Malaysia between 2005 and 20 I 0 were selected as the sample of the
study A pooled Ordinary Least Square COLS) analysis was used to examine the
relationship between ownership structure and corporate debt policy in banking
Malaysia The findings indicate that there is an insignificant relationship between
profitability and debt ratio However the results find that finn size growth
opportunityand institutional ownership have a positive and significant relationship
with the debt ratio In contrast the firm risk and managerial ownership have a
significant and negative effect on the debt ratio These findings are consistent with
the pecking order theory and agency theory Hence the corporate debt policy can be
used as a mechanism to mitigate the agency conflict in banking Malaysia
-
ABSTRAK
Kesan struktur pemilikan mengikut dasar hutang korporat industri perbankan
di Malaysia
Oleh
Wong Siik Ching
Kertas kerja ini mengkaji kesan struktur pemilikan mengikut dasar hutang
korporat industri perbankan di Malaysia Kajian ini juga mengenal pasti penentu
struktur pemilikan dalam perbankan Malaysia Sampel kajian ini memberi tumpuan
kepada 8 bank-bank tempatan yang disenaraikan di Bursa Malaysia antara tahun 2005
hingga tahun 2010 Suatu dikumpulkan persegi biasa (OLS) analisis digunakan untuk
melihat hubungan antara struktur pemilikan dengan dasar hutang korporat dalam
perbankan Malaysia Hasil kajian menunjukkan bahawa terdapat hubungan yang
signifikan antara keuntungan dengan nisbah hutang Walau bagaimanapun keputusan
mendapati bahawa saiz firma peluang pertumbuhan dan pemilikan institusi
mempunyai hubungan positif yang signifikan dengan nisbah hutang Sebaliknya
risiko yang kukuh dan pemilikan pengurus mempunyai kesan yang signifikan negatif
ke atas nisbah hutang Penemuan ini adalah selaras dengan teori pesanan combinasi
dan teori agensi Oleh sebab itu dasar hutang korporat boleh digunakan sebagai
mekanisme untuk mengurangkan konflik agensi dalam perbankan Malaysia
ACKNOWLEDGEMENT
This thesis was completed with the supports and assistance from many people
who are important in my life Firstly I would like to thank my supervisor Associate
Professor Dr Puah Chin Hong for his guidance and support throughout the study He
is kind to provide invaluable advices and comments in enhancing my knowledge to
write a good scientific research He has helped me greatly to solve the problem in the
study
Besides I want to take the opportunity to extend my gratitude to all my lectures
at Universiti Malaysia Sarawak especially for those who have helped me and given
me the supports and encouragements in the study I appreciate the lecturers who were
willing to share their experiences and knowledge for helping me to complete my
thesis
Furthermore I would like to express my appreciation to my family members for
providing me their support when I was suffering and stressful They are good
listeners and assist me to increase my confidence for completing my thesis on time
Last but not the least I would like to thank my friends who have given their support
inspiration understanding and advice that has helped me to complete my final year
project
I
List of Tables
List of Figures
CHAPTER 1
10
11
12
13
14
15
16
17
18
19
Pusat Khidmat MakJumat Akademik UNlVERSm MALAYSIA SARAWAK
TABLE OF CONTENTS
Xl
Xll
INTRODUCTION
Overview of the Study 1
Background of the Study 3
Definition ofOwnership Structure 7
121 The Types of Ownership Strucutre 8
Definition of Corporate Debt Policy 10
The Detenninants of Capital Structure 11
The Impact ofCorporate Ownership on Corporate 14
Debt Policy
Problem Statement 15
Objective of the Study 17
171 General Objective 18
172 Specific Objective 18
Significance of the Study 19
Scope of the Study 20
vii
I
CHAPTER 2 LITERATURE REVIEW
20 Introduction 21
21 Ownership Structure and Corporate Perfonnance 21
22 Corporate Debt Policy and Dividend Policy 24
23 Determinants ofCapital Structure and Ownership 28
Structure
24 Ownership Structure and Banking Industry 30
25 Ownership Structure and Corporate Governance 32
26 Ownership Structure and Agency Theory 35
CHAPTER 3 METHODOLOGY
30 Introduction 43
31 Theoretical Framework 43
311 Agency Theory 44
312 Pecking Order Theory 46
32 Conceptual Framework 47
33 Definition and Measurement ofthe Variables 49
331 Dependent Variable 50
tI 332 Independent Variables 50
333 Hypothesis of the Study 52
334 Summary ofthe Measurement Variables 53
34 Data and Sample 55
35 Data Analysis 56
351 Pooled Ordinary Least Square (OLS) Regression 56
viii
352 Estimation Model 58
36 Diagnostic Checking Tests and Stability Tests 59
361 Histogram and Normality Test 59
362 Breush-Godfrey Serial Correlation LM Test 60
363 Heteroskedasticity 61
364 Ramseys RESET Test 62
365 CUSUM Test 63
366 CUSUM of Squares Test 64
CHAPTER 4 EMPIRICAL RESULTS AND DISCUSSIONS
40 Introduction 66
41 Descriptive Analysis 66
42 Pooled OLS Reslllts 68
421 Profitability of Return on Asset 69
422 Firm Risk 70
423 Firm Size 71
424 Growth Opportunity 71
425 Managerial Ownership 72
426 Institutional Ownenhip 73
43 Diagnostic Checking Tests and Stability Tests Results 73
431 Normality Test Results 74
432Breush-Godfrey Serial Correlation LM Test 75
Results
433Heteroskedasticity Test Resuts Based on ARCH 75
ix
44
CHAPTERS
50
51
52
53
54
REFERENCES
364 Ramseys RESET Test Results
365 CUSUM Test Results
366 CUSUM of Squares Test Results
Chapter Remark
CONCLUSION AND RECOMMENDATION
Introduction
Conclusion Remark
Policy Implication
Recommendation
Limitation of the Study
76
77
78
80
83
83
86
87
88
90
x
1
2
3
4
5
6
7
8
LIST OF TABLES
Table Title Page
Summary of the Literature Review 38
Summary of the Measurement Variables 54
Descriptive Statistics ofDependent and Independent Variables 67
Correlation Matrix of the Debt Ratio and Explanatory Variables 68
Pooled OLS Regressions Results of Debt Ratio Analysis 69
Breush-Godfrey Serial Correlation LM Test Results 75
ARCH Test Results 76
Ramseys RESET Test Results 77
xi
LIST OF FIGURES
Figure Title Page
1 Conceptual Framework ofthe Impact of Ownership Structure 48
on Debt Policy
2 The Normality Test Results 74
3 CUSUM Test Results 78
4 CUSUM of Squares Test Results 79
xii
CHAPTER
INTRODUCTION
10 Overview of the Study
Corporate governance is an important aspect ofthe corporate environment It is
related to corporate control and ownership structure of a firm in a corporation
According to Hitt et aI (1999) strategic management and performance of firms are
regulated and controlled by corporate governance Besides it is used in
organization to establish command between firms owners and its top-level
managers whose interests may be in conflict Hence the separation of interests
among stakeholders in corporation csm lead to agency problem
In Malaysia corporate governance is highly concentrated in the hands of large
shareholders or controlling shareholders The shareholders are given the rights to
provide incentives that can affect decision-making in the corporation and exercise
the voting control over shares which may diverge significantly in cash flow rights
(Ishak amp Napier 2006) According to Ghazali (2007) family-owned and
government-owned companies are the common types of ownership structure in
Malaysia Generally Malaysia has five largest shareholders which own 60 or
more of the public listed companies equity The top largest shareholders are the
nominee companies followed by non-financial companies and the government
Nor et al (2010) stated that corporate governance in Malaysia vanes
according to the ownership structure of the corporate sector Tne dispersed
ownership situation in Malaysia is observed to be similar in United States of
America (USA) and United Kingdoms (UK) common law legal system The
ownership is observed from two perspectives which are ownership concentration
and the components of ownership concentration They are used as a proxy for
corporate governance mechanisms Besides the ownership can be categorized into
institutional ownership government ownership and the nominees as well as the
individuals who own the companies As further added by Ayoib et al (2003) the
government has established the Finance Committee on Corporate Governance and
the Malaysian Institute ofCorporate Governance (MICG) to review and strengthen
corporate governance in Malaysia In addition the Malaysian Institute of
Accountants (MliA) the Kuala Lumpur Stock Exchange (KLSE) and the Securities
Commission (SC) were fonned to enhance the corporate governance in Malaysia
Moreover the Malaysian government has changed the merged banking groups
compositionof ownership structure in the post-crisis years When the bank merger
programme was completed to consolidate the number of domestic commercial
banks were reduced from 20 in 1999 to lOin 2001 (Lum amp Koh 2007) Hence the
study concluded that the consolidation programme has resulted in larger and better
capitalised domestic banking institutions but do not have any significant impact on
the composition ofownership structure in the banking industry
2
11 Background of the Study
Agency problem is a popular issue that exists commonly in a corporation
There are several studies which provide evidence on the effects of agency conflicts
on corporate governance Rimbey (1998) found that the distribution of shares
among the outside shareholders is a device to mitigate agency costs and affect the
fIrms capital structure Therefore ownership represents a power that can be used
either to support or oppose existing management that is related to the concentration
or dispersion of the power
On the other hand managerial ownership is an important internal monitoring
force as a determinant of risk The risk is a central theme in financial economics
which is related to managerial ownership corporate debt and dividend policies
(Chen amp Steiner 1999) The determinants ofmanagerial ownership include the risk
debt and dividends which are treated as endogenous variable in the model Many
previous studies have found that managerial ownership has a signifIcant impact on
the levels of risk
Nevertheless Andreyeva (2001) claimed that the role of privatization in the evolution of a transparent private ownership structure is important to establish a
successful market The organizational financial structures and managerial behavior
of privatization transforms are the goals for the fIrm to maximize the profIt The
corporate governance system is a way to determine the ultimate success of
3
privatization to get the gains The ownership structure and corporate governance
systems from privatization will give impact on company performance This
provides existing knowledge for the policy implications of the transition
economies
The ownership structure of a corporation is considered as an endogenous
outcome ofdecisions that reflect the influence ofshareholders and oftrading on the
market for shares (Demsetz amp Villallonga 2001) The firms ownership structure
reflects the decisions made by the shareholders The ownership structure should be
influenced by the profit-maximizing interests of shareholders As a result there is
no systematic relation between variations in ownership structure and firm
performance Hence ownership structure is treated as an endogenous variable and
gives no evidence of a relation between profit rate and ownership concentration
The measurement of firm performance and ownership structure is not endogenous
in the estimation of the effect of ownership on performance It models ownership
structure as an endogenous variable and it examines two dimensions of this
structure to represent conflicting interests by the five largest shareholding interests
However Chu and Cheah (2004) argued that the ownership structures have an
effect on the development and performance of capital and debt market It is a high
concentration structure to distribute capital allocation in an efficiency economy
The ownership structure in capital market activeness can be promoted as investors
4
Pusat Khidruat Maklumat Akademik UNlVERSm MALAYSIA SARAWAK
can gam entry and exit easily In addition to that managers can control the
ownership and adjust the proportion ofdebt and equity to invest the capital and get
the gain Hence ownership structure plays an important role in the governance and
performance of firms
Craswell et al (1997) proved that the influence ofmanagerial and institutional
equity ownership is highly related to corporate performance They examined the
effects of both insider and institutional ownership of Australian corporate
performance Australian firms have significantly different legal and econOmIC
circumstances as compared to the firms in the US The fmdings indicate that there is
a weak relationship between institutional ownership and corporate performance
The result is found to be temporaly unstable and confined to large Australian
companies The evidence is not consistent with corporate performance related to
the level of institutional ownership A significant relationship between equity
ownership structure and corporate performance implies corrective transfers of
equity between insiders outsiders and the successful survival of firms with
effectively non-optimal ownership structures which casts doubt on the existence of
any generalized equilibrium Ifthe o~nership structure is endogenous the firms are
systematically related to equity ownership
5
In Malaysia the ownership concentration is weaker than other developed
countries and the institutional ownership is less than 20 ofthe outstanding shares
(Joher et aI 2006) The three ownership structures of corporation are institutional
ownership managerial ownership and individual ownership These three types of
ownership structures can affect ftrm performance and value by mitigating agency
costs of the firm Therefore the impact of institutional ownership on insider
ownership and corporate debt policy in Malaysia is investigated to provide
empirical evidence on corporate control in developed market
Various issues regarding the efficiency and the safety ofbanking industries are
increasing due to the financial crisis in 1997 (Barry et aI 2008) After the financial
crisis the banking system is reforme~ by bank regulators and they also carried out
several measures to provide efficient banking services to sustain the economy One
ofthe measures is when the government decided to change management ownership
and governance to avoid closure ofdistressed banks Moreover Asian governments
encouraged safe banks to merge with distressed banks to restore the financial
viability ofdmiddotistressed banks After the 1997 financial crisis the ownership structure
and the governance of banks are moified by bank restructuring program Hence
this study attempts to examine the impact ofownership structure on corporate debt
policy in Malaysian banking industry between from 2005 and 201 O
6
12 Definition of Ownership Structure
Generally ownership structure is defined as the identity of the equity owners
and distribution of equity regarding votes and capital These structures are
important in corporate governance to detennine the incentives of managers and
manage the economic efficiency of the corporations (Ownership Structure 2011)
Gursoyand Aydogan (1998) stipulated that ownership structure is categorized
into two dimensions which are ownership concentration and ownership mix
Ownership concentration refers to the distribution of the shares owned by a certain
number of individuals institutions and families On the other hand ownership mix
is related to the presence of certain institutions or groups such as government or
foreign partners among the shareholders These two categories of measures
incorporate both the influence power of shareholders as well as identity of owners
with their unique incentive mechanisms and preferences
7
121 The Types of Ownership Structure
Ownership structures are commonly divided into several types namely
managerial ownership family ownership and institutional ownership
(a) Managerial Ownership
According to Joher et al (2006) managerial ownership is an ownership which
consists of directors managers and other members in management to hold the
shares directly in a corporation The managerial ownership of equity can mitigate
the moral hazard problem between managers and shareholders Jensen and
Meckling (1976) argued that agency problem can reduce to moral hazard between
manager and owners if there were no debt contracts This is because managerial
ownership can be effective in aligning the managerial interest with outside
shareholders to mitigate the agency problems Datta et al (2004) also discovered
that the managers with high equity ownership prefer short maturity debt for
facilitating the agency conflicts of managerial discretion However Hashim and
Devi (2008) pointed out that the correlation between managerial and inside
ownership is a high positive relationship which is operated by the inside
management
8
(b) Family Ownership
Family ownership is a type ofownership that is owned entirely by the members
of a single family in a corporation The family ownership of corporate governance
is mostly operated by Asian firms According to Hashim and Devi (2008) family
ownership provides incentives to reduce the agency cost by aligning shareholders
and managerial interest They found that there is a positive and significant
relationship between family ownership and earnings quality They also proved that
family members who have greater expertise on firms operations can operate the
firms activities effectively to reduce the agency cost Nevertheless Villalonga and
Amit (2006) argued that family ownership makes profits for corporation when the
founder is active in the firm as the Chi~fExecutive Officer (CEO) or Chairman with
a hired CEO They also found that the agency conflicts exist between minority
shareholders and managers when the corporate government is performed by
descendant-CEO
(c) Institutional Ownership
Institutional ownership is an ownership of flllancial institution which includes
pension funds mutual funds closed-end fund life insurance companies savings
institutions and trust department of commercial banks (Joher et aI 2006)
According to Hashim and Devi (2008) the participation of institutional investors in
9
corporate governance plays an important role to protect minority shareholders
interest and mitigate the agency problem It is noted that there is a positive and
significant relationship between institutional ownership and earnings quality Thus
it indicates that the institutional have greater incentives to monitor firms activities
and the corporate government practices are improved by the involvement of
institutional investors participation
13 Definition of Corporate Debt Policy
Corporate debt policy is a non-government debt security which is divided into
short-term debt and long-term debt The short-term debt is issued as commercial
paper and long-term debt is issued as bonds It normally includes the council tax
housing rents business rates benefit overpayments legal costs and debtors
Besides the corporate debt policy is responsible to collect debt form citizens and
provides advice and practical help in the management ofvarious debts (Leeds City
Council Corporate Debt Policy 2010) It sets out the principles to maximize
collection performance from collecting debt Therefore it is the provision of
support mechanisms to all customer~
10
14 The Determinants of Capital Structure
According to the pecking order theory and agency theory the detenninants of
capital structure cover the profitability finn size tangibility growth opportunity
and firm risk These determinants of ownership structure will affect the firms
leverage or debt ratio
Banchuenvijit (2011) defined profitability as the determinant of capital
structure The pecking order theory prefers internal financing in which profitable
fInns will employ higher retained earning with higher profitability to hold less debt
Many empirical studies have found that there is a negative relationship between
~
profitability and leverage The fInn uses its own cash flow instead ofusing debt to
fmance its operations and investment opportunities when there is a negative sign
However Cespedes et al (2008) proved that the relationship between profitability
and leverage is a positive based on trade-off theory This is because the trade-off
theory is expected to show a positive sign when the firms debt level is higher It
implies that the higher the firms profitability the higher the potential tax shields
Pandey (2001) argued that the finn will employ high debt to gain tax benefits to get
higher profits based on interest tax sliield hypothesis proposed in the theory by
Modigliani and Miller (1963)
11
Besides firm size is found to be a positive detenninant of capital structure as
indicated in many previous studies However it implies a negative relation between
size and leverage when larger firms are expected to have less information
asymmetries in issuing debt or equity (Banchuenvijit 20 11) Chu and Cheah (2004)
pointed out that large firm size indicates the firm will share the risk and less asset
will be shared specificity between the firms founders On the other hand smaller
firm size and net cash flow will share the risk with large concentrated ownership
As stated by Pandey (200 I) large firms will employ higher amount of debt than
small firms because smaller firms would have less long-term debt and more
short-term debt due to the shareholders-lenders conflict Lamba and Stapledon
(2009) mentioned that larger firms tend to issue more shares than smaller finns and
are less likely to have a controlling shareholder
The term tangibility refers to tangible assets act as collateral and provides
security to lenders iffmancial distress based on trade-off hypothesis The firms are
expected have a high level of debt because of the higher tangible assets (Pandey
2001) Furthermore Banchuenvijit (2011) stated that there is a positive relationship
between tangibility and leverage when the firms are expected to issue high level of
debt can borrow on favorable terms with tangible assets that can be used as
collateral However there is a negative relationship between tangibility and
leverage when the firm has lower information asymmetries with tangible assets
Therefore it will cause equity issue to be less costly and lower the leverage ratios
12
ABSTRAK
Kesan struktur pemilikan mengikut dasar hutang korporat industri perbankan
di Malaysia
Oleh
Wong Siik Ching
Kertas kerja ini mengkaji kesan struktur pemilikan mengikut dasar hutang
korporat industri perbankan di Malaysia Kajian ini juga mengenal pasti penentu
struktur pemilikan dalam perbankan Malaysia Sampel kajian ini memberi tumpuan
kepada 8 bank-bank tempatan yang disenaraikan di Bursa Malaysia antara tahun 2005
hingga tahun 2010 Suatu dikumpulkan persegi biasa (OLS) analisis digunakan untuk
melihat hubungan antara struktur pemilikan dengan dasar hutang korporat dalam
perbankan Malaysia Hasil kajian menunjukkan bahawa terdapat hubungan yang
signifikan antara keuntungan dengan nisbah hutang Walau bagaimanapun keputusan
mendapati bahawa saiz firma peluang pertumbuhan dan pemilikan institusi
mempunyai hubungan positif yang signifikan dengan nisbah hutang Sebaliknya
risiko yang kukuh dan pemilikan pengurus mempunyai kesan yang signifikan negatif
ke atas nisbah hutang Penemuan ini adalah selaras dengan teori pesanan combinasi
dan teori agensi Oleh sebab itu dasar hutang korporat boleh digunakan sebagai
mekanisme untuk mengurangkan konflik agensi dalam perbankan Malaysia
ACKNOWLEDGEMENT
This thesis was completed with the supports and assistance from many people
who are important in my life Firstly I would like to thank my supervisor Associate
Professor Dr Puah Chin Hong for his guidance and support throughout the study He
is kind to provide invaluable advices and comments in enhancing my knowledge to
write a good scientific research He has helped me greatly to solve the problem in the
study
Besides I want to take the opportunity to extend my gratitude to all my lectures
at Universiti Malaysia Sarawak especially for those who have helped me and given
me the supports and encouragements in the study I appreciate the lecturers who were
willing to share their experiences and knowledge for helping me to complete my
thesis
Furthermore I would like to express my appreciation to my family members for
providing me their support when I was suffering and stressful They are good
listeners and assist me to increase my confidence for completing my thesis on time
Last but not the least I would like to thank my friends who have given their support
inspiration understanding and advice that has helped me to complete my final year
project
I
List of Tables
List of Figures
CHAPTER 1
10
11
12
13
14
15
16
17
18
19
Pusat Khidmat MakJumat Akademik UNlVERSm MALAYSIA SARAWAK
TABLE OF CONTENTS
Xl
Xll
INTRODUCTION
Overview of the Study 1
Background of the Study 3
Definition ofOwnership Structure 7
121 The Types of Ownership Strucutre 8
Definition of Corporate Debt Policy 10
The Detenninants of Capital Structure 11
The Impact ofCorporate Ownership on Corporate 14
Debt Policy
Problem Statement 15
Objective of the Study 17
171 General Objective 18
172 Specific Objective 18
Significance of the Study 19
Scope of the Study 20
vii
I
CHAPTER 2 LITERATURE REVIEW
20 Introduction 21
21 Ownership Structure and Corporate Perfonnance 21
22 Corporate Debt Policy and Dividend Policy 24
23 Determinants ofCapital Structure and Ownership 28
Structure
24 Ownership Structure and Banking Industry 30
25 Ownership Structure and Corporate Governance 32
26 Ownership Structure and Agency Theory 35
CHAPTER 3 METHODOLOGY
30 Introduction 43
31 Theoretical Framework 43
311 Agency Theory 44
312 Pecking Order Theory 46
32 Conceptual Framework 47
33 Definition and Measurement ofthe Variables 49
331 Dependent Variable 50
tI 332 Independent Variables 50
333 Hypothesis of the Study 52
334 Summary ofthe Measurement Variables 53
34 Data and Sample 55
35 Data Analysis 56
351 Pooled Ordinary Least Square (OLS) Regression 56
viii
352 Estimation Model 58
36 Diagnostic Checking Tests and Stability Tests 59
361 Histogram and Normality Test 59
362 Breush-Godfrey Serial Correlation LM Test 60
363 Heteroskedasticity 61
364 Ramseys RESET Test 62
365 CUSUM Test 63
366 CUSUM of Squares Test 64
CHAPTER 4 EMPIRICAL RESULTS AND DISCUSSIONS
40 Introduction 66
41 Descriptive Analysis 66
42 Pooled OLS Reslllts 68
421 Profitability of Return on Asset 69
422 Firm Risk 70
423 Firm Size 71
424 Growth Opportunity 71
425 Managerial Ownership 72
426 Institutional Ownenhip 73
43 Diagnostic Checking Tests and Stability Tests Results 73
431 Normality Test Results 74
432Breush-Godfrey Serial Correlation LM Test 75
Results
433Heteroskedasticity Test Resuts Based on ARCH 75
ix
44
CHAPTERS
50
51
52
53
54
REFERENCES
364 Ramseys RESET Test Results
365 CUSUM Test Results
366 CUSUM of Squares Test Results
Chapter Remark
CONCLUSION AND RECOMMENDATION
Introduction
Conclusion Remark
Policy Implication
Recommendation
Limitation of the Study
76
77
78
80
83
83
86
87
88
90
x
1
2
3
4
5
6
7
8
LIST OF TABLES
Table Title Page
Summary of the Literature Review 38
Summary of the Measurement Variables 54
Descriptive Statistics ofDependent and Independent Variables 67
Correlation Matrix of the Debt Ratio and Explanatory Variables 68
Pooled OLS Regressions Results of Debt Ratio Analysis 69
Breush-Godfrey Serial Correlation LM Test Results 75
ARCH Test Results 76
Ramseys RESET Test Results 77
xi
LIST OF FIGURES
Figure Title Page
1 Conceptual Framework ofthe Impact of Ownership Structure 48
on Debt Policy
2 The Normality Test Results 74
3 CUSUM Test Results 78
4 CUSUM of Squares Test Results 79
xii
CHAPTER
INTRODUCTION
10 Overview of the Study
Corporate governance is an important aspect ofthe corporate environment It is
related to corporate control and ownership structure of a firm in a corporation
According to Hitt et aI (1999) strategic management and performance of firms are
regulated and controlled by corporate governance Besides it is used in
organization to establish command between firms owners and its top-level
managers whose interests may be in conflict Hence the separation of interests
among stakeholders in corporation csm lead to agency problem
In Malaysia corporate governance is highly concentrated in the hands of large
shareholders or controlling shareholders The shareholders are given the rights to
provide incentives that can affect decision-making in the corporation and exercise
the voting control over shares which may diverge significantly in cash flow rights
(Ishak amp Napier 2006) According to Ghazali (2007) family-owned and
government-owned companies are the common types of ownership structure in
Malaysia Generally Malaysia has five largest shareholders which own 60 or
more of the public listed companies equity The top largest shareholders are the
nominee companies followed by non-financial companies and the government
Nor et al (2010) stated that corporate governance in Malaysia vanes
according to the ownership structure of the corporate sector Tne dispersed
ownership situation in Malaysia is observed to be similar in United States of
America (USA) and United Kingdoms (UK) common law legal system The
ownership is observed from two perspectives which are ownership concentration
and the components of ownership concentration They are used as a proxy for
corporate governance mechanisms Besides the ownership can be categorized into
institutional ownership government ownership and the nominees as well as the
individuals who own the companies As further added by Ayoib et al (2003) the
government has established the Finance Committee on Corporate Governance and
the Malaysian Institute ofCorporate Governance (MICG) to review and strengthen
corporate governance in Malaysia In addition the Malaysian Institute of
Accountants (MliA) the Kuala Lumpur Stock Exchange (KLSE) and the Securities
Commission (SC) were fonned to enhance the corporate governance in Malaysia
Moreover the Malaysian government has changed the merged banking groups
compositionof ownership structure in the post-crisis years When the bank merger
programme was completed to consolidate the number of domestic commercial
banks were reduced from 20 in 1999 to lOin 2001 (Lum amp Koh 2007) Hence the
study concluded that the consolidation programme has resulted in larger and better
capitalised domestic banking institutions but do not have any significant impact on
the composition ofownership structure in the banking industry
2
11 Background of the Study
Agency problem is a popular issue that exists commonly in a corporation
There are several studies which provide evidence on the effects of agency conflicts
on corporate governance Rimbey (1998) found that the distribution of shares
among the outside shareholders is a device to mitigate agency costs and affect the
fIrms capital structure Therefore ownership represents a power that can be used
either to support or oppose existing management that is related to the concentration
or dispersion of the power
On the other hand managerial ownership is an important internal monitoring
force as a determinant of risk The risk is a central theme in financial economics
which is related to managerial ownership corporate debt and dividend policies
(Chen amp Steiner 1999) The determinants ofmanagerial ownership include the risk
debt and dividends which are treated as endogenous variable in the model Many
previous studies have found that managerial ownership has a signifIcant impact on
the levels of risk
Nevertheless Andreyeva (2001) claimed that the role of privatization in the evolution of a transparent private ownership structure is important to establish a
successful market The organizational financial structures and managerial behavior
of privatization transforms are the goals for the fIrm to maximize the profIt The
corporate governance system is a way to determine the ultimate success of
3
privatization to get the gains The ownership structure and corporate governance
systems from privatization will give impact on company performance This
provides existing knowledge for the policy implications of the transition
economies
The ownership structure of a corporation is considered as an endogenous
outcome ofdecisions that reflect the influence ofshareholders and oftrading on the
market for shares (Demsetz amp Villallonga 2001) The firms ownership structure
reflects the decisions made by the shareholders The ownership structure should be
influenced by the profit-maximizing interests of shareholders As a result there is
no systematic relation between variations in ownership structure and firm
performance Hence ownership structure is treated as an endogenous variable and
gives no evidence of a relation between profit rate and ownership concentration
The measurement of firm performance and ownership structure is not endogenous
in the estimation of the effect of ownership on performance It models ownership
structure as an endogenous variable and it examines two dimensions of this
structure to represent conflicting interests by the five largest shareholding interests
However Chu and Cheah (2004) argued that the ownership structures have an
effect on the development and performance of capital and debt market It is a high
concentration structure to distribute capital allocation in an efficiency economy
The ownership structure in capital market activeness can be promoted as investors
4
Pusat Khidruat Maklumat Akademik UNlVERSm MALAYSIA SARAWAK
can gam entry and exit easily In addition to that managers can control the
ownership and adjust the proportion ofdebt and equity to invest the capital and get
the gain Hence ownership structure plays an important role in the governance and
performance of firms
Craswell et al (1997) proved that the influence ofmanagerial and institutional
equity ownership is highly related to corporate performance They examined the
effects of both insider and institutional ownership of Australian corporate
performance Australian firms have significantly different legal and econOmIC
circumstances as compared to the firms in the US The fmdings indicate that there is
a weak relationship between institutional ownership and corporate performance
The result is found to be temporaly unstable and confined to large Australian
companies The evidence is not consistent with corporate performance related to
the level of institutional ownership A significant relationship between equity
ownership structure and corporate performance implies corrective transfers of
equity between insiders outsiders and the successful survival of firms with
effectively non-optimal ownership structures which casts doubt on the existence of
any generalized equilibrium Ifthe o~nership structure is endogenous the firms are
systematically related to equity ownership
5
In Malaysia the ownership concentration is weaker than other developed
countries and the institutional ownership is less than 20 ofthe outstanding shares
(Joher et aI 2006) The three ownership structures of corporation are institutional
ownership managerial ownership and individual ownership These three types of
ownership structures can affect ftrm performance and value by mitigating agency
costs of the firm Therefore the impact of institutional ownership on insider
ownership and corporate debt policy in Malaysia is investigated to provide
empirical evidence on corporate control in developed market
Various issues regarding the efficiency and the safety ofbanking industries are
increasing due to the financial crisis in 1997 (Barry et aI 2008) After the financial
crisis the banking system is reforme~ by bank regulators and they also carried out
several measures to provide efficient banking services to sustain the economy One
ofthe measures is when the government decided to change management ownership
and governance to avoid closure ofdistressed banks Moreover Asian governments
encouraged safe banks to merge with distressed banks to restore the financial
viability ofdmiddotistressed banks After the 1997 financial crisis the ownership structure
and the governance of banks are moified by bank restructuring program Hence
this study attempts to examine the impact ofownership structure on corporate debt
policy in Malaysian banking industry between from 2005 and 201 O
6
12 Definition of Ownership Structure
Generally ownership structure is defined as the identity of the equity owners
and distribution of equity regarding votes and capital These structures are
important in corporate governance to detennine the incentives of managers and
manage the economic efficiency of the corporations (Ownership Structure 2011)
Gursoyand Aydogan (1998) stipulated that ownership structure is categorized
into two dimensions which are ownership concentration and ownership mix
Ownership concentration refers to the distribution of the shares owned by a certain
number of individuals institutions and families On the other hand ownership mix
is related to the presence of certain institutions or groups such as government or
foreign partners among the shareholders These two categories of measures
incorporate both the influence power of shareholders as well as identity of owners
with their unique incentive mechanisms and preferences
7
121 The Types of Ownership Structure
Ownership structures are commonly divided into several types namely
managerial ownership family ownership and institutional ownership
(a) Managerial Ownership
According to Joher et al (2006) managerial ownership is an ownership which
consists of directors managers and other members in management to hold the
shares directly in a corporation The managerial ownership of equity can mitigate
the moral hazard problem between managers and shareholders Jensen and
Meckling (1976) argued that agency problem can reduce to moral hazard between
manager and owners if there were no debt contracts This is because managerial
ownership can be effective in aligning the managerial interest with outside
shareholders to mitigate the agency problems Datta et al (2004) also discovered
that the managers with high equity ownership prefer short maturity debt for
facilitating the agency conflicts of managerial discretion However Hashim and
Devi (2008) pointed out that the correlation between managerial and inside
ownership is a high positive relationship which is operated by the inside
management
8
(b) Family Ownership
Family ownership is a type ofownership that is owned entirely by the members
of a single family in a corporation The family ownership of corporate governance
is mostly operated by Asian firms According to Hashim and Devi (2008) family
ownership provides incentives to reduce the agency cost by aligning shareholders
and managerial interest They found that there is a positive and significant
relationship between family ownership and earnings quality They also proved that
family members who have greater expertise on firms operations can operate the
firms activities effectively to reduce the agency cost Nevertheless Villalonga and
Amit (2006) argued that family ownership makes profits for corporation when the
founder is active in the firm as the Chi~fExecutive Officer (CEO) or Chairman with
a hired CEO They also found that the agency conflicts exist between minority
shareholders and managers when the corporate government is performed by
descendant-CEO
(c) Institutional Ownership
Institutional ownership is an ownership of flllancial institution which includes
pension funds mutual funds closed-end fund life insurance companies savings
institutions and trust department of commercial banks (Joher et aI 2006)
According to Hashim and Devi (2008) the participation of institutional investors in
9
corporate governance plays an important role to protect minority shareholders
interest and mitigate the agency problem It is noted that there is a positive and
significant relationship between institutional ownership and earnings quality Thus
it indicates that the institutional have greater incentives to monitor firms activities
and the corporate government practices are improved by the involvement of
institutional investors participation
13 Definition of Corporate Debt Policy
Corporate debt policy is a non-government debt security which is divided into
short-term debt and long-term debt The short-term debt is issued as commercial
paper and long-term debt is issued as bonds It normally includes the council tax
housing rents business rates benefit overpayments legal costs and debtors
Besides the corporate debt policy is responsible to collect debt form citizens and
provides advice and practical help in the management ofvarious debts (Leeds City
Council Corporate Debt Policy 2010) It sets out the principles to maximize
collection performance from collecting debt Therefore it is the provision of
support mechanisms to all customer~
10
14 The Determinants of Capital Structure
According to the pecking order theory and agency theory the detenninants of
capital structure cover the profitability finn size tangibility growth opportunity
and firm risk These determinants of ownership structure will affect the firms
leverage or debt ratio
Banchuenvijit (2011) defined profitability as the determinant of capital
structure The pecking order theory prefers internal financing in which profitable
fInns will employ higher retained earning with higher profitability to hold less debt
Many empirical studies have found that there is a negative relationship between
~
profitability and leverage The fInn uses its own cash flow instead ofusing debt to
fmance its operations and investment opportunities when there is a negative sign
However Cespedes et al (2008) proved that the relationship between profitability
and leverage is a positive based on trade-off theory This is because the trade-off
theory is expected to show a positive sign when the firms debt level is higher It
implies that the higher the firms profitability the higher the potential tax shields
Pandey (2001) argued that the finn will employ high debt to gain tax benefits to get
higher profits based on interest tax sliield hypothesis proposed in the theory by
Modigliani and Miller (1963)
11
Besides firm size is found to be a positive detenninant of capital structure as
indicated in many previous studies However it implies a negative relation between
size and leverage when larger firms are expected to have less information
asymmetries in issuing debt or equity (Banchuenvijit 20 11) Chu and Cheah (2004)
pointed out that large firm size indicates the firm will share the risk and less asset
will be shared specificity between the firms founders On the other hand smaller
firm size and net cash flow will share the risk with large concentrated ownership
As stated by Pandey (200 I) large firms will employ higher amount of debt than
small firms because smaller firms would have less long-term debt and more
short-term debt due to the shareholders-lenders conflict Lamba and Stapledon
(2009) mentioned that larger firms tend to issue more shares than smaller finns and
are less likely to have a controlling shareholder
The term tangibility refers to tangible assets act as collateral and provides
security to lenders iffmancial distress based on trade-off hypothesis The firms are
expected have a high level of debt because of the higher tangible assets (Pandey
2001) Furthermore Banchuenvijit (2011) stated that there is a positive relationship
between tangibility and leverage when the firms are expected to issue high level of
debt can borrow on favorable terms with tangible assets that can be used as
collateral However there is a negative relationship between tangibility and
leverage when the firm has lower information asymmetries with tangible assets
Therefore it will cause equity issue to be less costly and lower the leverage ratios
12
ACKNOWLEDGEMENT
This thesis was completed with the supports and assistance from many people
who are important in my life Firstly I would like to thank my supervisor Associate
Professor Dr Puah Chin Hong for his guidance and support throughout the study He
is kind to provide invaluable advices and comments in enhancing my knowledge to
write a good scientific research He has helped me greatly to solve the problem in the
study
Besides I want to take the opportunity to extend my gratitude to all my lectures
at Universiti Malaysia Sarawak especially for those who have helped me and given
me the supports and encouragements in the study I appreciate the lecturers who were
willing to share their experiences and knowledge for helping me to complete my
thesis
Furthermore I would like to express my appreciation to my family members for
providing me their support when I was suffering and stressful They are good
listeners and assist me to increase my confidence for completing my thesis on time
Last but not the least I would like to thank my friends who have given their support
inspiration understanding and advice that has helped me to complete my final year
project
I
List of Tables
List of Figures
CHAPTER 1
10
11
12
13
14
15
16
17
18
19
Pusat Khidmat MakJumat Akademik UNlVERSm MALAYSIA SARAWAK
TABLE OF CONTENTS
Xl
Xll
INTRODUCTION
Overview of the Study 1
Background of the Study 3
Definition ofOwnership Structure 7
121 The Types of Ownership Strucutre 8
Definition of Corporate Debt Policy 10
The Detenninants of Capital Structure 11
The Impact ofCorporate Ownership on Corporate 14
Debt Policy
Problem Statement 15
Objective of the Study 17
171 General Objective 18
172 Specific Objective 18
Significance of the Study 19
Scope of the Study 20
vii
I
CHAPTER 2 LITERATURE REVIEW
20 Introduction 21
21 Ownership Structure and Corporate Perfonnance 21
22 Corporate Debt Policy and Dividend Policy 24
23 Determinants ofCapital Structure and Ownership 28
Structure
24 Ownership Structure and Banking Industry 30
25 Ownership Structure and Corporate Governance 32
26 Ownership Structure and Agency Theory 35
CHAPTER 3 METHODOLOGY
30 Introduction 43
31 Theoretical Framework 43
311 Agency Theory 44
312 Pecking Order Theory 46
32 Conceptual Framework 47
33 Definition and Measurement ofthe Variables 49
331 Dependent Variable 50
tI 332 Independent Variables 50
333 Hypothesis of the Study 52
334 Summary ofthe Measurement Variables 53
34 Data and Sample 55
35 Data Analysis 56
351 Pooled Ordinary Least Square (OLS) Regression 56
viii
352 Estimation Model 58
36 Diagnostic Checking Tests and Stability Tests 59
361 Histogram and Normality Test 59
362 Breush-Godfrey Serial Correlation LM Test 60
363 Heteroskedasticity 61
364 Ramseys RESET Test 62
365 CUSUM Test 63
366 CUSUM of Squares Test 64
CHAPTER 4 EMPIRICAL RESULTS AND DISCUSSIONS
40 Introduction 66
41 Descriptive Analysis 66
42 Pooled OLS Reslllts 68
421 Profitability of Return on Asset 69
422 Firm Risk 70
423 Firm Size 71
424 Growth Opportunity 71
425 Managerial Ownership 72
426 Institutional Ownenhip 73
43 Diagnostic Checking Tests and Stability Tests Results 73
431 Normality Test Results 74
432Breush-Godfrey Serial Correlation LM Test 75
Results
433Heteroskedasticity Test Resuts Based on ARCH 75
ix
44
CHAPTERS
50
51
52
53
54
REFERENCES
364 Ramseys RESET Test Results
365 CUSUM Test Results
366 CUSUM of Squares Test Results
Chapter Remark
CONCLUSION AND RECOMMENDATION
Introduction
Conclusion Remark
Policy Implication
Recommendation
Limitation of the Study
76
77
78
80
83
83
86
87
88
90
x
1
2
3
4
5
6
7
8
LIST OF TABLES
Table Title Page
Summary of the Literature Review 38
Summary of the Measurement Variables 54
Descriptive Statistics ofDependent and Independent Variables 67
Correlation Matrix of the Debt Ratio and Explanatory Variables 68
Pooled OLS Regressions Results of Debt Ratio Analysis 69
Breush-Godfrey Serial Correlation LM Test Results 75
ARCH Test Results 76
Ramseys RESET Test Results 77
xi
LIST OF FIGURES
Figure Title Page
1 Conceptual Framework ofthe Impact of Ownership Structure 48
on Debt Policy
2 The Normality Test Results 74
3 CUSUM Test Results 78
4 CUSUM of Squares Test Results 79
xii
CHAPTER
INTRODUCTION
10 Overview of the Study
Corporate governance is an important aspect ofthe corporate environment It is
related to corporate control and ownership structure of a firm in a corporation
According to Hitt et aI (1999) strategic management and performance of firms are
regulated and controlled by corporate governance Besides it is used in
organization to establish command between firms owners and its top-level
managers whose interests may be in conflict Hence the separation of interests
among stakeholders in corporation csm lead to agency problem
In Malaysia corporate governance is highly concentrated in the hands of large
shareholders or controlling shareholders The shareholders are given the rights to
provide incentives that can affect decision-making in the corporation and exercise
the voting control over shares which may diverge significantly in cash flow rights
(Ishak amp Napier 2006) According to Ghazali (2007) family-owned and
government-owned companies are the common types of ownership structure in
Malaysia Generally Malaysia has five largest shareholders which own 60 or
more of the public listed companies equity The top largest shareholders are the
nominee companies followed by non-financial companies and the government
Nor et al (2010) stated that corporate governance in Malaysia vanes
according to the ownership structure of the corporate sector Tne dispersed
ownership situation in Malaysia is observed to be similar in United States of
America (USA) and United Kingdoms (UK) common law legal system The
ownership is observed from two perspectives which are ownership concentration
and the components of ownership concentration They are used as a proxy for
corporate governance mechanisms Besides the ownership can be categorized into
institutional ownership government ownership and the nominees as well as the
individuals who own the companies As further added by Ayoib et al (2003) the
government has established the Finance Committee on Corporate Governance and
the Malaysian Institute ofCorporate Governance (MICG) to review and strengthen
corporate governance in Malaysia In addition the Malaysian Institute of
Accountants (MliA) the Kuala Lumpur Stock Exchange (KLSE) and the Securities
Commission (SC) were fonned to enhance the corporate governance in Malaysia
Moreover the Malaysian government has changed the merged banking groups
compositionof ownership structure in the post-crisis years When the bank merger
programme was completed to consolidate the number of domestic commercial
banks were reduced from 20 in 1999 to lOin 2001 (Lum amp Koh 2007) Hence the
study concluded that the consolidation programme has resulted in larger and better
capitalised domestic banking institutions but do not have any significant impact on
the composition ofownership structure in the banking industry
2
11 Background of the Study
Agency problem is a popular issue that exists commonly in a corporation
There are several studies which provide evidence on the effects of agency conflicts
on corporate governance Rimbey (1998) found that the distribution of shares
among the outside shareholders is a device to mitigate agency costs and affect the
fIrms capital structure Therefore ownership represents a power that can be used
either to support or oppose existing management that is related to the concentration
or dispersion of the power
On the other hand managerial ownership is an important internal monitoring
force as a determinant of risk The risk is a central theme in financial economics
which is related to managerial ownership corporate debt and dividend policies
(Chen amp Steiner 1999) The determinants ofmanagerial ownership include the risk
debt and dividends which are treated as endogenous variable in the model Many
previous studies have found that managerial ownership has a signifIcant impact on
the levels of risk
Nevertheless Andreyeva (2001) claimed that the role of privatization in the evolution of a transparent private ownership structure is important to establish a
successful market The organizational financial structures and managerial behavior
of privatization transforms are the goals for the fIrm to maximize the profIt The
corporate governance system is a way to determine the ultimate success of
3
privatization to get the gains The ownership structure and corporate governance
systems from privatization will give impact on company performance This
provides existing knowledge for the policy implications of the transition
economies
The ownership structure of a corporation is considered as an endogenous
outcome ofdecisions that reflect the influence ofshareholders and oftrading on the
market for shares (Demsetz amp Villallonga 2001) The firms ownership structure
reflects the decisions made by the shareholders The ownership structure should be
influenced by the profit-maximizing interests of shareholders As a result there is
no systematic relation between variations in ownership structure and firm
performance Hence ownership structure is treated as an endogenous variable and
gives no evidence of a relation between profit rate and ownership concentration
The measurement of firm performance and ownership structure is not endogenous
in the estimation of the effect of ownership on performance It models ownership
structure as an endogenous variable and it examines two dimensions of this
structure to represent conflicting interests by the five largest shareholding interests
However Chu and Cheah (2004) argued that the ownership structures have an
effect on the development and performance of capital and debt market It is a high
concentration structure to distribute capital allocation in an efficiency economy
The ownership structure in capital market activeness can be promoted as investors
4
Pusat Khidruat Maklumat Akademik UNlVERSm MALAYSIA SARAWAK
can gam entry and exit easily In addition to that managers can control the
ownership and adjust the proportion ofdebt and equity to invest the capital and get
the gain Hence ownership structure plays an important role in the governance and
performance of firms
Craswell et al (1997) proved that the influence ofmanagerial and institutional
equity ownership is highly related to corporate performance They examined the
effects of both insider and institutional ownership of Australian corporate
performance Australian firms have significantly different legal and econOmIC
circumstances as compared to the firms in the US The fmdings indicate that there is
a weak relationship between institutional ownership and corporate performance
The result is found to be temporaly unstable and confined to large Australian
companies The evidence is not consistent with corporate performance related to
the level of institutional ownership A significant relationship between equity
ownership structure and corporate performance implies corrective transfers of
equity between insiders outsiders and the successful survival of firms with
effectively non-optimal ownership structures which casts doubt on the existence of
any generalized equilibrium Ifthe o~nership structure is endogenous the firms are
systematically related to equity ownership
5
In Malaysia the ownership concentration is weaker than other developed
countries and the institutional ownership is less than 20 ofthe outstanding shares
(Joher et aI 2006) The three ownership structures of corporation are institutional
ownership managerial ownership and individual ownership These three types of
ownership structures can affect ftrm performance and value by mitigating agency
costs of the firm Therefore the impact of institutional ownership on insider
ownership and corporate debt policy in Malaysia is investigated to provide
empirical evidence on corporate control in developed market
Various issues regarding the efficiency and the safety ofbanking industries are
increasing due to the financial crisis in 1997 (Barry et aI 2008) After the financial
crisis the banking system is reforme~ by bank regulators and they also carried out
several measures to provide efficient banking services to sustain the economy One
ofthe measures is when the government decided to change management ownership
and governance to avoid closure ofdistressed banks Moreover Asian governments
encouraged safe banks to merge with distressed banks to restore the financial
viability ofdmiddotistressed banks After the 1997 financial crisis the ownership structure
and the governance of banks are moified by bank restructuring program Hence
this study attempts to examine the impact ofownership structure on corporate debt
policy in Malaysian banking industry between from 2005 and 201 O
6
12 Definition of Ownership Structure
Generally ownership structure is defined as the identity of the equity owners
and distribution of equity regarding votes and capital These structures are
important in corporate governance to detennine the incentives of managers and
manage the economic efficiency of the corporations (Ownership Structure 2011)
Gursoyand Aydogan (1998) stipulated that ownership structure is categorized
into two dimensions which are ownership concentration and ownership mix
Ownership concentration refers to the distribution of the shares owned by a certain
number of individuals institutions and families On the other hand ownership mix
is related to the presence of certain institutions or groups such as government or
foreign partners among the shareholders These two categories of measures
incorporate both the influence power of shareholders as well as identity of owners
with their unique incentive mechanisms and preferences
7
121 The Types of Ownership Structure
Ownership structures are commonly divided into several types namely
managerial ownership family ownership and institutional ownership
(a) Managerial Ownership
According to Joher et al (2006) managerial ownership is an ownership which
consists of directors managers and other members in management to hold the
shares directly in a corporation The managerial ownership of equity can mitigate
the moral hazard problem between managers and shareholders Jensen and
Meckling (1976) argued that agency problem can reduce to moral hazard between
manager and owners if there were no debt contracts This is because managerial
ownership can be effective in aligning the managerial interest with outside
shareholders to mitigate the agency problems Datta et al (2004) also discovered
that the managers with high equity ownership prefer short maturity debt for
facilitating the agency conflicts of managerial discretion However Hashim and
Devi (2008) pointed out that the correlation between managerial and inside
ownership is a high positive relationship which is operated by the inside
management
8
(b) Family Ownership
Family ownership is a type ofownership that is owned entirely by the members
of a single family in a corporation The family ownership of corporate governance
is mostly operated by Asian firms According to Hashim and Devi (2008) family
ownership provides incentives to reduce the agency cost by aligning shareholders
and managerial interest They found that there is a positive and significant
relationship between family ownership and earnings quality They also proved that
family members who have greater expertise on firms operations can operate the
firms activities effectively to reduce the agency cost Nevertheless Villalonga and
Amit (2006) argued that family ownership makes profits for corporation when the
founder is active in the firm as the Chi~fExecutive Officer (CEO) or Chairman with
a hired CEO They also found that the agency conflicts exist between minority
shareholders and managers when the corporate government is performed by
descendant-CEO
(c) Institutional Ownership
Institutional ownership is an ownership of flllancial institution which includes
pension funds mutual funds closed-end fund life insurance companies savings
institutions and trust department of commercial banks (Joher et aI 2006)
According to Hashim and Devi (2008) the participation of institutional investors in
9
corporate governance plays an important role to protect minority shareholders
interest and mitigate the agency problem It is noted that there is a positive and
significant relationship between institutional ownership and earnings quality Thus
it indicates that the institutional have greater incentives to monitor firms activities
and the corporate government practices are improved by the involvement of
institutional investors participation
13 Definition of Corporate Debt Policy
Corporate debt policy is a non-government debt security which is divided into
short-term debt and long-term debt The short-term debt is issued as commercial
paper and long-term debt is issued as bonds It normally includes the council tax
housing rents business rates benefit overpayments legal costs and debtors
Besides the corporate debt policy is responsible to collect debt form citizens and
provides advice and practical help in the management ofvarious debts (Leeds City
Council Corporate Debt Policy 2010) It sets out the principles to maximize
collection performance from collecting debt Therefore it is the provision of
support mechanisms to all customer~
10
14 The Determinants of Capital Structure
According to the pecking order theory and agency theory the detenninants of
capital structure cover the profitability finn size tangibility growth opportunity
and firm risk These determinants of ownership structure will affect the firms
leverage or debt ratio
Banchuenvijit (2011) defined profitability as the determinant of capital
structure The pecking order theory prefers internal financing in which profitable
fInns will employ higher retained earning with higher profitability to hold less debt
Many empirical studies have found that there is a negative relationship between
~
profitability and leverage The fInn uses its own cash flow instead ofusing debt to
fmance its operations and investment opportunities when there is a negative sign
However Cespedes et al (2008) proved that the relationship between profitability
and leverage is a positive based on trade-off theory This is because the trade-off
theory is expected to show a positive sign when the firms debt level is higher It
implies that the higher the firms profitability the higher the potential tax shields
Pandey (2001) argued that the finn will employ high debt to gain tax benefits to get
higher profits based on interest tax sliield hypothesis proposed in the theory by
Modigliani and Miller (1963)
11
Besides firm size is found to be a positive detenninant of capital structure as
indicated in many previous studies However it implies a negative relation between
size and leverage when larger firms are expected to have less information
asymmetries in issuing debt or equity (Banchuenvijit 20 11) Chu and Cheah (2004)
pointed out that large firm size indicates the firm will share the risk and less asset
will be shared specificity between the firms founders On the other hand smaller
firm size and net cash flow will share the risk with large concentrated ownership
As stated by Pandey (200 I) large firms will employ higher amount of debt than
small firms because smaller firms would have less long-term debt and more
short-term debt due to the shareholders-lenders conflict Lamba and Stapledon
(2009) mentioned that larger firms tend to issue more shares than smaller finns and
are less likely to have a controlling shareholder
The term tangibility refers to tangible assets act as collateral and provides
security to lenders iffmancial distress based on trade-off hypothesis The firms are
expected have a high level of debt because of the higher tangible assets (Pandey
2001) Furthermore Banchuenvijit (2011) stated that there is a positive relationship
between tangibility and leverage when the firms are expected to issue high level of
debt can borrow on favorable terms with tangible assets that can be used as
collateral However there is a negative relationship between tangibility and
leverage when the firm has lower information asymmetries with tangible assets
Therefore it will cause equity issue to be less costly and lower the leverage ratios
12
List of Tables
List of Figures
CHAPTER 1
10
11
12
13
14
15
16
17
18
19
Pusat Khidmat MakJumat Akademik UNlVERSm MALAYSIA SARAWAK
TABLE OF CONTENTS
Xl
Xll
INTRODUCTION
Overview of the Study 1
Background of the Study 3
Definition ofOwnership Structure 7
121 The Types of Ownership Strucutre 8
Definition of Corporate Debt Policy 10
The Detenninants of Capital Structure 11
The Impact ofCorporate Ownership on Corporate 14
Debt Policy
Problem Statement 15
Objective of the Study 17
171 General Objective 18
172 Specific Objective 18
Significance of the Study 19
Scope of the Study 20
vii
I
CHAPTER 2 LITERATURE REVIEW
20 Introduction 21
21 Ownership Structure and Corporate Perfonnance 21
22 Corporate Debt Policy and Dividend Policy 24
23 Determinants ofCapital Structure and Ownership 28
Structure
24 Ownership Structure and Banking Industry 30
25 Ownership Structure and Corporate Governance 32
26 Ownership Structure and Agency Theory 35
CHAPTER 3 METHODOLOGY
30 Introduction 43
31 Theoretical Framework 43
311 Agency Theory 44
312 Pecking Order Theory 46
32 Conceptual Framework 47
33 Definition and Measurement ofthe Variables 49
331 Dependent Variable 50
tI 332 Independent Variables 50
333 Hypothesis of the Study 52
334 Summary ofthe Measurement Variables 53
34 Data and Sample 55
35 Data Analysis 56
351 Pooled Ordinary Least Square (OLS) Regression 56
viii
352 Estimation Model 58
36 Diagnostic Checking Tests and Stability Tests 59
361 Histogram and Normality Test 59
362 Breush-Godfrey Serial Correlation LM Test 60
363 Heteroskedasticity 61
364 Ramseys RESET Test 62
365 CUSUM Test 63
366 CUSUM of Squares Test 64
CHAPTER 4 EMPIRICAL RESULTS AND DISCUSSIONS
40 Introduction 66
41 Descriptive Analysis 66
42 Pooled OLS Reslllts 68
421 Profitability of Return on Asset 69
422 Firm Risk 70
423 Firm Size 71
424 Growth Opportunity 71
425 Managerial Ownership 72
426 Institutional Ownenhip 73
43 Diagnostic Checking Tests and Stability Tests Results 73
431 Normality Test Results 74
432Breush-Godfrey Serial Correlation LM Test 75
Results
433Heteroskedasticity Test Resuts Based on ARCH 75
ix
44
CHAPTERS
50
51
52
53
54
REFERENCES
364 Ramseys RESET Test Results
365 CUSUM Test Results
366 CUSUM of Squares Test Results
Chapter Remark
CONCLUSION AND RECOMMENDATION
Introduction
Conclusion Remark
Policy Implication
Recommendation
Limitation of the Study
76
77
78
80
83
83
86
87
88
90
x
1
2
3
4
5
6
7
8
LIST OF TABLES
Table Title Page
Summary of the Literature Review 38
Summary of the Measurement Variables 54
Descriptive Statistics ofDependent and Independent Variables 67
Correlation Matrix of the Debt Ratio and Explanatory Variables 68
Pooled OLS Regressions Results of Debt Ratio Analysis 69
Breush-Godfrey Serial Correlation LM Test Results 75
ARCH Test Results 76
Ramseys RESET Test Results 77
xi
LIST OF FIGURES
Figure Title Page
1 Conceptual Framework ofthe Impact of Ownership Structure 48
on Debt Policy
2 The Normality Test Results 74
3 CUSUM Test Results 78
4 CUSUM of Squares Test Results 79
xii
CHAPTER
INTRODUCTION
10 Overview of the Study
Corporate governance is an important aspect ofthe corporate environment It is
related to corporate control and ownership structure of a firm in a corporation
According to Hitt et aI (1999) strategic management and performance of firms are
regulated and controlled by corporate governance Besides it is used in
organization to establish command between firms owners and its top-level
managers whose interests may be in conflict Hence the separation of interests
among stakeholders in corporation csm lead to agency problem
In Malaysia corporate governance is highly concentrated in the hands of large
shareholders or controlling shareholders The shareholders are given the rights to
provide incentives that can affect decision-making in the corporation and exercise
the voting control over shares which may diverge significantly in cash flow rights
(Ishak amp Napier 2006) According to Ghazali (2007) family-owned and
government-owned companies are the common types of ownership structure in
Malaysia Generally Malaysia has five largest shareholders which own 60 or
more of the public listed companies equity The top largest shareholders are the
nominee companies followed by non-financial companies and the government
Nor et al (2010) stated that corporate governance in Malaysia vanes
according to the ownership structure of the corporate sector Tne dispersed
ownership situation in Malaysia is observed to be similar in United States of
America (USA) and United Kingdoms (UK) common law legal system The
ownership is observed from two perspectives which are ownership concentration
and the components of ownership concentration They are used as a proxy for
corporate governance mechanisms Besides the ownership can be categorized into
institutional ownership government ownership and the nominees as well as the
individuals who own the companies As further added by Ayoib et al (2003) the
government has established the Finance Committee on Corporate Governance and
the Malaysian Institute ofCorporate Governance (MICG) to review and strengthen
corporate governance in Malaysia In addition the Malaysian Institute of
Accountants (MliA) the Kuala Lumpur Stock Exchange (KLSE) and the Securities
Commission (SC) were fonned to enhance the corporate governance in Malaysia
Moreover the Malaysian government has changed the merged banking groups
compositionof ownership structure in the post-crisis years When the bank merger
programme was completed to consolidate the number of domestic commercial
banks were reduced from 20 in 1999 to lOin 2001 (Lum amp Koh 2007) Hence the
study concluded that the consolidation programme has resulted in larger and better
capitalised domestic banking institutions but do not have any significant impact on
the composition ofownership structure in the banking industry
2
11 Background of the Study
Agency problem is a popular issue that exists commonly in a corporation
There are several studies which provide evidence on the effects of agency conflicts
on corporate governance Rimbey (1998) found that the distribution of shares
among the outside shareholders is a device to mitigate agency costs and affect the
fIrms capital structure Therefore ownership represents a power that can be used
either to support or oppose existing management that is related to the concentration
or dispersion of the power
On the other hand managerial ownership is an important internal monitoring
force as a determinant of risk The risk is a central theme in financial economics
which is related to managerial ownership corporate debt and dividend policies
(Chen amp Steiner 1999) The determinants ofmanagerial ownership include the risk
debt and dividends which are treated as endogenous variable in the model Many
previous studies have found that managerial ownership has a signifIcant impact on
the levels of risk
Nevertheless Andreyeva (2001) claimed that the role of privatization in the evolution of a transparent private ownership structure is important to establish a
successful market The organizational financial structures and managerial behavior
of privatization transforms are the goals for the fIrm to maximize the profIt The
corporate governance system is a way to determine the ultimate success of
3
privatization to get the gains The ownership structure and corporate governance
systems from privatization will give impact on company performance This
provides existing knowledge for the policy implications of the transition
economies
The ownership structure of a corporation is considered as an endogenous
outcome ofdecisions that reflect the influence ofshareholders and oftrading on the
market for shares (Demsetz amp Villallonga 2001) The firms ownership structure
reflects the decisions made by the shareholders The ownership structure should be
influenced by the profit-maximizing interests of shareholders As a result there is
no systematic relation between variations in ownership structure and firm
performance Hence ownership structure is treated as an endogenous variable and
gives no evidence of a relation between profit rate and ownership concentration
The measurement of firm performance and ownership structure is not endogenous
in the estimation of the effect of ownership on performance It models ownership
structure as an endogenous variable and it examines two dimensions of this
structure to represent conflicting interests by the five largest shareholding interests
However Chu and Cheah (2004) argued that the ownership structures have an
effect on the development and performance of capital and debt market It is a high
concentration structure to distribute capital allocation in an efficiency economy
The ownership structure in capital market activeness can be promoted as investors
4
Pusat Khidruat Maklumat Akademik UNlVERSm MALAYSIA SARAWAK
can gam entry and exit easily In addition to that managers can control the
ownership and adjust the proportion ofdebt and equity to invest the capital and get
the gain Hence ownership structure plays an important role in the governance and
performance of firms
Craswell et al (1997) proved that the influence ofmanagerial and institutional
equity ownership is highly related to corporate performance They examined the
effects of both insider and institutional ownership of Australian corporate
performance Australian firms have significantly different legal and econOmIC
circumstances as compared to the firms in the US The fmdings indicate that there is
a weak relationship between institutional ownership and corporate performance
The result is found to be temporaly unstable and confined to large Australian
companies The evidence is not consistent with corporate performance related to
the level of institutional ownership A significant relationship between equity
ownership structure and corporate performance implies corrective transfers of
equity between insiders outsiders and the successful survival of firms with
effectively non-optimal ownership structures which casts doubt on the existence of
any generalized equilibrium Ifthe o~nership structure is endogenous the firms are
systematically related to equity ownership
5
In Malaysia the ownership concentration is weaker than other developed
countries and the institutional ownership is less than 20 ofthe outstanding shares
(Joher et aI 2006) The three ownership structures of corporation are institutional
ownership managerial ownership and individual ownership These three types of
ownership structures can affect ftrm performance and value by mitigating agency
costs of the firm Therefore the impact of institutional ownership on insider
ownership and corporate debt policy in Malaysia is investigated to provide
empirical evidence on corporate control in developed market
Various issues regarding the efficiency and the safety ofbanking industries are
increasing due to the financial crisis in 1997 (Barry et aI 2008) After the financial
crisis the banking system is reforme~ by bank regulators and they also carried out
several measures to provide efficient banking services to sustain the economy One
ofthe measures is when the government decided to change management ownership
and governance to avoid closure ofdistressed banks Moreover Asian governments
encouraged safe banks to merge with distressed banks to restore the financial
viability ofdmiddotistressed banks After the 1997 financial crisis the ownership structure
and the governance of banks are moified by bank restructuring program Hence
this study attempts to examine the impact ofownership structure on corporate debt
policy in Malaysian banking industry between from 2005 and 201 O
6
12 Definition of Ownership Structure
Generally ownership structure is defined as the identity of the equity owners
and distribution of equity regarding votes and capital These structures are
important in corporate governance to detennine the incentives of managers and
manage the economic efficiency of the corporations (Ownership Structure 2011)
Gursoyand Aydogan (1998) stipulated that ownership structure is categorized
into two dimensions which are ownership concentration and ownership mix
Ownership concentration refers to the distribution of the shares owned by a certain
number of individuals institutions and families On the other hand ownership mix
is related to the presence of certain institutions or groups such as government or
foreign partners among the shareholders These two categories of measures
incorporate both the influence power of shareholders as well as identity of owners
with their unique incentive mechanisms and preferences
7
121 The Types of Ownership Structure
Ownership structures are commonly divided into several types namely
managerial ownership family ownership and institutional ownership
(a) Managerial Ownership
According to Joher et al (2006) managerial ownership is an ownership which
consists of directors managers and other members in management to hold the
shares directly in a corporation The managerial ownership of equity can mitigate
the moral hazard problem between managers and shareholders Jensen and
Meckling (1976) argued that agency problem can reduce to moral hazard between
manager and owners if there were no debt contracts This is because managerial
ownership can be effective in aligning the managerial interest with outside
shareholders to mitigate the agency problems Datta et al (2004) also discovered
that the managers with high equity ownership prefer short maturity debt for
facilitating the agency conflicts of managerial discretion However Hashim and
Devi (2008) pointed out that the correlation between managerial and inside
ownership is a high positive relationship which is operated by the inside
management
8
(b) Family Ownership
Family ownership is a type ofownership that is owned entirely by the members
of a single family in a corporation The family ownership of corporate governance
is mostly operated by Asian firms According to Hashim and Devi (2008) family
ownership provides incentives to reduce the agency cost by aligning shareholders
and managerial interest They found that there is a positive and significant
relationship between family ownership and earnings quality They also proved that
family members who have greater expertise on firms operations can operate the
firms activities effectively to reduce the agency cost Nevertheless Villalonga and
Amit (2006) argued that family ownership makes profits for corporation when the
founder is active in the firm as the Chi~fExecutive Officer (CEO) or Chairman with
a hired CEO They also found that the agency conflicts exist between minority
shareholders and managers when the corporate government is performed by
descendant-CEO
(c) Institutional Ownership
Institutional ownership is an ownership of flllancial institution which includes
pension funds mutual funds closed-end fund life insurance companies savings
institutions and trust department of commercial banks (Joher et aI 2006)
According to Hashim and Devi (2008) the participation of institutional investors in
9
corporate governance plays an important role to protect minority shareholders
interest and mitigate the agency problem It is noted that there is a positive and
significant relationship between institutional ownership and earnings quality Thus
it indicates that the institutional have greater incentives to monitor firms activities
and the corporate government practices are improved by the involvement of
institutional investors participation
13 Definition of Corporate Debt Policy
Corporate debt policy is a non-government debt security which is divided into
short-term debt and long-term debt The short-term debt is issued as commercial
paper and long-term debt is issued as bonds It normally includes the council tax
housing rents business rates benefit overpayments legal costs and debtors
Besides the corporate debt policy is responsible to collect debt form citizens and
provides advice and practical help in the management ofvarious debts (Leeds City
Council Corporate Debt Policy 2010) It sets out the principles to maximize
collection performance from collecting debt Therefore it is the provision of
support mechanisms to all customer~
10
14 The Determinants of Capital Structure
According to the pecking order theory and agency theory the detenninants of
capital structure cover the profitability finn size tangibility growth opportunity
and firm risk These determinants of ownership structure will affect the firms
leverage or debt ratio
Banchuenvijit (2011) defined profitability as the determinant of capital
structure The pecking order theory prefers internal financing in which profitable
fInns will employ higher retained earning with higher profitability to hold less debt
Many empirical studies have found that there is a negative relationship between
~
profitability and leverage The fInn uses its own cash flow instead ofusing debt to
fmance its operations and investment opportunities when there is a negative sign
However Cespedes et al (2008) proved that the relationship between profitability
and leverage is a positive based on trade-off theory This is because the trade-off
theory is expected to show a positive sign when the firms debt level is higher It
implies that the higher the firms profitability the higher the potential tax shields
Pandey (2001) argued that the finn will employ high debt to gain tax benefits to get
higher profits based on interest tax sliield hypothesis proposed in the theory by
Modigliani and Miller (1963)
11
Besides firm size is found to be a positive detenninant of capital structure as
indicated in many previous studies However it implies a negative relation between
size and leverage when larger firms are expected to have less information
asymmetries in issuing debt or equity (Banchuenvijit 20 11) Chu and Cheah (2004)
pointed out that large firm size indicates the firm will share the risk and less asset
will be shared specificity between the firms founders On the other hand smaller
firm size and net cash flow will share the risk with large concentrated ownership
As stated by Pandey (200 I) large firms will employ higher amount of debt than
small firms because smaller firms would have less long-term debt and more
short-term debt due to the shareholders-lenders conflict Lamba and Stapledon
(2009) mentioned that larger firms tend to issue more shares than smaller finns and
are less likely to have a controlling shareholder
The term tangibility refers to tangible assets act as collateral and provides
security to lenders iffmancial distress based on trade-off hypothesis The firms are
expected have a high level of debt because of the higher tangible assets (Pandey
2001) Furthermore Banchuenvijit (2011) stated that there is a positive relationship
between tangibility and leverage when the firms are expected to issue high level of
debt can borrow on favorable terms with tangible assets that can be used as
collateral However there is a negative relationship between tangibility and
leverage when the firm has lower information asymmetries with tangible assets
Therefore it will cause equity issue to be less costly and lower the leverage ratios
12
CHAPTER 2 LITERATURE REVIEW
20 Introduction 21
21 Ownership Structure and Corporate Perfonnance 21
22 Corporate Debt Policy and Dividend Policy 24
23 Determinants ofCapital Structure and Ownership 28
Structure
24 Ownership Structure and Banking Industry 30
25 Ownership Structure and Corporate Governance 32
26 Ownership Structure and Agency Theory 35
CHAPTER 3 METHODOLOGY
30 Introduction 43
31 Theoretical Framework 43
311 Agency Theory 44
312 Pecking Order Theory 46
32 Conceptual Framework 47
33 Definition and Measurement ofthe Variables 49
331 Dependent Variable 50
tI 332 Independent Variables 50
333 Hypothesis of the Study 52
334 Summary ofthe Measurement Variables 53
34 Data and Sample 55
35 Data Analysis 56
351 Pooled Ordinary Least Square (OLS) Regression 56
viii
352 Estimation Model 58
36 Diagnostic Checking Tests and Stability Tests 59
361 Histogram and Normality Test 59
362 Breush-Godfrey Serial Correlation LM Test 60
363 Heteroskedasticity 61
364 Ramseys RESET Test 62
365 CUSUM Test 63
366 CUSUM of Squares Test 64
CHAPTER 4 EMPIRICAL RESULTS AND DISCUSSIONS
40 Introduction 66
41 Descriptive Analysis 66
42 Pooled OLS Reslllts 68
421 Profitability of Return on Asset 69
422 Firm Risk 70
423 Firm Size 71
424 Growth Opportunity 71
425 Managerial Ownership 72
426 Institutional Ownenhip 73
43 Diagnostic Checking Tests and Stability Tests Results 73
431 Normality Test Results 74
432Breush-Godfrey Serial Correlation LM Test 75
Results
433Heteroskedasticity Test Resuts Based on ARCH 75
ix
44
CHAPTERS
50
51
52
53
54
REFERENCES
364 Ramseys RESET Test Results
365 CUSUM Test Results
366 CUSUM of Squares Test Results
Chapter Remark
CONCLUSION AND RECOMMENDATION
Introduction
Conclusion Remark
Policy Implication
Recommendation
Limitation of the Study
76
77
78
80
83
83
86
87
88
90
x
1
2
3
4
5
6
7
8
LIST OF TABLES
Table Title Page
Summary of the Literature Review 38
Summary of the Measurement Variables 54
Descriptive Statistics ofDependent and Independent Variables 67
Correlation Matrix of the Debt Ratio and Explanatory Variables 68
Pooled OLS Regressions Results of Debt Ratio Analysis 69
Breush-Godfrey Serial Correlation LM Test Results 75
ARCH Test Results 76
Ramseys RESET Test Results 77
xi
LIST OF FIGURES
Figure Title Page
1 Conceptual Framework ofthe Impact of Ownership Structure 48
on Debt Policy
2 The Normality Test Results 74
3 CUSUM Test Results 78
4 CUSUM of Squares Test Results 79
xii
CHAPTER
INTRODUCTION
10 Overview of the Study
Corporate governance is an important aspect ofthe corporate environment It is
related to corporate control and ownership structure of a firm in a corporation
According to Hitt et aI (1999) strategic management and performance of firms are
regulated and controlled by corporate governance Besides it is used in
organization to establish command between firms owners and its top-level
managers whose interests may be in conflict Hence the separation of interests
among stakeholders in corporation csm lead to agency problem
In Malaysia corporate governance is highly concentrated in the hands of large
shareholders or controlling shareholders The shareholders are given the rights to
provide incentives that can affect decision-making in the corporation and exercise
the voting control over shares which may diverge significantly in cash flow rights
(Ishak amp Napier 2006) According to Ghazali (2007) family-owned and
government-owned companies are the common types of ownership structure in
Malaysia Generally Malaysia has five largest shareholders which own 60 or
more of the public listed companies equity The top largest shareholders are the
nominee companies followed by non-financial companies and the government
Nor et al (2010) stated that corporate governance in Malaysia vanes
according to the ownership structure of the corporate sector Tne dispersed
ownership situation in Malaysia is observed to be similar in United States of
America (USA) and United Kingdoms (UK) common law legal system The
ownership is observed from two perspectives which are ownership concentration
and the components of ownership concentration They are used as a proxy for
corporate governance mechanisms Besides the ownership can be categorized into
institutional ownership government ownership and the nominees as well as the
individuals who own the companies As further added by Ayoib et al (2003) the
government has established the Finance Committee on Corporate Governance and
the Malaysian Institute ofCorporate Governance (MICG) to review and strengthen
corporate governance in Malaysia In addition the Malaysian Institute of
Accountants (MliA) the Kuala Lumpur Stock Exchange (KLSE) and the Securities
Commission (SC) were fonned to enhance the corporate governance in Malaysia
Moreover the Malaysian government has changed the merged banking groups
compositionof ownership structure in the post-crisis years When the bank merger
programme was completed to consolidate the number of domestic commercial
banks were reduced from 20 in 1999 to lOin 2001 (Lum amp Koh 2007) Hence the
study concluded that the consolidation programme has resulted in larger and better
capitalised domestic banking institutions but do not have any significant impact on
the composition ofownership structure in the banking industry
2
11 Background of the Study
Agency problem is a popular issue that exists commonly in a corporation
There are several studies which provide evidence on the effects of agency conflicts
on corporate governance Rimbey (1998) found that the distribution of shares
among the outside shareholders is a device to mitigate agency costs and affect the
fIrms capital structure Therefore ownership represents a power that can be used
either to support or oppose existing management that is related to the concentration
or dispersion of the power
On the other hand managerial ownership is an important internal monitoring
force as a determinant of risk The risk is a central theme in financial economics
which is related to managerial ownership corporate debt and dividend policies
(Chen amp Steiner 1999) The determinants ofmanagerial ownership include the risk
debt and dividends which are treated as endogenous variable in the model Many
previous studies have found that managerial ownership has a signifIcant impact on
the levels of risk
Nevertheless Andreyeva (2001) claimed that the role of privatization in the evolution of a transparent private ownership structure is important to establish a
successful market The organizational financial structures and managerial behavior
of privatization transforms are the goals for the fIrm to maximize the profIt The
corporate governance system is a way to determine the ultimate success of
3
privatization to get the gains The ownership structure and corporate governance
systems from privatization will give impact on company performance This
provides existing knowledge for the policy implications of the transition
economies
The ownership structure of a corporation is considered as an endogenous
outcome ofdecisions that reflect the influence ofshareholders and oftrading on the
market for shares (Demsetz amp Villallonga 2001) The firms ownership structure
reflects the decisions made by the shareholders The ownership structure should be
influenced by the profit-maximizing interests of shareholders As a result there is
no systematic relation between variations in ownership structure and firm
performance Hence ownership structure is treated as an endogenous variable and
gives no evidence of a relation between profit rate and ownership concentration
The measurement of firm performance and ownership structure is not endogenous
in the estimation of the effect of ownership on performance It models ownership
structure as an endogenous variable and it examines two dimensions of this
structure to represent conflicting interests by the five largest shareholding interests
However Chu and Cheah (2004) argued that the ownership structures have an
effect on the development and performance of capital and debt market It is a high
concentration structure to distribute capital allocation in an efficiency economy
The ownership structure in capital market activeness can be promoted as investors
4
Pusat Khidruat Maklumat Akademik UNlVERSm MALAYSIA SARAWAK
can gam entry and exit easily In addition to that managers can control the
ownership and adjust the proportion ofdebt and equity to invest the capital and get
the gain Hence ownership structure plays an important role in the governance and
performance of firms
Craswell et al (1997) proved that the influence ofmanagerial and institutional
equity ownership is highly related to corporate performance They examined the
effects of both insider and institutional ownership of Australian corporate
performance Australian firms have significantly different legal and econOmIC
circumstances as compared to the firms in the US The fmdings indicate that there is
a weak relationship between institutional ownership and corporate performance
The result is found to be temporaly unstable and confined to large Australian
companies The evidence is not consistent with corporate performance related to
the level of institutional ownership A significant relationship between equity
ownership structure and corporate performance implies corrective transfers of
equity between insiders outsiders and the successful survival of firms with
effectively non-optimal ownership structures which casts doubt on the existence of
any generalized equilibrium Ifthe o~nership structure is endogenous the firms are
systematically related to equity ownership
5
In Malaysia the ownership concentration is weaker than other developed
countries and the institutional ownership is less than 20 ofthe outstanding shares
(Joher et aI 2006) The three ownership structures of corporation are institutional
ownership managerial ownership and individual ownership These three types of
ownership structures can affect ftrm performance and value by mitigating agency
costs of the firm Therefore the impact of institutional ownership on insider
ownership and corporate debt policy in Malaysia is investigated to provide
empirical evidence on corporate control in developed market
Various issues regarding the efficiency and the safety ofbanking industries are
increasing due to the financial crisis in 1997 (Barry et aI 2008) After the financial
crisis the banking system is reforme~ by bank regulators and they also carried out
several measures to provide efficient banking services to sustain the economy One
ofthe measures is when the government decided to change management ownership
and governance to avoid closure ofdistressed banks Moreover Asian governments
encouraged safe banks to merge with distressed banks to restore the financial
viability ofdmiddotistressed banks After the 1997 financial crisis the ownership structure
and the governance of banks are moified by bank restructuring program Hence
this study attempts to examine the impact ofownership structure on corporate debt
policy in Malaysian banking industry between from 2005 and 201 O
6
12 Definition of Ownership Structure
Generally ownership structure is defined as the identity of the equity owners
and distribution of equity regarding votes and capital These structures are
important in corporate governance to detennine the incentives of managers and
manage the economic efficiency of the corporations (Ownership Structure 2011)
Gursoyand Aydogan (1998) stipulated that ownership structure is categorized
into two dimensions which are ownership concentration and ownership mix
Ownership concentration refers to the distribution of the shares owned by a certain
number of individuals institutions and families On the other hand ownership mix
is related to the presence of certain institutions or groups such as government or
foreign partners among the shareholders These two categories of measures
incorporate both the influence power of shareholders as well as identity of owners
with their unique incentive mechanisms and preferences
7
121 The Types of Ownership Structure
Ownership structures are commonly divided into several types namely
managerial ownership family ownership and institutional ownership
(a) Managerial Ownership
According to Joher et al (2006) managerial ownership is an ownership which
consists of directors managers and other members in management to hold the
shares directly in a corporation The managerial ownership of equity can mitigate
the moral hazard problem between managers and shareholders Jensen and
Meckling (1976) argued that agency problem can reduce to moral hazard between
manager and owners if there were no debt contracts This is because managerial
ownership can be effective in aligning the managerial interest with outside
shareholders to mitigate the agency problems Datta et al (2004) also discovered
that the managers with high equity ownership prefer short maturity debt for
facilitating the agency conflicts of managerial discretion However Hashim and
Devi (2008) pointed out that the correlation between managerial and inside
ownership is a high positive relationship which is operated by the inside
management
8
(b) Family Ownership
Family ownership is a type ofownership that is owned entirely by the members
of a single family in a corporation The family ownership of corporate governance
is mostly operated by Asian firms According to Hashim and Devi (2008) family
ownership provides incentives to reduce the agency cost by aligning shareholders
and managerial interest They found that there is a positive and significant
relationship between family ownership and earnings quality They also proved that
family members who have greater expertise on firms operations can operate the
firms activities effectively to reduce the agency cost Nevertheless Villalonga and
Amit (2006) argued that family ownership makes profits for corporation when the
founder is active in the firm as the Chi~fExecutive Officer (CEO) or Chairman with
a hired CEO They also found that the agency conflicts exist between minority
shareholders and managers when the corporate government is performed by
descendant-CEO
(c) Institutional Ownership
Institutional ownership is an ownership of flllancial institution which includes
pension funds mutual funds closed-end fund life insurance companies savings
institutions and trust department of commercial banks (Joher et aI 2006)
According to Hashim and Devi (2008) the participation of institutional investors in
9
corporate governance plays an important role to protect minority shareholders
interest and mitigate the agency problem It is noted that there is a positive and
significant relationship between institutional ownership and earnings quality Thus
it indicates that the institutional have greater incentives to monitor firms activities
and the corporate government practices are improved by the involvement of
institutional investors participation
13 Definition of Corporate Debt Policy
Corporate debt policy is a non-government debt security which is divided into
short-term debt and long-term debt The short-term debt is issued as commercial
paper and long-term debt is issued as bonds It normally includes the council tax
housing rents business rates benefit overpayments legal costs and debtors
Besides the corporate debt policy is responsible to collect debt form citizens and
provides advice and practical help in the management ofvarious debts (Leeds City
Council Corporate Debt Policy 2010) It sets out the principles to maximize
collection performance from collecting debt Therefore it is the provision of
support mechanisms to all customer~
10
14 The Determinants of Capital Structure
According to the pecking order theory and agency theory the detenninants of
capital structure cover the profitability finn size tangibility growth opportunity
and firm risk These determinants of ownership structure will affect the firms
leverage or debt ratio
Banchuenvijit (2011) defined profitability as the determinant of capital
structure The pecking order theory prefers internal financing in which profitable
fInns will employ higher retained earning with higher profitability to hold less debt
Many empirical studies have found that there is a negative relationship between
~
profitability and leverage The fInn uses its own cash flow instead ofusing debt to
fmance its operations and investment opportunities when there is a negative sign
However Cespedes et al (2008) proved that the relationship between profitability
and leverage is a positive based on trade-off theory This is because the trade-off
theory is expected to show a positive sign when the firms debt level is higher It
implies that the higher the firms profitability the higher the potential tax shields
Pandey (2001) argued that the finn will employ high debt to gain tax benefits to get
higher profits based on interest tax sliield hypothesis proposed in the theory by
Modigliani and Miller (1963)
11
Besides firm size is found to be a positive detenninant of capital structure as
indicated in many previous studies However it implies a negative relation between
size and leverage when larger firms are expected to have less information
asymmetries in issuing debt or equity (Banchuenvijit 20 11) Chu and Cheah (2004)
pointed out that large firm size indicates the firm will share the risk and less asset
will be shared specificity between the firms founders On the other hand smaller
firm size and net cash flow will share the risk with large concentrated ownership
As stated by Pandey (200 I) large firms will employ higher amount of debt than
small firms because smaller firms would have less long-term debt and more
short-term debt due to the shareholders-lenders conflict Lamba and Stapledon
(2009) mentioned that larger firms tend to issue more shares than smaller finns and
are less likely to have a controlling shareholder
The term tangibility refers to tangible assets act as collateral and provides
security to lenders iffmancial distress based on trade-off hypothesis The firms are
expected have a high level of debt because of the higher tangible assets (Pandey
2001) Furthermore Banchuenvijit (2011) stated that there is a positive relationship
between tangibility and leverage when the firms are expected to issue high level of
debt can borrow on favorable terms with tangible assets that can be used as
collateral However there is a negative relationship between tangibility and
leverage when the firm has lower information asymmetries with tangible assets
Therefore it will cause equity issue to be less costly and lower the leverage ratios
12
352 Estimation Model 58
36 Diagnostic Checking Tests and Stability Tests 59
361 Histogram and Normality Test 59
362 Breush-Godfrey Serial Correlation LM Test 60
363 Heteroskedasticity 61
364 Ramseys RESET Test 62
365 CUSUM Test 63
366 CUSUM of Squares Test 64
CHAPTER 4 EMPIRICAL RESULTS AND DISCUSSIONS
40 Introduction 66
41 Descriptive Analysis 66
42 Pooled OLS Reslllts 68
421 Profitability of Return on Asset 69
422 Firm Risk 70
423 Firm Size 71
424 Growth Opportunity 71
425 Managerial Ownership 72
426 Institutional Ownenhip 73
43 Diagnostic Checking Tests and Stability Tests Results 73
431 Normality Test Results 74
432Breush-Godfrey Serial Correlation LM Test 75
Results
433Heteroskedasticity Test Resuts Based on ARCH 75
ix
44
CHAPTERS
50
51
52
53
54
REFERENCES
364 Ramseys RESET Test Results
365 CUSUM Test Results
366 CUSUM of Squares Test Results
Chapter Remark
CONCLUSION AND RECOMMENDATION
Introduction
Conclusion Remark
Policy Implication
Recommendation
Limitation of the Study
76
77
78
80
83
83
86
87
88
90
x
1
2
3
4
5
6
7
8
LIST OF TABLES
Table Title Page
Summary of the Literature Review 38
Summary of the Measurement Variables 54
Descriptive Statistics ofDependent and Independent Variables 67
Correlation Matrix of the Debt Ratio and Explanatory Variables 68
Pooled OLS Regressions Results of Debt Ratio Analysis 69
Breush-Godfrey Serial Correlation LM Test Results 75
ARCH Test Results 76
Ramseys RESET Test Results 77
xi
LIST OF FIGURES
Figure Title Page
1 Conceptual Framework ofthe Impact of Ownership Structure 48
on Debt Policy
2 The Normality Test Results 74
3 CUSUM Test Results 78
4 CUSUM of Squares Test Results 79
xii
CHAPTER
INTRODUCTION
10 Overview of the Study
Corporate governance is an important aspect ofthe corporate environment It is
related to corporate control and ownership structure of a firm in a corporation
According to Hitt et aI (1999) strategic management and performance of firms are
regulated and controlled by corporate governance Besides it is used in
organization to establish command between firms owners and its top-level
managers whose interests may be in conflict Hence the separation of interests
among stakeholders in corporation csm lead to agency problem
In Malaysia corporate governance is highly concentrated in the hands of large
shareholders or controlling shareholders The shareholders are given the rights to
provide incentives that can affect decision-making in the corporation and exercise
the voting control over shares which may diverge significantly in cash flow rights
(Ishak amp Napier 2006) According to Ghazali (2007) family-owned and
government-owned companies are the common types of ownership structure in
Malaysia Generally Malaysia has five largest shareholders which own 60 or
more of the public listed companies equity The top largest shareholders are the
nominee companies followed by non-financial companies and the government
Nor et al (2010) stated that corporate governance in Malaysia vanes
according to the ownership structure of the corporate sector Tne dispersed
ownership situation in Malaysia is observed to be similar in United States of
America (USA) and United Kingdoms (UK) common law legal system The
ownership is observed from two perspectives which are ownership concentration
and the components of ownership concentration They are used as a proxy for
corporate governance mechanisms Besides the ownership can be categorized into
institutional ownership government ownership and the nominees as well as the
individuals who own the companies As further added by Ayoib et al (2003) the
government has established the Finance Committee on Corporate Governance and
the Malaysian Institute ofCorporate Governance (MICG) to review and strengthen
corporate governance in Malaysia In addition the Malaysian Institute of
Accountants (MliA) the Kuala Lumpur Stock Exchange (KLSE) and the Securities
Commission (SC) were fonned to enhance the corporate governance in Malaysia
Moreover the Malaysian government has changed the merged banking groups
compositionof ownership structure in the post-crisis years When the bank merger
programme was completed to consolidate the number of domestic commercial
banks were reduced from 20 in 1999 to lOin 2001 (Lum amp Koh 2007) Hence the
study concluded that the consolidation programme has resulted in larger and better
capitalised domestic banking institutions but do not have any significant impact on
the composition ofownership structure in the banking industry
2
11 Background of the Study
Agency problem is a popular issue that exists commonly in a corporation
There are several studies which provide evidence on the effects of agency conflicts
on corporate governance Rimbey (1998) found that the distribution of shares
among the outside shareholders is a device to mitigate agency costs and affect the
fIrms capital structure Therefore ownership represents a power that can be used
either to support or oppose existing management that is related to the concentration
or dispersion of the power
On the other hand managerial ownership is an important internal monitoring
force as a determinant of risk The risk is a central theme in financial economics
which is related to managerial ownership corporate debt and dividend policies
(Chen amp Steiner 1999) The determinants ofmanagerial ownership include the risk
debt and dividends which are treated as endogenous variable in the model Many
previous studies have found that managerial ownership has a signifIcant impact on
the levels of risk
Nevertheless Andreyeva (2001) claimed that the role of privatization in the evolution of a transparent private ownership structure is important to establish a
successful market The organizational financial structures and managerial behavior
of privatization transforms are the goals for the fIrm to maximize the profIt The
corporate governance system is a way to determine the ultimate success of
3
privatization to get the gains The ownership structure and corporate governance
systems from privatization will give impact on company performance This
provides existing knowledge for the policy implications of the transition
economies
The ownership structure of a corporation is considered as an endogenous
outcome ofdecisions that reflect the influence ofshareholders and oftrading on the
market for shares (Demsetz amp Villallonga 2001) The firms ownership structure
reflects the decisions made by the shareholders The ownership structure should be
influenced by the profit-maximizing interests of shareholders As a result there is
no systematic relation between variations in ownership structure and firm
performance Hence ownership structure is treated as an endogenous variable and
gives no evidence of a relation between profit rate and ownership concentration
The measurement of firm performance and ownership structure is not endogenous
in the estimation of the effect of ownership on performance It models ownership
structure as an endogenous variable and it examines two dimensions of this
structure to represent conflicting interests by the five largest shareholding interests
However Chu and Cheah (2004) argued that the ownership structures have an
effect on the development and performance of capital and debt market It is a high
concentration structure to distribute capital allocation in an efficiency economy
The ownership structure in capital market activeness can be promoted as investors
4
Pusat Khidruat Maklumat Akademik UNlVERSm MALAYSIA SARAWAK
can gam entry and exit easily In addition to that managers can control the
ownership and adjust the proportion ofdebt and equity to invest the capital and get
the gain Hence ownership structure plays an important role in the governance and
performance of firms
Craswell et al (1997) proved that the influence ofmanagerial and institutional
equity ownership is highly related to corporate performance They examined the
effects of both insider and institutional ownership of Australian corporate
performance Australian firms have significantly different legal and econOmIC
circumstances as compared to the firms in the US The fmdings indicate that there is
a weak relationship between institutional ownership and corporate performance
The result is found to be temporaly unstable and confined to large Australian
companies The evidence is not consistent with corporate performance related to
the level of institutional ownership A significant relationship between equity
ownership structure and corporate performance implies corrective transfers of
equity between insiders outsiders and the successful survival of firms with
effectively non-optimal ownership structures which casts doubt on the existence of
any generalized equilibrium Ifthe o~nership structure is endogenous the firms are
systematically related to equity ownership
5
In Malaysia the ownership concentration is weaker than other developed
countries and the institutional ownership is less than 20 ofthe outstanding shares
(Joher et aI 2006) The three ownership structures of corporation are institutional
ownership managerial ownership and individual ownership These three types of
ownership structures can affect ftrm performance and value by mitigating agency
costs of the firm Therefore the impact of institutional ownership on insider
ownership and corporate debt policy in Malaysia is investigated to provide
empirical evidence on corporate control in developed market
Various issues regarding the efficiency and the safety ofbanking industries are
increasing due to the financial crisis in 1997 (Barry et aI 2008) After the financial
crisis the banking system is reforme~ by bank regulators and they also carried out
several measures to provide efficient banking services to sustain the economy One
ofthe measures is when the government decided to change management ownership
and governance to avoid closure ofdistressed banks Moreover Asian governments
encouraged safe banks to merge with distressed banks to restore the financial
viability ofdmiddotistressed banks After the 1997 financial crisis the ownership structure
and the governance of banks are moified by bank restructuring program Hence
this study attempts to examine the impact ofownership structure on corporate debt
policy in Malaysian banking industry between from 2005 and 201 O
6
12 Definition of Ownership Structure
Generally ownership structure is defined as the identity of the equity owners
and distribution of equity regarding votes and capital These structures are
important in corporate governance to detennine the incentives of managers and
manage the economic efficiency of the corporations (Ownership Structure 2011)
Gursoyand Aydogan (1998) stipulated that ownership structure is categorized
into two dimensions which are ownership concentration and ownership mix
Ownership concentration refers to the distribution of the shares owned by a certain
number of individuals institutions and families On the other hand ownership mix
is related to the presence of certain institutions or groups such as government or
foreign partners among the shareholders These two categories of measures
incorporate both the influence power of shareholders as well as identity of owners
with their unique incentive mechanisms and preferences
7
121 The Types of Ownership Structure
Ownership structures are commonly divided into several types namely
managerial ownership family ownership and institutional ownership
(a) Managerial Ownership
According to Joher et al (2006) managerial ownership is an ownership which
consists of directors managers and other members in management to hold the
shares directly in a corporation The managerial ownership of equity can mitigate
the moral hazard problem between managers and shareholders Jensen and
Meckling (1976) argued that agency problem can reduce to moral hazard between
manager and owners if there were no debt contracts This is because managerial
ownership can be effective in aligning the managerial interest with outside
shareholders to mitigate the agency problems Datta et al (2004) also discovered
that the managers with high equity ownership prefer short maturity debt for
facilitating the agency conflicts of managerial discretion However Hashim and
Devi (2008) pointed out that the correlation between managerial and inside
ownership is a high positive relationship which is operated by the inside
management
8
(b) Family Ownership
Family ownership is a type ofownership that is owned entirely by the members
of a single family in a corporation The family ownership of corporate governance
is mostly operated by Asian firms According to Hashim and Devi (2008) family
ownership provides incentives to reduce the agency cost by aligning shareholders
and managerial interest They found that there is a positive and significant
relationship between family ownership and earnings quality They also proved that
family members who have greater expertise on firms operations can operate the
firms activities effectively to reduce the agency cost Nevertheless Villalonga and
Amit (2006) argued that family ownership makes profits for corporation when the
founder is active in the firm as the Chi~fExecutive Officer (CEO) or Chairman with
a hired CEO They also found that the agency conflicts exist between minority
shareholders and managers when the corporate government is performed by
descendant-CEO
(c) Institutional Ownership
Institutional ownership is an ownership of flllancial institution which includes
pension funds mutual funds closed-end fund life insurance companies savings
institutions and trust department of commercial banks (Joher et aI 2006)
According to Hashim and Devi (2008) the participation of institutional investors in
9
corporate governance plays an important role to protect minority shareholders
interest and mitigate the agency problem It is noted that there is a positive and
significant relationship between institutional ownership and earnings quality Thus
it indicates that the institutional have greater incentives to monitor firms activities
and the corporate government practices are improved by the involvement of
institutional investors participation
13 Definition of Corporate Debt Policy
Corporate debt policy is a non-government debt security which is divided into
short-term debt and long-term debt The short-term debt is issued as commercial
paper and long-term debt is issued as bonds It normally includes the council tax
housing rents business rates benefit overpayments legal costs and debtors
Besides the corporate debt policy is responsible to collect debt form citizens and
provides advice and practical help in the management ofvarious debts (Leeds City
Council Corporate Debt Policy 2010) It sets out the principles to maximize
collection performance from collecting debt Therefore it is the provision of
support mechanisms to all customer~
10
14 The Determinants of Capital Structure
According to the pecking order theory and agency theory the detenninants of
capital structure cover the profitability finn size tangibility growth opportunity
and firm risk These determinants of ownership structure will affect the firms
leverage or debt ratio
Banchuenvijit (2011) defined profitability as the determinant of capital
structure The pecking order theory prefers internal financing in which profitable
fInns will employ higher retained earning with higher profitability to hold less debt
Many empirical studies have found that there is a negative relationship between
~
profitability and leverage The fInn uses its own cash flow instead ofusing debt to
fmance its operations and investment opportunities when there is a negative sign
However Cespedes et al (2008) proved that the relationship between profitability
and leverage is a positive based on trade-off theory This is because the trade-off
theory is expected to show a positive sign when the firms debt level is higher It
implies that the higher the firms profitability the higher the potential tax shields
Pandey (2001) argued that the finn will employ high debt to gain tax benefits to get
higher profits based on interest tax sliield hypothesis proposed in the theory by
Modigliani and Miller (1963)
11
Besides firm size is found to be a positive detenninant of capital structure as
indicated in many previous studies However it implies a negative relation between
size and leverage when larger firms are expected to have less information
asymmetries in issuing debt or equity (Banchuenvijit 20 11) Chu and Cheah (2004)
pointed out that large firm size indicates the firm will share the risk and less asset
will be shared specificity between the firms founders On the other hand smaller
firm size and net cash flow will share the risk with large concentrated ownership
As stated by Pandey (200 I) large firms will employ higher amount of debt than
small firms because smaller firms would have less long-term debt and more
short-term debt due to the shareholders-lenders conflict Lamba and Stapledon
(2009) mentioned that larger firms tend to issue more shares than smaller finns and
are less likely to have a controlling shareholder
The term tangibility refers to tangible assets act as collateral and provides
security to lenders iffmancial distress based on trade-off hypothesis The firms are
expected have a high level of debt because of the higher tangible assets (Pandey
2001) Furthermore Banchuenvijit (2011) stated that there is a positive relationship
between tangibility and leverage when the firms are expected to issue high level of
debt can borrow on favorable terms with tangible assets that can be used as
collateral However there is a negative relationship between tangibility and
leverage when the firm has lower information asymmetries with tangible assets
Therefore it will cause equity issue to be less costly and lower the leverage ratios
12
44
CHAPTERS
50
51
52
53
54
REFERENCES
364 Ramseys RESET Test Results
365 CUSUM Test Results
366 CUSUM of Squares Test Results
Chapter Remark
CONCLUSION AND RECOMMENDATION
Introduction
Conclusion Remark
Policy Implication
Recommendation
Limitation of the Study
76
77
78
80
83
83
86
87
88
90
x
1
2
3
4
5
6
7
8
LIST OF TABLES
Table Title Page
Summary of the Literature Review 38
Summary of the Measurement Variables 54
Descriptive Statistics ofDependent and Independent Variables 67
Correlation Matrix of the Debt Ratio and Explanatory Variables 68
Pooled OLS Regressions Results of Debt Ratio Analysis 69
Breush-Godfrey Serial Correlation LM Test Results 75
ARCH Test Results 76
Ramseys RESET Test Results 77
xi
LIST OF FIGURES
Figure Title Page
1 Conceptual Framework ofthe Impact of Ownership Structure 48
on Debt Policy
2 The Normality Test Results 74
3 CUSUM Test Results 78
4 CUSUM of Squares Test Results 79
xii
CHAPTER
INTRODUCTION
10 Overview of the Study
Corporate governance is an important aspect ofthe corporate environment It is
related to corporate control and ownership structure of a firm in a corporation
According to Hitt et aI (1999) strategic management and performance of firms are
regulated and controlled by corporate governance Besides it is used in
organization to establish command between firms owners and its top-level
managers whose interests may be in conflict Hence the separation of interests
among stakeholders in corporation csm lead to agency problem
In Malaysia corporate governance is highly concentrated in the hands of large
shareholders or controlling shareholders The shareholders are given the rights to
provide incentives that can affect decision-making in the corporation and exercise
the voting control over shares which may diverge significantly in cash flow rights
(Ishak amp Napier 2006) According to Ghazali (2007) family-owned and
government-owned companies are the common types of ownership structure in
Malaysia Generally Malaysia has five largest shareholders which own 60 or
more of the public listed companies equity The top largest shareholders are the
nominee companies followed by non-financial companies and the government
Nor et al (2010) stated that corporate governance in Malaysia vanes
according to the ownership structure of the corporate sector Tne dispersed
ownership situation in Malaysia is observed to be similar in United States of
America (USA) and United Kingdoms (UK) common law legal system The
ownership is observed from two perspectives which are ownership concentration
and the components of ownership concentration They are used as a proxy for
corporate governance mechanisms Besides the ownership can be categorized into
institutional ownership government ownership and the nominees as well as the
individuals who own the companies As further added by Ayoib et al (2003) the
government has established the Finance Committee on Corporate Governance and
the Malaysian Institute ofCorporate Governance (MICG) to review and strengthen
corporate governance in Malaysia In addition the Malaysian Institute of
Accountants (MliA) the Kuala Lumpur Stock Exchange (KLSE) and the Securities
Commission (SC) were fonned to enhance the corporate governance in Malaysia
Moreover the Malaysian government has changed the merged banking groups
compositionof ownership structure in the post-crisis years When the bank merger
programme was completed to consolidate the number of domestic commercial
banks were reduced from 20 in 1999 to lOin 2001 (Lum amp Koh 2007) Hence the
study concluded that the consolidation programme has resulted in larger and better
capitalised domestic banking institutions but do not have any significant impact on
the composition ofownership structure in the banking industry
2
11 Background of the Study
Agency problem is a popular issue that exists commonly in a corporation
There are several studies which provide evidence on the effects of agency conflicts
on corporate governance Rimbey (1998) found that the distribution of shares
among the outside shareholders is a device to mitigate agency costs and affect the
fIrms capital structure Therefore ownership represents a power that can be used
either to support or oppose existing management that is related to the concentration
or dispersion of the power
On the other hand managerial ownership is an important internal monitoring
force as a determinant of risk The risk is a central theme in financial economics
which is related to managerial ownership corporate debt and dividend policies
(Chen amp Steiner 1999) The determinants ofmanagerial ownership include the risk
debt and dividends which are treated as endogenous variable in the model Many
previous studies have found that managerial ownership has a signifIcant impact on
the levels of risk
Nevertheless Andreyeva (2001) claimed that the role of privatization in the evolution of a transparent private ownership structure is important to establish a
successful market The organizational financial structures and managerial behavior
of privatization transforms are the goals for the fIrm to maximize the profIt The
corporate governance system is a way to determine the ultimate success of
3
privatization to get the gains The ownership structure and corporate governance
systems from privatization will give impact on company performance This
provides existing knowledge for the policy implications of the transition
economies
The ownership structure of a corporation is considered as an endogenous
outcome ofdecisions that reflect the influence ofshareholders and oftrading on the
market for shares (Demsetz amp Villallonga 2001) The firms ownership structure
reflects the decisions made by the shareholders The ownership structure should be
influenced by the profit-maximizing interests of shareholders As a result there is
no systematic relation between variations in ownership structure and firm
performance Hence ownership structure is treated as an endogenous variable and
gives no evidence of a relation between profit rate and ownership concentration
The measurement of firm performance and ownership structure is not endogenous
in the estimation of the effect of ownership on performance It models ownership
structure as an endogenous variable and it examines two dimensions of this
structure to represent conflicting interests by the five largest shareholding interests
However Chu and Cheah (2004) argued that the ownership structures have an
effect on the development and performance of capital and debt market It is a high
concentration structure to distribute capital allocation in an efficiency economy
The ownership structure in capital market activeness can be promoted as investors
4
Pusat Khidruat Maklumat Akademik UNlVERSm MALAYSIA SARAWAK
can gam entry and exit easily In addition to that managers can control the
ownership and adjust the proportion ofdebt and equity to invest the capital and get
the gain Hence ownership structure plays an important role in the governance and
performance of firms
Craswell et al (1997) proved that the influence ofmanagerial and institutional
equity ownership is highly related to corporate performance They examined the
effects of both insider and institutional ownership of Australian corporate
performance Australian firms have significantly different legal and econOmIC
circumstances as compared to the firms in the US The fmdings indicate that there is
a weak relationship between institutional ownership and corporate performance
The result is found to be temporaly unstable and confined to large Australian
companies The evidence is not consistent with corporate performance related to
the level of institutional ownership A significant relationship between equity
ownership structure and corporate performance implies corrective transfers of
equity between insiders outsiders and the successful survival of firms with
effectively non-optimal ownership structures which casts doubt on the existence of
any generalized equilibrium Ifthe o~nership structure is endogenous the firms are
systematically related to equity ownership
5
In Malaysia the ownership concentration is weaker than other developed
countries and the institutional ownership is less than 20 ofthe outstanding shares
(Joher et aI 2006) The three ownership structures of corporation are institutional
ownership managerial ownership and individual ownership These three types of
ownership structures can affect ftrm performance and value by mitigating agency
costs of the firm Therefore the impact of institutional ownership on insider
ownership and corporate debt policy in Malaysia is investigated to provide
empirical evidence on corporate control in developed market
Various issues regarding the efficiency and the safety ofbanking industries are
increasing due to the financial crisis in 1997 (Barry et aI 2008) After the financial
crisis the banking system is reforme~ by bank regulators and they also carried out
several measures to provide efficient banking services to sustain the economy One
ofthe measures is when the government decided to change management ownership
and governance to avoid closure ofdistressed banks Moreover Asian governments
encouraged safe banks to merge with distressed banks to restore the financial
viability ofdmiddotistressed banks After the 1997 financial crisis the ownership structure
and the governance of banks are moified by bank restructuring program Hence
this study attempts to examine the impact ofownership structure on corporate debt
policy in Malaysian banking industry between from 2005 and 201 O
6
12 Definition of Ownership Structure
Generally ownership structure is defined as the identity of the equity owners
and distribution of equity regarding votes and capital These structures are
important in corporate governance to detennine the incentives of managers and
manage the economic efficiency of the corporations (Ownership Structure 2011)
Gursoyand Aydogan (1998) stipulated that ownership structure is categorized
into two dimensions which are ownership concentration and ownership mix
Ownership concentration refers to the distribution of the shares owned by a certain
number of individuals institutions and families On the other hand ownership mix
is related to the presence of certain institutions or groups such as government or
foreign partners among the shareholders These two categories of measures
incorporate both the influence power of shareholders as well as identity of owners
with their unique incentive mechanisms and preferences
7
121 The Types of Ownership Structure
Ownership structures are commonly divided into several types namely
managerial ownership family ownership and institutional ownership
(a) Managerial Ownership
According to Joher et al (2006) managerial ownership is an ownership which
consists of directors managers and other members in management to hold the
shares directly in a corporation The managerial ownership of equity can mitigate
the moral hazard problem between managers and shareholders Jensen and
Meckling (1976) argued that agency problem can reduce to moral hazard between
manager and owners if there were no debt contracts This is because managerial
ownership can be effective in aligning the managerial interest with outside
shareholders to mitigate the agency problems Datta et al (2004) also discovered
that the managers with high equity ownership prefer short maturity debt for
facilitating the agency conflicts of managerial discretion However Hashim and
Devi (2008) pointed out that the correlation between managerial and inside
ownership is a high positive relationship which is operated by the inside
management
8
(b) Family Ownership
Family ownership is a type ofownership that is owned entirely by the members
of a single family in a corporation The family ownership of corporate governance
is mostly operated by Asian firms According to Hashim and Devi (2008) family
ownership provides incentives to reduce the agency cost by aligning shareholders
and managerial interest They found that there is a positive and significant
relationship between family ownership and earnings quality They also proved that
family members who have greater expertise on firms operations can operate the
firms activities effectively to reduce the agency cost Nevertheless Villalonga and
Amit (2006) argued that family ownership makes profits for corporation when the
founder is active in the firm as the Chi~fExecutive Officer (CEO) or Chairman with
a hired CEO They also found that the agency conflicts exist between minority
shareholders and managers when the corporate government is performed by
descendant-CEO
(c) Institutional Ownership
Institutional ownership is an ownership of flllancial institution which includes
pension funds mutual funds closed-end fund life insurance companies savings
institutions and trust department of commercial banks (Joher et aI 2006)
According to Hashim and Devi (2008) the participation of institutional investors in
9
corporate governance plays an important role to protect minority shareholders
interest and mitigate the agency problem It is noted that there is a positive and
significant relationship between institutional ownership and earnings quality Thus
it indicates that the institutional have greater incentives to monitor firms activities
and the corporate government practices are improved by the involvement of
institutional investors participation
13 Definition of Corporate Debt Policy
Corporate debt policy is a non-government debt security which is divided into
short-term debt and long-term debt The short-term debt is issued as commercial
paper and long-term debt is issued as bonds It normally includes the council tax
housing rents business rates benefit overpayments legal costs and debtors
Besides the corporate debt policy is responsible to collect debt form citizens and
provides advice and practical help in the management ofvarious debts (Leeds City
Council Corporate Debt Policy 2010) It sets out the principles to maximize
collection performance from collecting debt Therefore it is the provision of
support mechanisms to all customer~
10
14 The Determinants of Capital Structure
According to the pecking order theory and agency theory the detenninants of
capital structure cover the profitability finn size tangibility growth opportunity
and firm risk These determinants of ownership structure will affect the firms
leverage or debt ratio
Banchuenvijit (2011) defined profitability as the determinant of capital
structure The pecking order theory prefers internal financing in which profitable
fInns will employ higher retained earning with higher profitability to hold less debt
Many empirical studies have found that there is a negative relationship between
~
profitability and leverage The fInn uses its own cash flow instead ofusing debt to
fmance its operations and investment opportunities when there is a negative sign
However Cespedes et al (2008) proved that the relationship between profitability
and leverage is a positive based on trade-off theory This is because the trade-off
theory is expected to show a positive sign when the firms debt level is higher It
implies that the higher the firms profitability the higher the potential tax shields
Pandey (2001) argued that the finn will employ high debt to gain tax benefits to get
higher profits based on interest tax sliield hypothesis proposed in the theory by
Modigliani and Miller (1963)
11
Besides firm size is found to be a positive detenninant of capital structure as
indicated in many previous studies However it implies a negative relation between
size and leverage when larger firms are expected to have less information
asymmetries in issuing debt or equity (Banchuenvijit 20 11) Chu and Cheah (2004)
pointed out that large firm size indicates the firm will share the risk and less asset
will be shared specificity between the firms founders On the other hand smaller
firm size and net cash flow will share the risk with large concentrated ownership
As stated by Pandey (200 I) large firms will employ higher amount of debt than
small firms because smaller firms would have less long-term debt and more
short-term debt due to the shareholders-lenders conflict Lamba and Stapledon
(2009) mentioned that larger firms tend to issue more shares than smaller finns and
are less likely to have a controlling shareholder
The term tangibility refers to tangible assets act as collateral and provides
security to lenders iffmancial distress based on trade-off hypothesis The firms are
expected have a high level of debt because of the higher tangible assets (Pandey
2001) Furthermore Banchuenvijit (2011) stated that there is a positive relationship
between tangibility and leverage when the firms are expected to issue high level of
debt can borrow on favorable terms with tangible assets that can be used as
collateral However there is a negative relationship between tangibility and
leverage when the firm has lower information asymmetries with tangible assets
Therefore it will cause equity issue to be less costly and lower the leverage ratios
12
1
2
3
4
5
6
7
8
LIST OF TABLES
Table Title Page
Summary of the Literature Review 38
Summary of the Measurement Variables 54
Descriptive Statistics ofDependent and Independent Variables 67
Correlation Matrix of the Debt Ratio and Explanatory Variables 68
Pooled OLS Regressions Results of Debt Ratio Analysis 69
Breush-Godfrey Serial Correlation LM Test Results 75
ARCH Test Results 76
Ramseys RESET Test Results 77
xi
LIST OF FIGURES
Figure Title Page
1 Conceptual Framework ofthe Impact of Ownership Structure 48
on Debt Policy
2 The Normality Test Results 74
3 CUSUM Test Results 78
4 CUSUM of Squares Test Results 79
xii
CHAPTER
INTRODUCTION
10 Overview of the Study
Corporate governance is an important aspect ofthe corporate environment It is
related to corporate control and ownership structure of a firm in a corporation
According to Hitt et aI (1999) strategic management and performance of firms are
regulated and controlled by corporate governance Besides it is used in
organization to establish command between firms owners and its top-level
managers whose interests may be in conflict Hence the separation of interests
among stakeholders in corporation csm lead to agency problem
In Malaysia corporate governance is highly concentrated in the hands of large
shareholders or controlling shareholders The shareholders are given the rights to
provide incentives that can affect decision-making in the corporation and exercise
the voting control over shares which may diverge significantly in cash flow rights
(Ishak amp Napier 2006) According to Ghazali (2007) family-owned and
government-owned companies are the common types of ownership structure in
Malaysia Generally Malaysia has five largest shareholders which own 60 or
more of the public listed companies equity The top largest shareholders are the
nominee companies followed by non-financial companies and the government
Nor et al (2010) stated that corporate governance in Malaysia vanes
according to the ownership structure of the corporate sector Tne dispersed
ownership situation in Malaysia is observed to be similar in United States of
America (USA) and United Kingdoms (UK) common law legal system The
ownership is observed from two perspectives which are ownership concentration
and the components of ownership concentration They are used as a proxy for
corporate governance mechanisms Besides the ownership can be categorized into
institutional ownership government ownership and the nominees as well as the
individuals who own the companies As further added by Ayoib et al (2003) the
government has established the Finance Committee on Corporate Governance and
the Malaysian Institute ofCorporate Governance (MICG) to review and strengthen
corporate governance in Malaysia In addition the Malaysian Institute of
Accountants (MliA) the Kuala Lumpur Stock Exchange (KLSE) and the Securities
Commission (SC) were fonned to enhance the corporate governance in Malaysia
Moreover the Malaysian government has changed the merged banking groups
compositionof ownership structure in the post-crisis years When the bank merger
programme was completed to consolidate the number of domestic commercial
banks were reduced from 20 in 1999 to lOin 2001 (Lum amp Koh 2007) Hence the
study concluded that the consolidation programme has resulted in larger and better
capitalised domestic banking institutions but do not have any significant impact on
the composition ofownership structure in the banking industry
2
11 Background of the Study
Agency problem is a popular issue that exists commonly in a corporation
There are several studies which provide evidence on the effects of agency conflicts
on corporate governance Rimbey (1998) found that the distribution of shares
among the outside shareholders is a device to mitigate agency costs and affect the
fIrms capital structure Therefore ownership represents a power that can be used
either to support or oppose existing management that is related to the concentration
or dispersion of the power
On the other hand managerial ownership is an important internal monitoring
force as a determinant of risk The risk is a central theme in financial economics
which is related to managerial ownership corporate debt and dividend policies
(Chen amp Steiner 1999) The determinants ofmanagerial ownership include the risk
debt and dividends which are treated as endogenous variable in the model Many
previous studies have found that managerial ownership has a signifIcant impact on
the levels of risk
Nevertheless Andreyeva (2001) claimed that the role of privatization in the evolution of a transparent private ownership structure is important to establish a
successful market The organizational financial structures and managerial behavior
of privatization transforms are the goals for the fIrm to maximize the profIt The
corporate governance system is a way to determine the ultimate success of
3
privatization to get the gains The ownership structure and corporate governance
systems from privatization will give impact on company performance This
provides existing knowledge for the policy implications of the transition
economies
The ownership structure of a corporation is considered as an endogenous
outcome ofdecisions that reflect the influence ofshareholders and oftrading on the
market for shares (Demsetz amp Villallonga 2001) The firms ownership structure
reflects the decisions made by the shareholders The ownership structure should be
influenced by the profit-maximizing interests of shareholders As a result there is
no systematic relation between variations in ownership structure and firm
performance Hence ownership structure is treated as an endogenous variable and
gives no evidence of a relation between profit rate and ownership concentration
The measurement of firm performance and ownership structure is not endogenous
in the estimation of the effect of ownership on performance It models ownership
structure as an endogenous variable and it examines two dimensions of this
structure to represent conflicting interests by the five largest shareholding interests
However Chu and Cheah (2004) argued that the ownership structures have an
effect on the development and performance of capital and debt market It is a high
concentration structure to distribute capital allocation in an efficiency economy
The ownership structure in capital market activeness can be promoted as investors
4
Pusat Khidruat Maklumat Akademik UNlVERSm MALAYSIA SARAWAK
can gam entry and exit easily In addition to that managers can control the
ownership and adjust the proportion ofdebt and equity to invest the capital and get
the gain Hence ownership structure plays an important role in the governance and
performance of firms
Craswell et al (1997) proved that the influence ofmanagerial and institutional
equity ownership is highly related to corporate performance They examined the
effects of both insider and institutional ownership of Australian corporate
performance Australian firms have significantly different legal and econOmIC
circumstances as compared to the firms in the US The fmdings indicate that there is
a weak relationship between institutional ownership and corporate performance
The result is found to be temporaly unstable and confined to large Australian
companies The evidence is not consistent with corporate performance related to
the level of institutional ownership A significant relationship between equity
ownership structure and corporate performance implies corrective transfers of
equity between insiders outsiders and the successful survival of firms with
effectively non-optimal ownership structures which casts doubt on the existence of
any generalized equilibrium Ifthe o~nership structure is endogenous the firms are
systematically related to equity ownership
5
In Malaysia the ownership concentration is weaker than other developed
countries and the institutional ownership is less than 20 ofthe outstanding shares
(Joher et aI 2006) The three ownership structures of corporation are institutional
ownership managerial ownership and individual ownership These three types of
ownership structures can affect ftrm performance and value by mitigating agency
costs of the firm Therefore the impact of institutional ownership on insider
ownership and corporate debt policy in Malaysia is investigated to provide
empirical evidence on corporate control in developed market
Various issues regarding the efficiency and the safety ofbanking industries are
increasing due to the financial crisis in 1997 (Barry et aI 2008) After the financial
crisis the banking system is reforme~ by bank regulators and they also carried out
several measures to provide efficient banking services to sustain the economy One
ofthe measures is when the government decided to change management ownership
and governance to avoid closure ofdistressed banks Moreover Asian governments
encouraged safe banks to merge with distressed banks to restore the financial
viability ofdmiddotistressed banks After the 1997 financial crisis the ownership structure
and the governance of banks are moified by bank restructuring program Hence
this study attempts to examine the impact ofownership structure on corporate debt
policy in Malaysian banking industry between from 2005 and 201 O
6
12 Definition of Ownership Structure
Generally ownership structure is defined as the identity of the equity owners
and distribution of equity regarding votes and capital These structures are
important in corporate governance to detennine the incentives of managers and
manage the economic efficiency of the corporations (Ownership Structure 2011)
Gursoyand Aydogan (1998) stipulated that ownership structure is categorized
into two dimensions which are ownership concentration and ownership mix
Ownership concentration refers to the distribution of the shares owned by a certain
number of individuals institutions and families On the other hand ownership mix
is related to the presence of certain institutions or groups such as government or
foreign partners among the shareholders These two categories of measures
incorporate both the influence power of shareholders as well as identity of owners
with their unique incentive mechanisms and preferences
7
121 The Types of Ownership Structure
Ownership structures are commonly divided into several types namely
managerial ownership family ownership and institutional ownership
(a) Managerial Ownership
According to Joher et al (2006) managerial ownership is an ownership which
consists of directors managers and other members in management to hold the
shares directly in a corporation The managerial ownership of equity can mitigate
the moral hazard problem between managers and shareholders Jensen and
Meckling (1976) argued that agency problem can reduce to moral hazard between
manager and owners if there were no debt contracts This is because managerial
ownership can be effective in aligning the managerial interest with outside
shareholders to mitigate the agency problems Datta et al (2004) also discovered
that the managers with high equity ownership prefer short maturity debt for
facilitating the agency conflicts of managerial discretion However Hashim and
Devi (2008) pointed out that the correlation between managerial and inside
ownership is a high positive relationship which is operated by the inside
management
8
(b) Family Ownership
Family ownership is a type ofownership that is owned entirely by the members
of a single family in a corporation The family ownership of corporate governance
is mostly operated by Asian firms According to Hashim and Devi (2008) family
ownership provides incentives to reduce the agency cost by aligning shareholders
and managerial interest They found that there is a positive and significant
relationship between family ownership and earnings quality They also proved that
family members who have greater expertise on firms operations can operate the
firms activities effectively to reduce the agency cost Nevertheless Villalonga and
Amit (2006) argued that family ownership makes profits for corporation when the
founder is active in the firm as the Chi~fExecutive Officer (CEO) or Chairman with
a hired CEO They also found that the agency conflicts exist between minority
shareholders and managers when the corporate government is performed by
descendant-CEO
(c) Institutional Ownership
Institutional ownership is an ownership of flllancial institution which includes
pension funds mutual funds closed-end fund life insurance companies savings
institutions and trust department of commercial banks (Joher et aI 2006)
According to Hashim and Devi (2008) the participation of institutional investors in
9
corporate governance plays an important role to protect minority shareholders
interest and mitigate the agency problem It is noted that there is a positive and
significant relationship between institutional ownership and earnings quality Thus
it indicates that the institutional have greater incentives to monitor firms activities
and the corporate government practices are improved by the involvement of
institutional investors participation
13 Definition of Corporate Debt Policy
Corporate debt policy is a non-government debt security which is divided into
short-term debt and long-term debt The short-term debt is issued as commercial
paper and long-term debt is issued as bonds It normally includes the council tax
housing rents business rates benefit overpayments legal costs and debtors
Besides the corporate debt policy is responsible to collect debt form citizens and
provides advice and practical help in the management ofvarious debts (Leeds City
Council Corporate Debt Policy 2010) It sets out the principles to maximize
collection performance from collecting debt Therefore it is the provision of
support mechanisms to all customer~
10
14 The Determinants of Capital Structure
According to the pecking order theory and agency theory the detenninants of
capital structure cover the profitability finn size tangibility growth opportunity
and firm risk These determinants of ownership structure will affect the firms
leverage or debt ratio
Banchuenvijit (2011) defined profitability as the determinant of capital
structure The pecking order theory prefers internal financing in which profitable
fInns will employ higher retained earning with higher profitability to hold less debt
Many empirical studies have found that there is a negative relationship between
~
profitability and leverage The fInn uses its own cash flow instead ofusing debt to
fmance its operations and investment opportunities when there is a negative sign
However Cespedes et al (2008) proved that the relationship between profitability
and leverage is a positive based on trade-off theory This is because the trade-off
theory is expected to show a positive sign when the firms debt level is higher It
implies that the higher the firms profitability the higher the potential tax shields
Pandey (2001) argued that the finn will employ high debt to gain tax benefits to get
higher profits based on interest tax sliield hypothesis proposed in the theory by
Modigliani and Miller (1963)
11
Besides firm size is found to be a positive detenninant of capital structure as
indicated in many previous studies However it implies a negative relation between
size and leverage when larger firms are expected to have less information
asymmetries in issuing debt or equity (Banchuenvijit 20 11) Chu and Cheah (2004)
pointed out that large firm size indicates the firm will share the risk and less asset
will be shared specificity between the firms founders On the other hand smaller
firm size and net cash flow will share the risk with large concentrated ownership
As stated by Pandey (200 I) large firms will employ higher amount of debt than
small firms because smaller firms would have less long-term debt and more
short-term debt due to the shareholders-lenders conflict Lamba and Stapledon
(2009) mentioned that larger firms tend to issue more shares than smaller finns and
are less likely to have a controlling shareholder
The term tangibility refers to tangible assets act as collateral and provides
security to lenders iffmancial distress based on trade-off hypothesis The firms are
expected have a high level of debt because of the higher tangible assets (Pandey
2001) Furthermore Banchuenvijit (2011) stated that there is a positive relationship
between tangibility and leverage when the firms are expected to issue high level of
debt can borrow on favorable terms with tangible assets that can be used as
collateral However there is a negative relationship between tangibility and
leverage when the firm has lower information asymmetries with tangible assets
Therefore it will cause equity issue to be less costly and lower the leverage ratios
12
LIST OF FIGURES
Figure Title Page
1 Conceptual Framework ofthe Impact of Ownership Structure 48
on Debt Policy
2 The Normality Test Results 74
3 CUSUM Test Results 78
4 CUSUM of Squares Test Results 79
xii
CHAPTER
INTRODUCTION
10 Overview of the Study
Corporate governance is an important aspect ofthe corporate environment It is
related to corporate control and ownership structure of a firm in a corporation
According to Hitt et aI (1999) strategic management and performance of firms are
regulated and controlled by corporate governance Besides it is used in
organization to establish command between firms owners and its top-level
managers whose interests may be in conflict Hence the separation of interests
among stakeholders in corporation csm lead to agency problem
In Malaysia corporate governance is highly concentrated in the hands of large
shareholders or controlling shareholders The shareholders are given the rights to
provide incentives that can affect decision-making in the corporation and exercise
the voting control over shares which may diverge significantly in cash flow rights
(Ishak amp Napier 2006) According to Ghazali (2007) family-owned and
government-owned companies are the common types of ownership structure in
Malaysia Generally Malaysia has five largest shareholders which own 60 or
more of the public listed companies equity The top largest shareholders are the
nominee companies followed by non-financial companies and the government
Nor et al (2010) stated that corporate governance in Malaysia vanes
according to the ownership structure of the corporate sector Tne dispersed
ownership situation in Malaysia is observed to be similar in United States of
America (USA) and United Kingdoms (UK) common law legal system The
ownership is observed from two perspectives which are ownership concentration
and the components of ownership concentration They are used as a proxy for
corporate governance mechanisms Besides the ownership can be categorized into
institutional ownership government ownership and the nominees as well as the
individuals who own the companies As further added by Ayoib et al (2003) the
government has established the Finance Committee on Corporate Governance and
the Malaysian Institute ofCorporate Governance (MICG) to review and strengthen
corporate governance in Malaysia In addition the Malaysian Institute of
Accountants (MliA) the Kuala Lumpur Stock Exchange (KLSE) and the Securities
Commission (SC) were fonned to enhance the corporate governance in Malaysia
Moreover the Malaysian government has changed the merged banking groups
compositionof ownership structure in the post-crisis years When the bank merger
programme was completed to consolidate the number of domestic commercial
banks were reduced from 20 in 1999 to lOin 2001 (Lum amp Koh 2007) Hence the
study concluded that the consolidation programme has resulted in larger and better
capitalised domestic banking institutions but do not have any significant impact on
the composition ofownership structure in the banking industry
2
11 Background of the Study
Agency problem is a popular issue that exists commonly in a corporation
There are several studies which provide evidence on the effects of agency conflicts
on corporate governance Rimbey (1998) found that the distribution of shares
among the outside shareholders is a device to mitigate agency costs and affect the
fIrms capital structure Therefore ownership represents a power that can be used
either to support or oppose existing management that is related to the concentration
or dispersion of the power
On the other hand managerial ownership is an important internal monitoring
force as a determinant of risk The risk is a central theme in financial economics
which is related to managerial ownership corporate debt and dividend policies
(Chen amp Steiner 1999) The determinants ofmanagerial ownership include the risk
debt and dividends which are treated as endogenous variable in the model Many
previous studies have found that managerial ownership has a signifIcant impact on
the levels of risk
Nevertheless Andreyeva (2001) claimed that the role of privatization in the evolution of a transparent private ownership structure is important to establish a
successful market The organizational financial structures and managerial behavior
of privatization transforms are the goals for the fIrm to maximize the profIt The
corporate governance system is a way to determine the ultimate success of
3
privatization to get the gains The ownership structure and corporate governance
systems from privatization will give impact on company performance This
provides existing knowledge for the policy implications of the transition
economies
The ownership structure of a corporation is considered as an endogenous
outcome ofdecisions that reflect the influence ofshareholders and oftrading on the
market for shares (Demsetz amp Villallonga 2001) The firms ownership structure
reflects the decisions made by the shareholders The ownership structure should be
influenced by the profit-maximizing interests of shareholders As a result there is
no systematic relation between variations in ownership structure and firm
performance Hence ownership structure is treated as an endogenous variable and
gives no evidence of a relation between profit rate and ownership concentration
The measurement of firm performance and ownership structure is not endogenous
in the estimation of the effect of ownership on performance It models ownership
structure as an endogenous variable and it examines two dimensions of this
structure to represent conflicting interests by the five largest shareholding interests
However Chu and Cheah (2004) argued that the ownership structures have an
effect on the development and performance of capital and debt market It is a high
concentration structure to distribute capital allocation in an efficiency economy
The ownership structure in capital market activeness can be promoted as investors
4
Pusat Khidruat Maklumat Akademik UNlVERSm MALAYSIA SARAWAK
can gam entry and exit easily In addition to that managers can control the
ownership and adjust the proportion ofdebt and equity to invest the capital and get
the gain Hence ownership structure plays an important role in the governance and
performance of firms
Craswell et al (1997) proved that the influence ofmanagerial and institutional
equity ownership is highly related to corporate performance They examined the
effects of both insider and institutional ownership of Australian corporate
performance Australian firms have significantly different legal and econOmIC
circumstances as compared to the firms in the US The fmdings indicate that there is
a weak relationship between institutional ownership and corporate performance
The result is found to be temporaly unstable and confined to large Australian
companies The evidence is not consistent with corporate performance related to
the level of institutional ownership A significant relationship between equity
ownership structure and corporate performance implies corrective transfers of
equity between insiders outsiders and the successful survival of firms with
effectively non-optimal ownership structures which casts doubt on the existence of
any generalized equilibrium Ifthe o~nership structure is endogenous the firms are
systematically related to equity ownership
5
In Malaysia the ownership concentration is weaker than other developed
countries and the institutional ownership is less than 20 ofthe outstanding shares
(Joher et aI 2006) The three ownership structures of corporation are institutional
ownership managerial ownership and individual ownership These three types of
ownership structures can affect ftrm performance and value by mitigating agency
costs of the firm Therefore the impact of institutional ownership on insider
ownership and corporate debt policy in Malaysia is investigated to provide
empirical evidence on corporate control in developed market
Various issues regarding the efficiency and the safety ofbanking industries are
increasing due to the financial crisis in 1997 (Barry et aI 2008) After the financial
crisis the banking system is reforme~ by bank regulators and they also carried out
several measures to provide efficient banking services to sustain the economy One
ofthe measures is when the government decided to change management ownership
and governance to avoid closure ofdistressed banks Moreover Asian governments
encouraged safe banks to merge with distressed banks to restore the financial
viability ofdmiddotistressed banks After the 1997 financial crisis the ownership structure
and the governance of banks are moified by bank restructuring program Hence
this study attempts to examine the impact ofownership structure on corporate debt
policy in Malaysian banking industry between from 2005 and 201 O
6
12 Definition of Ownership Structure
Generally ownership structure is defined as the identity of the equity owners
and distribution of equity regarding votes and capital These structures are
important in corporate governance to detennine the incentives of managers and
manage the economic efficiency of the corporations (Ownership Structure 2011)
Gursoyand Aydogan (1998) stipulated that ownership structure is categorized
into two dimensions which are ownership concentration and ownership mix
Ownership concentration refers to the distribution of the shares owned by a certain
number of individuals institutions and families On the other hand ownership mix
is related to the presence of certain institutions or groups such as government or
foreign partners among the shareholders These two categories of measures
incorporate both the influence power of shareholders as well as identity of owners
with their unique incentive mechanisms and preferences
7
121 The Types of Ownership Structure
Ownership structures are commonly divided into several types namely
managerial ownership family ownership and institutional ownership
(a) Managerial Ownership
According to Joher et al (2006) managerial ownership is an ownership which
consists of directors managers and other members in management to hold the
shares directly in a corporation The managerial ownership of equity can mitigate
the moral hazard problem between managers and shareholders Jensen and
Meckling (1976) argued that agency problem can reduce to moral hazard between
manager and owners if there were no debt contracts This is because managerial
ownership can be effective in aligning the managerial interest with outside
shareholders to mitigate the agency problems Datta et al (2004) also discovered
that the managers with high equity ownership prefer short maturity debt for
facilitating the agency conflicts of managerial discretion However Hashim and
Devi (2008) pointed out that the correlation between managerial and inside
ownership is a high positive relationship which is operated by the inside
management
8
(b) Family Ownership
Family ownership is a type ofownership that is owned entirely by the members
of a single family in a corporation The family ownership of corporate governance
is mostly operated by Asian firms According to Hashim and Devi (2008) family
ownership provides incentives to reduce the agency cost by aligning shareholders
and managerial interest They found that there is a positive and significant
relationship between family ownership and earnings quality They also proved that
family members who have greater expertise on firms operations can operate the
firms activities effectively to reduce the agency cost Nevertheless Villalonga and
Amit (2006) argued that family ownership makes profits for corporation when the
founder is active in the firm as the Chi~fExecutive Officer (CEO) or Chairman with
a hired CEO They also found that the agency conflicts exist between minority
shareholders and managers when the corporate government is performed by
descendant-CEO
(c) Institutional Ownership
Institutional ownership is an ownership of flllancial institution which includes
pension funds mutual funds closed-end fund life insurance companies savings
institutions and trust department of commercial banks (Joher et aI 2006)
According to Hashim and Devi (2008) the participation of institutional investors in
9
corporate governance plays an important role to protect minority shareholders
interest and mitigate the agency problem It is noted that there is a positive and
significant relationship between institutional ownership and earnings quality Thus
it indicates that the institutional have greater incentives to monitor firms activities
and the corporate government practices are improved by the involvement of
institutional investors participation
13 Definition of Corporate Debt Policy
Corporate debt policy is a non-government debt security which is divided into
short-term debt and long-term debt The short-term debt is issued as commercial
paper and long-term debt is issued as bonds It normally includes the council tax
housing rents business rates benefit overpayments legal costs and debtors
Besides the corporate debt policy is responsible to collect debt form citizens and
provides advice and practical help in the management ofvarious debts (Leeds City
Council Corporate Debt Policy 2010) It sets out the principles to maximize
collection performance from collecting debt Therefore it is the provision of
support mechanisms to all customer~
10
14 The Determinants of Capital Structure
According to the pecking order theory and agency theory the detenninants of
capital structure cover the profitability finn size tangibility growth opportunity
and firm risk These determinants of ownership structure will affect the firms
leverage or debt ratio
Banchuenvijit (2011) defined profitability as the determinant of capital
structure The pecking order theory prefers internal financing in which profitable
fInns will employ higher retained earning with higher profitability to hold less debt
Many empirical studies have found that there is a negative relationship between
~
profitability and leverage The fInn uses its own cash flow instead ofusing debt to
fmance its operations and investment opportunities when there is a negative sign
However Cespedes et al (2008) proved that the relationship between profitability
and leverage is a positive based on trade-off theory This is because the trade-off
theory is expected to show a positive sign when the firms debt level is higher It
implies that the higher the firms profitability the higher the potential tax shields
Pandey (2001) argued that the finn will employ high debt to gain tax benefits to get
higher profits based on interest tax sliield hypothesis proposed in the theory by
Modigliani and Miller (1963)
11
Besides firm size is found to be a positive detenninant of capital structure as
indicated in many previous studies However it implies a negative relation between
size and leverage when larger firms are expected to have less information
asymmetries in issuing debt or equity (Banchuenvijit 20 11) Chu and Cheah (2004)
pointed out that large firm size indicates the firm will share the risk and less asset
will be shared specificity between the firms founders On the other hand smaller
firm size and net cash flow will share the risk with large concentrated ownership
As stated by Pandey (200 I) large firms will employ higher amount of debt than
small firms because smaller firms would have less long-term debt and more
short-term debt due to the shareholders-lenders conflict Lamba and Stapledon
(2009) mentioned that larger firms tend to issue more shares than smaller finns and
are less likely to have a controlling shareholder
The term tangibility refers to tangible assets act as collateral and provides
security to lenders iffmancial distress based on trade-off hypothesis The firms are
expected have a high level of debt because of the higher tangible assets (Pandey
2001) Furthermore Banchuenvijit (2011) stated that there is a positive relationship
between tangibility and leverage when the firms are expected to issue high level of
debt can borrow on favorable terms with tangible assets that can be used as
collateral However there is a negative relationship between tangibility and
leverage when the firm has lower information asymmetries with tangible assets
Therefore it will cause equity issue to be less costly and lower the leverage ratios
12
CHAPTER
INTRODUCTION
10 Overview of the Study
Corporate governance is an important aspect ofthe corporate environment It is
related to corporate control and ownership structure of a firm in a corporation
According to Hitt et aI (1999) strategic management and performance of firms are
regulated and controlled by corporate governance Besides it is used in
organization to establish command between firms owners and its top-level
managers whose interests may be in conflict Hence the separation of interests
among stakeholders in corporation csm lead to agency problem
In Malaysia corporate governance is highly concentrated in the hands of large
shareholders or controlling shareholders The shareholders are given the rights to
provide incentives that can affect decision-making in the corporation and exercise
the voting control over shares which may diverge significantly in cash flow rights
(Ishak amp Napier 2006) According to Ghazali (2007) family-owned and
government-owned companies are the common types of ownership structure in
Malaysia Generally Malaysia has five largest shareholders which own 60 or
more of the public listed companies equity The top largest shareholders are the
nominee companies followed by non-financial companies and the government
Nor et al (2010) stated that corporate governance in Malaysia vanes
according to the ownership structure of the corporate sector Tne dispersed
ownership situation in Malaysia is observed to be similar in United States of
America (USA) and United Kingdoms (UK) common law legal system The
ownership is observed from two perspectives which are ownership concentration
and the components of ownership concentration They are used as a proxy for
corporate governance mechanisms Besides the ownership can be categorized into
institutional ownership government ownership and the nominees as well as the
individuals who own the companies As further added by Ayoib et al (2003) the
government has established the Finance Committee on Corporate Governance and
the Malaysian Institute ofCorporate Governance (MICG) to review and strengthen
corporate governance in Malaysia In addition the Malaysian Institute of
Accountants (MliA) the Kuala Lumpur Stock Exchange (KLSE) and the Securities
Commission (SC) were fonned to enhance the corporate governance in Malaysia
Moreover the Malaysian government has changed the merged banking groups
compositionof ownership structure in the post-crisis years When the bank merger
programme was completed to consolidate the number of domestic commercial
banks were reduced from 20 in 1999 to lOin 2001 (Lum amp Koh 2007) Hence the
study concluded that the consolidation programme has resulted in larger and better
capitalised domestic banking institutions but do not have any significant impact on
the composition ofownership structure in the banking industry
2
11 Background of the Study
Agency problem is a popular issue that exists commonly in a corporation
There are several studies which provide evidence on the effects of agency conflicts
on corporate governance Rimbey (1998) found that the distribution of shares
among the outside shareholders is a device to mitigate agency costs and affect the
fIrms capital structure Therefore ownership represents a power that can be used
either to support or oppose existing management that is related to the concentration
or dispersion of the power
On the other hand managerial ownership is an important internal monitoring
force as a determinant of risk The risk is a central theme in financial economics
which is related to managerial ownership corporate debt and dividend policies
(Chen amp Steiner 1999) The determinants ofmanagerial ownership include the risk
debt and dividends which are treated as endogenous variable in the model Many
previous studies have found that managerial ownership has a signifIcant impact on
the levels of risk
Nevertheless Andreyeva (2001) claimed that the role of privatization in the evolution of a transparent private ownership structure is important to establish a
successful market The organizational financial structures and managerial behavior
of privatization transforms are the goals for the fIrm to maximize the profIt The
corporate governance system is a way to determine the ultimate success of
3
privatization to get the gains The ownership structure and corporate governance
systems from privatization will give impact on company performance This
provides existing knowledge for the policy implications of the transition
economies
The ownership structure of a corporation is considered as an endogenous
outcome ofdecisions that reflect the influence ofshareholders and oftrading on the
market for shares (Demsetz amp Villallonga 2001) The firms ownership structure
reflects the decisions made by the shareholders The ownership structure should be
influenced by the profit-maximizing interests of shareholders As a result there is
no systematic relation between variations in ownership structure and firm
performance Hence ownership structure is treated as an endogenous variable and
gives no evidence of a relation between profit rate and ownership concentration
The measurement of firm performance and ownership structure is not endogenous
in the estimation of the effect of ownership on performance It models ownership
structure as an endogenous variable and it examines two dimensions of this
structure to represent conflicting interests by the five largest shareholding interests
However Chu and Cheah (2004) argued that the ownership structures have an
effect on the development and performance of capital and debt market It is a high
concentration structure to distribute capital allocation in an efficiency economy
The ownership structure in capital market activeness can be promoted as investors
4
Pusat Khidruat Maklumat Akademik UNlVERSm MALAYSIA SARAWAK
can gam entry and exit easily In addition to that managers can control the
ownership and adjust the proportion ofdebt and equity to invest the capital and get
the gain Hence ownership structure plays an important role in the governance and
performance of firms
Craswell et al (1997) proved that the influence ofmanagerial and institutional
equity ownership is highly related to corporate performance They examined the
effects of both insider and institutional ownership of Australian corporate
performance Australian firms have significantly different legal and econOmIC
circumstances as compared to the firms in the US The fmdings indicate that there is
a weak relationship between institutional ownership and corporate performance
The result is found to be temporaly unstable and confined to large Australian
companies The evidence is not consistent with corporate performance related to
the level of institutional ownership A significant relationship between equity
ownership structure and corporate performance implies corrective transfers of
equity between insiders outsiders and the successful survival of firms with
effectively non-optimal ownership structures which casts doubt on the existence of
any generalized equilibrium Ifthe o~nership structure is endogenous the firms are
systematically related to equity ownership
5
In Malaysia the ownership concentration is weaker than other developed
countries and the institutional ownership is less than 20 ofthe outstanding shares
(Joher et aI 2006) The three ownership structures of corporation are institutional
ownership managerial ownership and individual ownership These three types of
ownership structures can affect ftrm performance and value by mitigating agency
costs of the firm Therefore the impact of institutional ownership on insider
ownership and corporate debt policy in Malaysia is investigated to provide
empirical evidence on corporate control in developed market
Various issues regarding the efficiency and the safety ofbanking industries are
increasing due to the financial crisis in 1997 (Barry et aI 2008) After the financial
crisis the banking system is reforme~ by bank regulators and they also carried out
several measures to provide efficient banking services to sustain the economy One
ofthe measures is when the government decided to change management ownership
and governance to avoid closure ofdistressed banks Moreover Asian governments
encouraged safe banks to merge with distressed banks to restore the financial
viability ofdmiddotistressed banks After the 1997 financial crisis the ownership structure
and the governance of banks are moified by bank restructuring program Hence
this study attempts to examine the impact ofownership structure on corporate debt
policy in Malaysian banking industry between from 2005 and 201 O
6
12 Definition of Ownership Structure
Generally ownership structure is defined as the identity of the equity owners
and distribution of equity regarding votes and capital These structures are
important in corporate governance to detennine the incentives of managers and
manage the economic efficiency of the corporations (Ownership Structure 2011)
Gursoyand Aydogan (1998) stipulated that ownership structure is categorized
into two dimensions which are ownership concentration and ownership mix
Ownership concentration refers to the distribution of the shares owned by a certain
number of individuals institutions and families On the other hand ownership mix
is related to the presence of certain institutions or groups such as government or
foreign partners among the shareholders These two categories of measures
incorporate both the influence power of shareholders as well as identity of owners
with their unique incentive mechanisms and preferences
7
121 The Types of Ownership Structure
Ownership structures are commonly divided into several types namely
managerial ownership family ownership and institutional ownership
(a) Managerial Ownership
According to Joher et al (2006) managerial ownership is an ownership which
consists of directors managers and other members in management to hold the
shares directly in a corporation The managerial ownership of equity can mitigate
the moral hazard problem between managers and shareholders Jensen and
Meckling (1976) argued that agency problem can reduce to moral hazard between
manager and owners if there were no debt contracts This is because managerial
ownership can be effective in aligning the managerial interest with outside
shareholders to mitigate the agency problems Datta et al (2004) also discovered
that the managers with high equity ownership prefer short maturity debt for
facilitating the agency conflicts of managerial discretion However Hashim and
Devi (2008) pointed out that the correlation between managerial and inside
ownership is a high positive relationship which is operated by the inside
management
8
(b) Family Ownership
Family ownership is a type ofownership that is owned entirely by the members
of a single family in a corporation The family ownership of corporate governance
is mostly operated by Asian firms According to Hashim and Devi (2008) family
ownership provides incentives to reduce the agency cost by aligning shareholders
and managerial interest They found that there is a positive and significant
relationship between family ownership and earnings quality They also proved that
family members who have greater expertise on firms operations can operate the
firms activities effectively to reduce the agency cost Nevertheless Villalonga and
Amit (2006) argued that family ownership makes profits for corporation when the
founder is active in the firm as the Chi~fExecutive Officer (CEO) or Chairman with
a hired CEO They also found that the agency conflicts exist between minority
shareholders and managers when the corporate government is performed by
descendant-CEO
(c) Institutional Ownership
Institutional ownership is an ownership of flllancial institution which includes
pension funds mutual funds closed-end fund life insurance companies savings
institutions and trust department of commercial banks (Joher et aI 2006)
According to Hashim and Devi (2008) the participation of institutional investors in
9
corporate governance plays an important role to protect minority shareholders
interest and mitigate the agency problem It is noted that there is a positive and
significant relationship between institutional ownership and earnings quality Thus
it indicates that the institutional have greater incentives to monitor firms activities
and the corporate government practices are improved by the involvement of
institutional investors participation
13 Definition of Corporate Debt Policy
Corporate debt policy is a non-government debt security which is divided into
short-term debt and long-term debt The short-term debt is issued as commercial
paper and long-term debt is issued as bonds It normally includes the council tax
housing rents business rates benefit overpayments legal costs and debtors
Besides the corporate debt policy is responsible to collect debt form citizens and
provides advice and practical help in the management ofvarious debts (Leeds City
Council Corporate Debt Policy 2010) It sets out the principles to maximize
collection performance from collecting debt Therefore it is the provision of
support mechanisms to all customer~
10
14 The Determinants of Capital Structure
According to the pecking order theory and agency theory the detenninants of
capital structure cover the profitability finn size tangibility growth opportunity
and firm risk These determinants of ownership structure will affect the firms
leverage or debt ratio
Banchuenvijit (2011) defined profitability as the determinant of capital
structure The pecking order theory prefers internal financing in which profitable
fInns will employ higher retained earning with higher profitability to hold less debt
Many empirical studies have found that there is a negative relationship between
~
profitability and leverage The fInn uses its own cash flow instead ofusing debt to
fmance its operations and investment opportunities when there is a negative sign
However Cespedes et al (2008) proved that the relationship between profitability
and leverage is a positive based on trade-off theory This is because the trade-off
theory is expected to show a positive sign when the firms debt level is higher It
implies that the higher the firms profitability the higher the potential tax shields
Pandey (2001) argued that the finn will employ high debt to gain tax benefits to get
higher profits based on interest tax sliield hypothesis proposed in the theory by
Modigliani and Miller (1963)
11
Besides firm size is found to be a positive detenninant of capital structure as
indicated in many previous studies However it implies a negative relation between
size and leverage when larger firms are expected to have less information
asymmetries in issuing debt or equity (Banchuenvijit 20 11) Chu and Cheah (2004)
pointed out that large firm size indicates the firm will share the risk and less asset
will be shared specificity between the firms founders On the other hand smaller
firm size and net cash flow will share the risk with large concentrated ownership
As stated by Pandey (200 I) large firms will employ higher amount of debt than
small firms because smaller firms would have less long-term debt and more
short-term debt due to the shareholders-lenders conflict Lamba and Stapledon
(2009) mentioned that larger firms tend to issue more shares than smaller finns and
are less likely to have a controlling shareholder
The term tangibility refers to tangible assets act as collateral and provides
security to lenders iffmancial distress based on trade-off hypothesis The firms are
expected have a high level of debt because of the higher tangible assets (Pandey
2001) Furthermore Banchuenvijit (2011) stated that there is a positive relationship
between tangibility and leverage when the firms are expected to issue high level of
debt can borrow on favorable terms with tangible assets that can be used as
collateral However there is a negative relationship between tangibility and
leverage when the firm has lower information asymmetries with tangible assets
Therefore it will cause equity issue to be less costly and lower the leverage ratios
12
Nor et al (2010) stated that corporate governance in Malaysia vanes
according to the ownership structure of the corporate sector Tne dispersed
ownership situation in Malaysia is observed to be similar in United States of
America (USA) and United Kingdoms (UK) common law legal system The
ownership is observed from two perspectives which are ownership concentration
and the components of ownership concentration They are used as a proxy for
corporate governance mechanisms Besides the ownership can be categorized into
institutional ownership government ownership and the nominees as well as the
individuals who own the companies As further added by Ayoib et al (2003) the
government has established the Finance Committee on Corporate Governance and
the Malaysian Institute ofCorporate Governance (MICG) to review and strengthen
corporate governance in Malaysia In addition the Malaysian Institute of
Accountants (MliA) the Kuala Lumpur Stock Exchange (KLSE) and the Securities
Commission (SC) were fonned to enhance the corporate governance in Malaysia
Moreover the Malaysian government has changed the merged banking groups
compositionof ownership structure in the post-crisis years When the bank merger
programme was completed to consolidate the number of domestic commercial
banks were reduced from 20 in 1999 to lOin 2001 (Lum amp Koh 2007) Hence the
study concluded that the consolidation programme has resulted in larger and better
capitalised domestic banking institutions but do not have any significant impact on
the composition ofownership structure in the banking industry
2
11 Background of the Study
Agency problem is a popular issue that exists commonly in a corporation
There are several studies which provide evidence on the effects of agency conflicts
on corporate governance Rimbey (1998) found that the distribution of shares
among the outside shareholders is a device to mitigate agency costs and affect the
fIrms capital structure Therefore ownership represents a power that can be used
either to support or oppose existing management that is related to the concentration
or dispersion of the power
On the other hand managerial ownership is an important internal monitoring
force as a determinant of risk The risk is a central theme in financial economics
which is related to managerial ownership corporate debt and dividend policies
(Chen amp Steiner 1999) The determinants ofmanagerial ownership include the risk
debt and dividends which are treated as endogenous variable in the model Many
previous studies have found that managerial ownership has a signifIcant impact on
the levels of risk
Nevertheless Andreyeva (2001) claimed that the role of privatization in the evolution of a transparent private ownership structure is important to establish a
successful market The organizational financial structures and managerial behavior
of privatization transforms are the goals for the fIrm to maximize the profIt The
corporate governance system is a way to determine the ultimate success of
3
privatization to get the gains The ownership structure and corporate governance
systems from privatization will give impact on company performance This
provides existing knowledge for the policy implications of the transition
economies
The ownership structure of a corporation is considered as an endogenous
outcome ofdecisions that reflect the influence ofshareholders and oftrading on the
market for shares (Demsetz amp Villallonga 2001) The firms ownership structure
reflects the decisions made by the shareholders The ownership structure should be
influenced by the profit-maximizing interests of shareholders As a result there is
no systematic relation between variations in ownership structure and firm
performance Hence ownership structure is treated as an endogenous variable and
gives no evidence of a relation between profit rate and ownership concentration
The measurement of firm performance and ownership structure is not endogenous
in the estimation of the effect of ownership on performance It models ownership
structure as an endogenous variable and it examines two dimensions of this
structure to represent conflicting interests by the five largest shareholding interests
However Chu and Cheah (2004) argued that the ownership structures have an
effect on the development and performance of capital and debt market It is a high
concentration structure to distribute capital allocation in an efficiency economy
The ownership structure in capital market activeness can be promoted as investors
4
Pusat Khidruat Maklumat Akademik UNlVERSm MALAYSIA SARAWAK
can gam entry and exit easily In addition to that managers can control the
ownership and adjust the proportion ofdebt and equity to invest the capital and get
the gain Hence ownership structure plays an important role in the governance and
performance of firms
Craswell et al (1997) proved that the influence ofmanagerial and institutional
equity ownership is highly related to corporate performance They examined the
effects of both insider and institutional ownership of Australian corporate
performance Australian firms have significantly different legal and econOmIC
circumstances as compared to the firms in the US The fmdings indicate that there is
a weak relationship between institutional ownership and corporate performance
The result is found to be temporaly unstable and confined to large Australian
companies The evidence is not consistent with corporate performance related to
the level of institutional ownership A significant relationship between equity
ownership structure and corporate performance implies corrective transfers of
equity between insiders outsiders and the successful survival of firms with
effectively non-optimal ownership structures which casts doubt on the existence of
any generalized equilibrium Ifthe o~nership structure is endogenous the firms are
systematically related to equity ownership
5
In Malaysia the ownership concentration is weaker than other developed
countries and the institutional ownership is less than 20 ofthe outstanding shares
(Joher et aI 2006) The three ownership structures of corporation are institutional
ownership managerial ownership and individual ownership These three types of
ownership structures can affect ftrm performance and value by mitigating agency
costs of the firm Therefore the impact of institutional ownership on insider
ownership and corporate debt policy in Malaysia is investigated to provide
empirical evidence on corporate control in developed market
Various issues regarding the efficiency and the safety ofbanking industries are
increasing due to the financial crisis in 1997 (Barry et aI 2008) After the financial
crisis the banking system is reforme~ by bank regulators and they also carried out
several measures to provide efficient banking services to sustain the economy One
ofthe measures is when the government decided to change management ownership
and governance to avoid closure ofdistressed banks Moreover Asian governments
encouraged safe banks to merge with distressed banks to restore the financial
viability ofdmiddotistressed banks After the 1997 financial crisis the ownership structure
and the governance of banks are moified by bank restructuring program Hence
this study attempts to examine the impact ofownership structure on corporate debt
policy in Malaysian banking industry between from 2005 and 201 O
6
12 Definition of Ownership Structure
Generally ownership structure is defined as the identity of the equity owners
and distribution of equity regarding votes and capital These structures are
important in corporate governance to detennine the incentives of managers and
manage the economic efficiency of the corporations (Ownership Structure 2011)
Gursoyand Aydogan (1998) stipulated that ownership structure is categorized
into two dimensions which are ownership concentration and ownership mix
Ownership concentration refers to the distribution of the shares owned by a certain
number of individuals institutions and families On the other hand ownership mix
is related to the presence of certain institutions or groups such as government or
foreign partners among the shareholders These two categories of measures
incorporate both the influence power of shareholders as well as identity of owners
with their unique incentive mechanisms and preferences
7
121 The Types of Ownership Structure
Ownership structures are commonly divided into several types namely
managerial ownership family ownership and institutional ownership
(a) Managerial Ownership
According to Joher et al (2006) managerial ownership is an ownership which
consists of directors managers and other members in management to hold the
shares directly in a corporation The managerial ownership of equity can mitigate
the moral hazard problem between managers and shareholders Jensen and
Meckling (1976) argued that agency problem can reduce to moral hazard between
manager and owners if there were no debt contracts This is because managerial
ownership can be effective in aligning the managerial interest with outside
shareholders to mitigate the agency problems Datta et al (2004) also discovered
that the managers with high equity ownership prefer short maturity debt for
facilitating the agency conflicts of managerial discretion However Hashim and
Devi (2008) pointed out that the correlation between managerial and inside
ownership is a high positive relationship which is operated by the inside
management
8
(b) Family Ownership
Family ownership is a type ofownership that is owned entirely by the members
of a single family in a corporation The family ownership of corporate governance
is mostly operated by Asian firms According to Hashim and Devi (2008) family
ownership provides incentives to reduce the agency cost by aligning shareholders
and managerial interest They found that there is a positive and significant
relationship between family ownership and earnings quality They also proved that
family members who have greater expertise on firms operations can operate the
firms activities effectively to reduce the agency cost Nevertheless Villalonga and
Amit (2006) argued that family ownership makes profits for corporation when the
founder is active in the firm as the Chi~fExecutive Officer (CEO) or Chairman with
a hired CEO They also found that the agency conflicts exist between minority
shareholders and managers when the corporate government is performed by
descendant-CEO
(c) Institutional Ownership
Institutional ownership is an ownership of flllancial institution which includes
pension funds mutual funds closed-end fund life insurance companies savings
institutions and trust department of commercial banks (Joher et aI 2006)
According to Hashim and Devi (2008) the participation of institutional investors in
9
corporate governance plays an important role to protect minority shareholders
interest and mitigate the agency problem It is noted that there is a positive and
significant relationship between institutional ownership and earnings quality Thus
it indicates that the institutional have greater incentives to monitor firms activities
and the corporate government practices are improved by the involvement of
institutional investors participation
13 Definition of Corporate Debt Policy
Corporate debt policy is a non-government debt security which is divided into
short-term debt and long-term debt The short-term debt is issued as commercial
paper and long-term debt is issued as bonds It normally includes the council tax
housing rents business rates benefit overpayments legal costs and debtors
Besides the corporate debt policy is responsible to collect debt form citizens and
provides advice and practical help in the management ofvarious debts (Leeds City
Council Corporate Debt Policy 2010) It sets out the principles to maximize
collection performance from collecting debt Therefore it is the provision of
support mechanisms to all customer~
10
14 The Determinants of Capital Structure
According to the pecking order theory and agency theory the detenninants of
capital structure cover the profitability finn size tangibility growth opportunity
and firm risk These determinants of ownership structure will affect the firms
leverage or debt ratio
Banchuenvijit (2011) defined profitability as the determinant of capital
structure The pecking order theory prefers internal financing in which profitable
fInns will employ higher retained earning with higher profitability to hold less debt
Many empirical studies have found that there is a negative relationship between
~
profitability and leverage The fInn uses its own cash flow instead ofusing debt to
fmance its operations and investment opportunities when there is a negative sign
However Cespedes et al (2008) proved that the relationship between profitability
and leverage is a positive based on trade-off theory This is because the trade-off
theory is expected to show a positive sign when the firms debt level is higher It
implies that the higher the firms profitability the higher the potential tax shields
Pandey (2001) argued that the finn will employ high debt to gain tax benefits to get
higher profits based on interest tax sliield hypothesis proposed in the theory by
Modigliani and Miller (1963)
11
Besides firm size is found to be a positive detenninant of capital structure as
indicated in many previous studies However it implies a negative relation between
size and leverage when larger firms are expected to have less information
asymmetries in issuing debt or equity (Banchuenvijit 20 11) Chu and Cheah (2004)
pointed out that large firm size indicates the firm will share the risk and less asset
will be shared specificity between the firms founders On the other hand smaller
firm size and net cash flow will share the risk with large concentrated ownership
As stated by Pandey (200 I) large firms will employ higher amount of debt than
small firms because smaller firms would have less long-term debt and more
short-term debt due to the shareholders-lenders conflict Lamba and Stapledon
(2009) mentioned that larger firms tend to issue more shares than smaller finns and
are less likely to have a controlling shareholder
The term tangibility refers to tangible assets act as collateral and provides
security to lenders iffmancial distress based on trade-off hypothesis The firms are
expected have a high level of debt because of the higher tangible assets (Pandey
2001) Furthermore Banchuenvijit (2011) stated that there is a positive relationship
between tangibility and leverage when the firms are expected to issue high level of
debt can borrow on favorable terms with tangible assets that can be used as
collateral However there is a negative relationship between tangibility and
leverage when the firm has lower information asymmetries with tangible assets
Therefore it will cause equity issue to be less costly and lower the leverage ratios
12
11 Background of the Study
Agency problem is a popular issue that exists commonly in a corporation
There are several studies which provide evidence on the effects of agency conflicts
on corporate governance Rimbey (1998) found that the distribution of shares
among the outside shareholders is a device to mitigate agency costs and affect the
fIrms capital structure Therefore ownership represents a power that can be used
either to support or oppose existing management that is related to the concentration
or dispersion of the power
On the other hand managerial ownership is an important internal monitoring
force as a determinant of risk The risk is a central theme in financial economics
which is related to managerial ownership corporate debt and dividend policies
(Chen amp Steiner 1999) The determinants ofmanagerial ownership include the risk
debt and dividends which are treated as endogenous variable in the model Many
previous studies have found that managerial ownership has a signifIcant impact on
the levels of risk
Nevertheless Andreyeva (2001) claimed that the role of privatization in the evolution of a transparent private ownership structure is important to establish a
successful market The organizational financial structures and managerial behavior
of privatization transforms are the goals for the fIrm to maximize the profIt The
corporate governance system is a way to determine the ultimate success of
3
privatization to get the gains The ownership structure and corporate governance
systems from privatization will give impact on company performance This
provides existing knowledge for the policy implications of the transition
economies
The ownership structure of a corporation is considered as an endogenous
outcome ofdecisions that reflect the influence ofshareholders and oftrading on the
market for shares (Demsetz amp Villallonga 2001) The firms ownership structure
reflects the decisions made by the shareholders The ownership structure should be
influenced by the profit-maximizing interests of shareholders As a result there is
no systematic relation between variations in ownership structure and firm
performance Hence ownership structure is treated as an endogenous variable and
gives no evidence of a relation between profit rate and ownership concentration
The measurement of firm performance and ownership structure is not endogenous
in the estimation of the effect of ownership on performance It models ownership
structure as an endogenous variable and it examines two dimensions of this
structure to represent conflicting interests by the five largest shareholding interests
However Chu and Cheah (2004) argued that the ownership structures have an
effect on the development and performance of capital and debt market It is a high
concentration structure to distribute capital allocation in an efficiency economy
The ownership structure in capital market activeness can be promoted as investors
4
Pusat Khidruat Maklumat Akademik UNlVERSm MALAYSIA SARAWAK
can gam entry and exit easily In addition to that managers can control the
ownership and adjust the proportion ofdebt and equity to invest the capital and get
the gain Hence ownership structure plays an important role in the governance and
performance of firms
Craswell et al (1997) proved that the influence ofmanagerial and institutional
equity ownership is highly related to corporate performance They examined the
effects of both insider and institutional ownership of Australian corporate
performance Australian firms have significantly different legal and econOmIC
circumstances as compared to the firms in the US The fmdings indicate that there is
a weak relationship between institutional ownership and corporate performance
The result is found to be temporaly unstable and confined to large Australian
companies The evidence is not consistent with corporate performance related to
the level of institutional ownership A significant relationship between equity
ownership structure and corporate performance implies corrective transfers of
equity between insiders outsiders and the successful survival of firms with
effectively non-optimal ownership structures which casts doubt on the existence of
any generalized equilibrium Ifthe o~nership structure is endogenous the firms are
systematically related to equity ownership
5
In Malaysia the ownership concentration is weaker than other developed
countries and the institutional ownership is less than 20 ofthe outstanding shares
(Joher et aI 2006) The three ownership structures of corporation are institutional
ownership managerial ownership and individual ownership These three types of
ownership structures can affect ftrm performance and value by mitigating agency
costs of the firm Therefore the impact of institutional ownership on insider
ownership and corporate debt policy in Malaysia is investigated to provide
empirical evidence on corporate control in developed market
Various issues regarding the efficiency and the safety ofbanking industries are
increasing due to the financial crisis in 1997 (Barry et aI 2008) After the financial
crisis the banking system is reforme~ by bank regulators and they also carried out
several measures to provide efficient banking services to sustain the economy One
ofthe measures is when the government decided to change management ownership
and governance to avoid closure ofdistressed banks Moreover Asian governments
encouraged safe banks to merge with distressed banks to restore the financial
viability ofdmiddotistressed banks After the 1997 financial crisis the ownership structure
and the governance of banks are moified by bank restructuring program Hence
this study attempts to examine the impact ofownership structure on corporate debt
policy in Malaysian banking industry between from 2005 and 201 O
6
12 Definition of Ownership Structure
Generally ownership structure is defined as the identity of the equity owners
and distribution of equity regarding votes and capital These structures are
important in corporate governance to detennine the incentives of managers and
manage the economic efficiency of the corporations (Ownership Structure 2011)
Gursoyand Aydogan (1998) stipulated that ownership structure is categorized
into two dimensions which are ownership concentration and ownership mix
Ownership concentration refers to the distribution of the shares owned by a certain
number of individuals institutions and families On the other hand ownership mix
is related to the presence of certain institutions or groups such as government or
foreign partners among the shareholders These two categories of measures
incorporate both the influence power of shareholders as well as identity of owners
with their unique incentive mechanisms and preferences
7
121 The Types of Ownership Structure
Ownership structures are commonly divided into several types namely
managerial ownership family ownership and institutional ownership
(a) Managerial Ownership
According to Joher et al (2006) managerial ownership is an ownership which
consists of directors managers and other members in management to hold the
shares directly in a corporation The managerial ownership of equity can mitigate
the moral hazard problem between managers and shareholders Jensen and
Meckling (1976) argued that agency problem can reduce to moral hazard between
manager and owners if there were no debt contracts This is because managerial
ownership can be effective in aligning the managerial interest with outside
shareholders to mitigate the agency problems Datta et al (2004) also discovered
that the managers with high equity ownership prefer short maturity debt for
facilitating the agency conflicts of managerial discretion However Hashim and
Devi (2008) pointed out that the correlation between managerial and inside
ownership is a high positive relationship which is operated by the inside
management
8
(b) Family Ownership
Family ownership is a type ofownership that is owned entirely by the members
of a single family in a corporation The family ownership of corporate governance
is mostly operated by Asian firms According to Hashim and Devi (2008) family
ownership provides incentives to reduce the agency cost by aligning shareholders
and managerial interest They found that there is a positive and significant
relationship between family ownership and earnings quality They also proved that
family members who have greater expertise on firms operations can operate the
firms activities effectively to reduce the agency cost Nevertheless Villalonga and
Amit (2006) argued that family ownership makes profits for corporation when the
founder is active in the firm as the Chi~fExecutive Officer (CEO) or Chairman with
a hired CEO They also found that the agency conflicts exist between minority
shareholders and managers when the corporate government is performed by
descendant-CEO
(c) Institutional Ownership
Institutional ownership is an ownership of flllancial institution which includes
pension funds mutual funds closed-end fund life insurance companies savings
institutions and trust department of commercial banks (Joher et aI 2006)
According to Hashim and Devi (2008) the participation of institutional investors in
9
corporate governance plays an important role to protect minority shareholders
interest and mitigate the agency problem It is noted that there is a positive and
significant relationship between institutional ownership and earnings quality Thus
it indicates that the institutional have greater incentives to monitor firms activities
and the corporate government practices are improved by the involvement of
institutional investors participation
13 Definition of Corporate Debt Policy
Corporate debt policy is a non-government debt security which is divided into
short-term debt and long-term debt The short-term debt is issued as commercial
paper and long-term debt is issued as bonds It normally includes the council tax
housing rents business rates benefit overpayments legal costs and debtors
Besides the corporate debt policy is responsible to collect debt form citizens and
provides advice and practical help in the management ofvarious debts (Leeds City
Council Corporate Debt Policy 2010) It sets out the principles to maximize
collection performance from collecting debt Therefore it is the provision of
support mechanisms to all customer~
10
14 The Determinants of Capital Structure
According to the pecking order theory and agency theory the detenninants of
capital structure cover the profitability finn size tangibility growth opportunity
and firm risk These determinants of ownership structure will affect the firms
leverage or debt ratio
Banchuenvijit (2011) defined profitability as the determinant of capital
structure The pecking order theory prefers internal financing in which profitable
fInns will employ higher retained earning with higher profitability to hold less debt
Many empirical studies have found that there is a negative relationship between
~
profitability and leverage The fInn uses its own cash flow instead ofusing debt to
fmance its operations and investment opportunities when there is a negative sign
However Cespedes et al (2008) proved that the relationship between profitability
and leverage is a positive based on trade-off theory This is because the trade-off
theory is expected to show a positive sign when the firms debt level is higher It
implies that the higher the firms profitability the higher the potential tax shields
Pandey (2001) argued that the finn will employ high debt to gain tax benefits to get
higher profits based on interest tax sliield hypothesis proposed in the theory by
Modigliani and Miller (1963)
11
Besides firm size is found to be a positive detenninant of capital structure as
indicated in many previous studies However it implies a negative relation between
size and leverage when larger firms are expected to have less information
asymmetries in issuing debt or equity (Banchuenvijit 20 11) Chu and Cheah (2004)
pointed out that large firm size indicates the firm will share the risk and less asset
will be shared specificity between the firms founders On the other hand smaller
firm size and net cash flow will share the risk with large concentrated ownership
As stated by Pandey (200 I) large firms will employ higher amount of debt than
small firms because smaller firms would have less long-term debt and more
short-term debt due to the shareholders-lenders conflict Lamba and Stapledon
(2009) mentioned that larger firms tend to issue more shares than smaller finns and
are less likely to have a controlling shareholder
The term tangibility refers to tangible assets act as collateral and provides
security to lenders iffmancial distress based on trade-off hypothesis The firms are
expected have a high level of debt because of the higher tangible assets (Pandey
2001) Furthermore Banchuenvijit (2011) stated that there is a positive relationship
between tangibility and leverage when the firms are expected to issue high level of
debt can borrow on favorable terms with tangible assets that can be used as
collateral However there is a negative relationship between tangibility and
leverage when the firm has lower information asymmetries with tangible assets
Therefore it will cause equity issue to be less costly and lower the leverage ratios
12
privatization to get the gains The ownership structure and corporate governance
systems from privatization will give impact on company performance This
provides existing knowledge for the policy implications of the transition
economies
The ownership structure of a corporation is considered as an endogenous
outcome ofdecisions that reflect the influence ofshareholders and oftrading on the
market for shares (Demsetz amp Villallonga 2001) The firms ownership structure
reflects the decisions made by the shareholders The ownership structure should be
influenced by the profit-maximizing interests of shareholders As a result there is
no systematic relation between variations in ownership structure and firm
performance Hence ownership structure is treated as an endogenous variable and
gives no evidence of a relation between profit rate and ownership concentration
The measurement of firm performance and ownership structure is not endogenous
in the estimation of the effect of ownership on performance It models ownership
structure as an endogenous variable and it examines two dimensions of this
structure to represent conflicting interests by the five largest shareholding interests
However Chu and Cheah (2004) argued that the ownership structures have an
effect on the development and performance of capital and debt market It is a high
concentration structure to distribute capital allocation in an efficiency economy
The ownership structure in capital market activeness can be promoted as investors
4
Pusat Khidruat Maklumat Akademik UNlVERSm MALAYSIA SARAWAK
can gam entry and exit easily In addition to that managers can control the
ownership and adjust the proportion ofdebt and equity to invest the capital and get
the gain Hence ownership structure plays an important role in the governance and
performance of firms
Craswell et al (1997) proved that the influence ofmanagerial and institutional
equity ownership is highly related to corporate performance They examined the
effects of both insider and institutional ownership of Australian corporate
performance Australian firms have significantly different legal and econOmIC
circumstances as compared to the firms in the US The fmdings indicate that there is
a weak relationship between institutional ownership and corporate performance
The result is found to be temporaly unstable and confined to large Australian
companies The evidence is not consistent with corporate performance related to
the level of institutional ownership A significant relationship between equity
ownership structure and corporate performance implies corrective transfers of
equity between insiders outsiders and the successful survival of firms with
effectively non-optimal ownership structures which casts doubt on the existence of
any generalized equilibrium Ifthe o~nership structure is endogenous the firms are
systematically related to equity ownership
5
In Malaysia the ownership concentration is weaker than other developed
countries and the institutional ownership is less than 20 ofthe outstanding shares
(Joher et aI 2006) The three ownership structures of corporation are institutional
ownership managerial ownership and individual ownership These three types of
ownership structures can affect ftrm performance and value by mitigating agency
costs of the firm Therefore the impact of institutional ownership on insider
ownership and corporate debt policy in Malaysia is investigated to provide
empirical evidence on corporate control in developed market
Various issues regarding the efficiency and the safety ofbanking industries are
increasing due to the financial crisis in 1997 (Barry et aI 2008) After the financial
crisis the banking system is reforme~ by bank regulators and they also carried out
several measures to provide efficient banking services to sustain the economy One
ofthe measures is when the government decided to change management ownership
and governance to avoid closure ofdistressed banks Moreover Asian governments
encouraged safe banks to merge with distressed banks to restore the financial
viability ofdmiddotistressed banks After the 1997 financial crisis the ownership structure
and the governance of banks are moified by bank restructuring program Hence
this study attempts to examine the impact ofownership structure on corporate debt
policy in Malaysian banking industry between from 2005 and 201 O
6
12 Definition of Ownership Structure
Generally ownership structure is defined as the identity of the equity owners
and distribution of equity regarding votes and capital These structures are
important in corporate governance to detennine the incentives of managers and
manage the economic efficiency of the corporations (Ownership Structure 2011)
Gursoyand Aydogan (1998) stipulated that ownership structure is categorized
into two dimensions which are ownership concentration and ownership mix
Ownership concentration refers to the distribution of the shares owned by a certain
number of individuals institutions and families On the other hand ownership mix
is related to the presence of certain institutions or groups such as government or
foreign partners among the shareholders These two categories of measures
incorporate both the influence power of shareholders as well as identity of owners
with their unique incentive mechanisms and preferences
7
121 The Types of Ownership Structure
Ownership structures are commonly divided into several types namely
managerial ownership family ownership and institutional ownership
(a) Managerial Ownership
According to Joher et al (2006) managerial ownership is an ownership which
consists of directors managers and other members in management to hold the
shares directly in a corporation The managerial ownership of equity can mitigate
the moral hazard problem between managers and shareholders Jensen and
Meckling (1976) argued that agency problem can reduce to moral hazard between
manager and owners if there were no debt contracts This is because managerial
ownership can be effective in aligning the managerial interest with outside
shareholders to mitigate the agency problems Datta et al (2004) also discovered
that the managers with high equity ownership prefer short maturity debt for
facilitating the agency conflicts of managerial discretion However Hashim and
Devi (2008) pointed out that the correlation between managerial and inside
ownership is a high positive relationship which is operated by the inside
management
8
(b) Family Ownership
Family ownership is a type ofownership that is owned entirely by the members
of a single family in a corporation The family ownership of corporate governance
is mostly operated by Asian firms According to Hashim and Devi (2008) family
ownership provides incentives to reduce the agency cost by aligning shareholders
and managerial interest They found that there is a positive and significant
relationship between family ownership and earnings quality They also proved that
family members who have greater expertise on firms operations can operate the
firms activities effectively to reduce the agency cost Nevertheless Villalonga and
Amit (2006) argued that family ownership makes profits for corporation when the
founder is active in the firm as the Chi~fExecutive Officer (CEO) or Chairman with
a hired CEO They also found that the agency conflicts exist between minority
shareholders and managers when the corporate government is performed by
descendant-CEO
(c) Institutional Ownership
Institutional ownership is an ownership of flllancial institution which includes
pension funds mutual funds closed-end fund life insurance companies savings
institutions and trust department of commercial banks (Joher et aI 2006)
According to Hashim and Devi (2008) the participation of institutional investors in
9
corporate governance plays an important role to protect minority shareholders
interest and mitigate the agency problem It is noted that there is a positive and
significant relationship between institutional ownership and earnings quality Thus
it indicates that the institutional have greater incentives to monitor firms activities
and the corporate government practices are improved by the involvement of
institutional investors participation
13 Definition of Corporate Debt Policy
Corporate debt policy is a non-government debt security which is divided into
short-term debt and long-term debt The short-term debt is issued as commercial
paper and long-term debt is issued as bonds It normally includes the council tax
housing rents business rates benefit overpayments legal costs and debtors
Besides the corporate debt policy is responsible to collect debt form citizens and
provides advice and practical help in the management ofvarious debts (Leeds City
Council Corporate Debt Policy 2010) It sets out the principles to maximize
collection performance from collecting debt Therefore it is the provision of
support mechanisms to all customer~
10
14 The Determinants of Capital Structure
According to the pecking order theory and agency theory the detenninants of
capital structure cover the profitability finn size tangibility growth opportunity
and firm risk These determinants of ownership structure will affect the firms
leverage or debt ratio
Banchuenvijit (2011) defined profitability as the determinant of capital
structure The pecking order theory prefers internal financing in which profitable
fInns will employ higher retained earning with higher profitability to hold less debt
Many empirical studies have found that there is a negative relationship between
~
profitability and leverage The fInn uses its own cash flow instead ofusing debt to
fmance its operations and investment opportunities when there is a negative sign
However Cespedes et al (2008) proved that the relationship between profitability
and leverage is a positive based on trade-off theory This is because the trade-off
theory is expected to show a positive sign when the firms debt level is higher It
implies that the higher the firms profitability the higher the potential tax shields
Pandey (2001) argued that the finn will employ high debt to gain tax benefits to get
higher profits based on interest tax sliield hypothesis proposed in the theory by
Modigliani and Miller (1963)
11
Besides firm size is found to be a positive detenninant of capital structure as
indicated in many previous studies However it implies a negative relation between
size and leverage when larger firms are expected to have less information
asymmetries in issuing debt or equity (Banchuenvijit 20 11) Chu and Cheah (2004)
pointed out that large firm size indicates the firm will share the risk and less asset
will be shared specificity between the firms founders On the other hand smaller
firm size and net cash flow will share the risk with large concentrated ownership
As stated by Pandey (200 I) large firms will employ higher amount of debt than
small firms because smaller firms would have less long-term debt and more
short-term debt due to the shareholders-lenders conflict Lamba and Stapledon
(2009) mentioned that larger firms tend to issue more shares than smaller finns and
are less likely to have a controlling shareholder
The term tangibility refers to tangible assets act as collateral and provides
security to lenders iffmancial distress based on trade-off hypothesis The firms are
expected have a high level of debt because of the higher tangible assets (Pandey
2001) Furthermore Banchuenvijit (2011) stated that there is a positive relationship
between tangibility and leverage when the firms are expected to issue high level of
debt can borrow on favorable terms with tangible assets that can be used as
collateral However there is a negative relationship between tangibility and
leverage when the firm has lower information asymmetries with tangible assets
Therefore it will cause equity issue to be less costly and lower the leverage ratios
12
Pusat Khidruat Maklumat Akademik UNlVERSm MALAYSIA SARAWAK
can gam entry and exit easily In addition to that managers can control the
ownership and adjust the proportion ofdebt and equity to invest the capital and get
the gain Hence ownership structure plays an important role in the governance and
performance of firms
Craswell et al (1997) proved that the influence ofmanagerial and institutional
equity ownership is highly related to corporate performance They examined the
effects of both insider and institutional ownership of Australian corporate
performance Australian firms have significantly different legal and econOmIC
circumstances as compared to the firms in the US The fmdings indicate that there is
a weak relationship between institutional ownership and corporate performance
The result is found to be temporaly unstable and confined to large Australian
companies The evidence is not consistent with corporate performance related to
the level of institutional ownership A significant relationship between equity
ownership structure and corporate performance implies corrective transfers of
equity between insiders outsiders and the successful survival of firms with
effectively non-optimal ownership structures which casts doubt on the existence of
any generalized equilibrium Ifthe o~nership structure is endogenous the firms are
systematically related to equity ownership
5
In Malaysia the ownership concentration is weaker than other developed
countries and the institutional ownership is less than 20 ofthe outstanding shares
(Joher et aI 2006) The three ownership structures of corporation are institutional
ownership managerial ownership and individual ownership These three types of
ownership structures can affect ftrm performance and value by mitigating agency
costs of the firm Therefore the impact of institutional ownership on insider
ownership and corporate debt policy in Malaysia is investigated to provide
empirical evidence on corporate control in developed market
Various issues regarding the efficiency and the safety ofbanking industries are
increasing due to the financial crisis in 1997 (Barry et aI 2008) After the financial
crisis the banking system is reforme~ by bank regulators and they also carried out
several measures to provide efficient banking services to sustain the economy One
ofthe measures is when the government decided to change management ownership
and governance to avoid closure ofdistressed banks Moreover Asian governments
encouraged safe banks to merge with distressed banks to restore the financial
viability ofdmiddotistressed banks After the 1997 financial crisis the ownership structure
and the governance of banks are moified by bank restructuring program Hence
this study attempts to examine the impact ofownership structure on corporate debt
policy in Malaysian banking industry between from 2005 and 201 O
6
12 Definition of Ownership Structure
Generally ownership structure is defined as the identity of the equity owners
and distribution of equity regarding votes and capital These structures are
important in corporate governance to detennine the incentives of managers and
manage the economic efficiency of the corporations (Ownership Structure 2011)
Gursoyand Aydogan (1998) stipulated that ownership structure is categorized
into two dimensions which are ownership concentration and ownership mix
Ownership concentration refers to the distribution of the shares owned by a certain
number of individuals institutions and families On the other hand ownership mix
is related to the presence of certain institutions or groups such as government or
foreign partners among the shareholders These two categories of measures
incorporate both the influence power of shareholders as well as identity of owners
with their unique incentive mechanisms and preferences
7
121 The Types of Ownership Structure
Ownership structures are commonly divided into several types namely
managerial ownership family ownership and institutional ownership
(a) Managerial Ownership
According to Joher et al (2006) managerial ownership is an ownership which
consists of directors managers and other members in management to hold the
shares directly in a corporation The managerial ownership of equity can mitigate
the moral hazard problem between managers and shareholders Jensen and
Meckling (1976) argued that agency problem can reduce to moral hazard between
manager and owners if there were no debt contracts This is because managerial
ownership can be effective in aligning the managerial interest with outside
shareholders to mitigate the agency problems Datta et al (2004) also discovered
that the managers with high equity ownership prefer short maturity debt for
facilitating the agency conflicts of managerial discretion However Hashim and
Devi (2008) pointed out that the correlation between managerial and inside
ownership is a high positive relationship which is operated by the inside
management
8
(b) Family Ownership
Family ownership is a type ofownership that is owned entirely by the members
of a single family in a corporation The family ownership of corporate governance
is mostly operated by Asian firms According to Hashim and Devi (2008) family
ownership provides incentives to reduce the agency cost by aligning shareholders
and managerial interest They found that there is a positive and significant
relationship between family ownership and earnings quality They also proved that
family members who have greater expertise on firms operations can operate the
firms activities effectively to reduce the agency cost Nevertheless Villalonga and
Amit (2006) argued that family ownership makes profits for corporation when the
founder is active in the firm as the Chi~fExecutive Officer (CEO) or Chairman with
a hired CEO They also found that the agency conflicts exist between minority
shareholders and managers when the corporate government is performed by
descendant-CEO
(c) Institutional Ownership
Institutional ownership is an ownership of flllancial institution which includes
pension funds mutual funds closed-end fund life insurance companies savings
institutions and trust department of commercial banks (Joher et aI 2006)
According to Hashim and Devi (2008) the participation of institutional investors in
9
corporate governance plays an important role to protect minority shareholders
interest and mitigate the agency problem It is noted that there is a positive and
significant relationship between institutional ownership and earnings quality Thus
it indicates that the institutional have greater incentives to monitor firms activities
and the corporate government practices are improved by the involvement of
institutional investors participation
13 Definition of Corporate Debt Policy
Corporate debt policy is a non-government debt security which is divided into
short-term debt and long-term debt The short-term debt is issued as commercial
paper and long-term debt is issued as bonds It normally includes the council tax
housing rents business rates benefit overpayments legal costs and debtors
Besides the corporate debt policy is responsible to collect debt form citizens and
provides advice and practical help in the management ofvarious debts (Leeds City
Council Corporate Debt Policy 2010) It sets out the principles to maximize
collection performance from collecting debt Therefore it is the provision of
support mechanisms to all customer~
10
14 The Determinants of Capital Structure
According to the pecking order theory and agency theory the detenninants of
capital structure cover the profitability finn size tangibility growth opportunity
and firm risk These determinants of ownership structure will affect the firms
leverage or debt ratio
Banchuenvijit (2011) defined profitability as the determinant of capital
structure The pecking order theory prefers internal financing in which profitable
fInns will employ higher retained earning with higher profitability to hold less debt
Many empirical studies have found that there is a negative relationship between
~
profitability and leverage The fInn uses its own cash flow instead ofusing debt to
fmance its operations and investment opportunities when there is a negative sign
However Cespedes et al (2008) proved that the relationship between profitability
and leverage is a positive based on trade-off theory This is because the trade-off
theory is expected to show a positive sign when the firms debt level is higher It
implies that the higher the firms profitability the higher the potential tax shields
Pandey (2001) argued that the finn will employ high debt to gain tax benefits to get
higher profits based on interest tax sliield hypothesis proposed in the theory by
Modigliani and Miller (1963)
11
Besides firm size is found to be a positive detenninant of capital structure as
indicated in many previous studies However it implies a negative relation between
size and leverage when larger firms are expected to have less information
asymmetries in issuing debt or equity (Banchuenvijit 20 11) Chu and Cheah (2004)
pointed out that large firm size indicates the firm will share the risk and less asset
will be shared specificity between the firms founders On the other hand smaller
firm size and net cash flow will share the risk with large concentrated ownership
As stated by Pandey (200 I) large firms will employ higher amount of debt than
small firms because smaller firms would have less long-term debt and more
short-term debt due to the shareholders-lenders conflict Lamba and Stapledon
(2009) mentioned that larger firms tend to issue more shares than smaller finns and
are less likely to have a controlling shareholder
The term tangibility refers to tangible assets act as collateral and provides
security to lenders iffmancial distress based on trade-off hypothesis The firms are
expected have a high level of debt because of the higher tangible assets (Pandey
2001) Furthermore Banchuenvijit (2011) stated that there is a positive relationship
between tangibility and leverage when the firms are expected to issue high level of
debt can borrow on favorable terms with tangible assets that can be used as
collateral However there is a negative relationship between tangibility and
leverage when the firm has lower information asymmetries with tangible assets
Therefore it will cause equity issue to be less costly and lower the leverage ratios
12
In Malaysia the ownership concentration is weaker than other developed
countries and the institutional ownership is less than 20 ofthe outstanding shares
(Joher et aI 2006) The three ownership structures of corporation are institutional
ownership managerial ownership and individual ownership These three types of
ownership structures can affect ftrm performance and value by mitigating agency
costs of the firm Therefore the impact of institutional ownership on insider
ownership and corporate debt policy in Malaysia is investigated to provide
empirical evidence on corporate control in developed market
Various issues regarding the efficiency and the safety ofbanking industries are
increasing due to the financial crisis in 1997 (Barry et aI 2008) After the financial
crisis the banking system is reforme~ by bank regulators and they also carried out
several measures to provide efficient banking services to sustain the economy One
ofthe measures is when the government decided to change management ownership
and governance to avoid closure ofdistressed banks Moreover Asian governments
encouraged safe banks to merge with distressed banks to restore the financial
viability ofdmiddotistressed banks After the 1997 financial crisis the ownership structure
and the governance of banks are moified by bank restructuring program Hence
this study attempts to examine the impact ofownership structure on corporate debt
policy in Malaysian banking industry between from 2005 and 201 O
6
12 Definition of Ownership Structure
Generally ownership structure is defined as the identity of the equity owners
and distribution of equity regarding votes and capital These structures are
important in corporate governance to detennine the incentives of managers and
manage the economic efficiency of the corporations (Ownership Structure 2011)
Gursoyand Aydogan (1998) stipulated that ownership structure is categorized
into two dimensions which are ownership concentration and ownership mix
Ownership concentration refers to the distribution of the shares owned by a certain
number of individuals institutions and families On the other hand ownership mix
is related to the presence of certain institutions or groups such as government or
foreign partners among the shareholders These two categories of measures
incorporate both the influence power of shareholders as well as identity of owners
with their unique incentive mechanisms and preferences
7
121 The Types of Ownership Structure
Ownership structures are commonly divided into several types namely
managerial ownership family ownership and institutional ownership
(a) Managerial Ownership
According to Joher et al (2006) managerial ownership is an ownership which
consists of directors managers and other members in management to hold the
shares directly in a corporation The managerial ownership of equity can mitigate
the moral hazard problem between managers and shareholders Jensen and
Meckling (1976) argued that agency problem can reduce to moral hazard between
manager and owners if there were no debt contracts This is because managerial
ownership can be effective in aligning the managerial interest with outside
shareholders to mitigate the agency problems Datta et al (2004) also discovered
that the managers with high equity ownership prefer short maturity debt for
facilitating the agency conflicts of managerial discretion However Hashim and
Devi (2008) pointed out that the correlation between managerial and inside
ownership is a high positive relationship which is operated by the inside
management
8
(b) Family Ownership
Family ownership is a type ofownership that is owned entirely by the members
of a single family in a corporation The family ownership of corporate governance
is mostly operated by Asian firms According to Hashim and Devi (2008) family
ownership provides incentives to reduce the agency cost by aligning shareholders
and managerial interest They found that there is a positive and significant
relationship between family ownership and earnings quality They also proved that
family members who have greater expertise on firms operations can operate the
firms activities effectively to reduce the agency cost Nevertheless Villalonga and
Amit (2006) argued that family ownership makes profits for corporation when the
founder is active in the firm as the Chi~fExecutive Officer (CEO) or Chairman with
a hired CEO They also found that the agency conflicts exist between minority
shareholders and managers when the corporate government is performed by
descendant-CEO
(c) Institutional Ownership
Institutional ownership is an ownership of flllancial institution which includes
pension funds mutual funds closed-end fund life insurance companies savings
institutions and trust department of commercial banks (Joher et aI 2006)
According to Hashim and Devi (2008) the participation of institutional investors in
9
corporate governance plays an important role to protect minority shareholders
interest and mitigate the agency problem It is noted that there is a positive and
significant relationship between institutional ownership and earnings quality Thus
it indicates that the institutional have greater incentives to monitor firms activities
and the corporate government practices are improved by the involvement of
institutional investors participation
13 Definition of Corporate Debt Policy
Corporate debt policy is a non-government debt security which is divided into
short-term debt and long-term debt The short-term debt is issued as commercial
paper and long-term debt is issued as bonds It normally includes the council tax
housing rents business rates benefit overpayments legal costs and debtors
Besides the corporate debt policy is responsible to collect debt form citizens and
provides advice and practical help in the management ofvarious debts (Leeds City
Council Corporate Debt Policy 2010) It sets out the principles to maximize
collection performance from collecting debt Therefore it is the provision of
support mechanisms to all customer~
10
14 The Determinants of Capital Structure
According to the pecking order theory and agency theory the detenninants of
capital structure cover the profitability finn size tangibility growth opportunity
and firm risk These determinants of ownership structure will affect the firms
leverage or debt ratio
Banchuenvijit (2011) defined profitability as the determinant of capital
structure The pecking order theory prefers internal financing in which profitable
fInns will employ higher retained earning with higher profitability to hold less debt
Many empirical studies have found that there is a negative relationship between
~
profitability and leverage The fInn uses its own cash flow instead ofusing debt to
fmance its operations and investment opportunities when there is a negative sign
However Cespedes et al (2008) proved that the relationship between profitability
and leverage is a positive based on trade-off theory This is because the trade-off
theory is expected to show a positive sign when the firms debt level is higher It
implies that the higher the firms profitability the higher the potential tax shields
Pandey (2001) argued that the finn will employ high debt to gain tax benefits to get
higher profits based on interest tax sliield hypothesis proposed in the theory by
Modigliani and Miller (1963)
11
Besides firm size is found to be a positive detenninant of capital structure as
indicated in many previous studies However it implies a negative relation between
size and leverage when larger firms are expected to have less information
asymmetries in issuing debt or equity (Banchuenvijit 20 11) Chu and Cheah (2004)
pointed out that large firm size indicates the firm will share the risk and less asset
will be shared specificity between the firms founders On the other hand smaller
firm size and net cash flow will share the risk with large concentrated ownership
As stated by Pandey (200 I) large firms will employ higher amount of debt than
small firms because smaller firms would have less long-term debt and more
short-term debt due to the shareholders-lenders conflict Lamba and Stapledon
(2009) mentioned that larger firms tend to issue more shares than smaller finns and
are less likely to have a controlling shareholder
The term tangibility refers to tangible assets act as collateral and provides
security to lenders iffmancial distress based on trade-off hypothesis The firms are
expected have a high level of debt because of the higher tangible assets (Pandey
2001) Furthermore Banchuenvijit (2011) stated that there is a positive relationship
between tangibility and leverage when the firms are expected to issue high level of
debt can borrow on favorable terms with tangible assets that can be used as
collateral However there is a negative relationship between tangibility and
leverage when the firm has lower information asymmetries with tangible assets
Therefore it will cause equity issue to be less costly and lower the leverage ratios
12
12 Definition of Ownership Structure
Generally ownership structure is defined as the identity of the equity owners
and distribution of equity regarding votes and capital These structures are
important in corporate governance to detennine the incentives of managers and
manage the economic efficiency of the corporations (Ownership Structure 2011)
Gursoyand Aydogan (1998) stipulated that ownership structure is categorized
into two dimensions which are ownership concentration and ownership mix
Ownership concentration refers to the distribution of the shares owned by a certain
number of individuals institutions and families On the other hand ownership mix
is related to the presence of certain institutions or groups such as government or
foreign partners among the shareholders These two categories of measures
incorporate both the influence power of shareholders as well as identity of owners
with their unique incentive mechanisms and preferences
7
121 The Types of Ownership Structure
Ownership structures are commonly divided into several types namely
managerial ownership family ownership and institutional ownership
(a) Managerial Ownership
According to Joher et al (2006) managerial ownership is an ownership which
consists of directors managers and other members in management to hold the
shares directly in a corporation The managerial ownership of equity can mitigate
the moral hazard problem between managers and shareholders Jensen and
Meckling (1976) argued that agency problem can reduce to moral hazard between
manager and owners if there were no debt contracts This is because managerial
ownership can be effective in aligning the managerial interest with outside
shareholders to mitigate the agency problems Datta et al (2004) also discovered
that the managers with high equity ownership prefer short maturity debt for
facilitating the agency conflicts of managerial discretion However Hashim and
Devi (2008) pointed out that the correlation between managerial and inside
ownership is a high positive relationship which is operated by the inside
management
8
(b) Family Ownership
Family ownership is a type ofownership that is owned entirely by the members
of a single family in a corporation The family ownership of corporate governance
is mostly operated by Asian firms According to Hashim and Devi (2008) family
ownership provides incentives to reduce the agency cost by aligning shareholders
and managerial interest They found that there is a positive and significant
relationship between family ownership and earnings quality They also proved that
family members who have greater expertise on firms operations can operate the
firms activities effectively to reduce the agency cost Nevertheless Villalonga and
Amit (2006) argued that family ownership makes profits for corporation when the
founder is active in the firm as the Chi~fExecutive Officer (CEO) or Chairman with
a hired CEO They also found that the agency conflicts exist between minority
shareholders and managers when the corporate government is performed by
descendant-CEO
(c) Institutional Ownership
Institutional ownership is an ownership of flllancial institution which includes
pension funds mutual funds closed-end fund life insurance companies savings
institutions and trust department of commercial banks (Joher et aI 2006)
According to Hashim and Devi (2008) the participation of institutional investors in
9
corporate governance plays an important role to protect minority shareholders
interest and mitigate the agency problem It is noted that there is a positive and
significant relationship between institutional ownership and earnings quality Thus
it indicates that the institutional have greater incentives to monitor firms activities
and the corporate government practices are improved by the involvement of
institutional investors participation
13 Definition of Corporate Debt Policy
Corporate debt policy is a non-government debt security which is divided into
short-term debt and long-term debt The short-term debt is issued as commercial
paper and long-term debt is issued as bonds It normally includes the council tax
housing rents business rates benefit overpayments legal costs and debtors
Besides the corporate debt policy is responsible to collect debt form citizens and
provides advice and practical help in the management ofvarious debts (Leeds City
Council Corporate Debt Policy 2010) It sets out the principles to maximize
collection performance from collecting debt Therefore it is the provision of
support mechanisms to all customer~
10
14 The Determinants of Capital Structure
According to the pecking order theory and agency theory the detenninants of
capital structure cover the profitability finn size tangibility growth opportunity
and firm risk These determinants of ownership structure will affect the firms
leverage or debt ratio
Banchuenvijit (2011) defined profitability as the determinant of capital
structure The pecking order theory prefers internal financing in which profitable
fInns will employ higher retained earning with higher profitability to hold less debt
Many empirical studies have found that there is a negative relationship between
~
profitability and leverage The fInn uses its own cash flow instead ofusing debt to
fmance its operations and investment opportunities when there is a negative sign
However Cespedes et al (2008) proved that the relationship between profitability
and leverage is a positive based on trade-off theory This is because the trade-off
theory is expected to show a positive sign when the firms debt level is higher It
implies that the higher the firms profitability the higher the potential tax shields
Pandey (2001) argued that the finn will employ high debt to gain tax benefits to get
higher profits based on interest tax sliield hypothesis proposed in the theory by
Modigliani and Miller (1963)
11
Besides firm size is found to be a positive detenninant of capital structure as
indicated in many previous studies However it implies a negative relation between
size and leverage when larger firms are expected to have less information
asymmetries in issuing debt or equity (Banchuenvijit 20 11) Chu and Cheah (2004)
pointed out that large firm size indicates the firm will share the risk and less asset
will be shared specificity between the firms founders On the other hand smaller
firm size and net cash flow will share the risk with large concentrated ownership
As stated by Pandey (200 I) large firms will employ higher amount of debt than
small firms because smaller firms would have less long-term debt and more
short-term debt due to the shareholders-lenders conflict Lamba and Stapledon
(2009) mentioned that larger firms tend to issue more shares than smaller finns and
are less likely to have a controlling shareholder
The term tangibility refers to tangible assets act as collateral and provides
security to lenders iffmancial distress based on trade-off hypothesis The firms are
expected have a high level of debt because of the higher tangible assets (Pandey
2001) Furthermore Banchuenvijit (2011) stated that there is a positive relationship
between tangibility and leverage when the firms are expected to issue high level of
debt can borrow on favorable terms with tangible assets that can be used as
collateral However there is a negative relationship between tangibility and
leverage when the firm has lower information asymmetries with tangible assets
Therefore it will cause equity issue to be less costly and lower the leverage ratios
12
121 The Types of Ownership Structure
Ownership structures are commonly divided into several types namely
managerial ownership family ownership and institutional ownership
(a) Managerial Ownership
According to Joher et al (2006) managerial ownership is an ownership which
consists of directors managers and other members in management to hold the
shares directly in a corporation The managerial ownership of equity can mitigate
the moral hazard problem between managers and shareholders Jensen and
Meckling (1976) argued that agency problem can reduce to moral hazard between
manager and owners if there were no debt contracts This is because managerial
ownership can be effective in aligning the managerial interest with outside
shareholders to mitigate the agency problems Datta et al (2004) also discovered
that the managers with high equity ownership prefer short maturity debt for
facilitating the agency conflicts of managerial discretion However Hashim and
Devi (2008) pointed out that the correlation between managerial and inside
ownership is a high positive relationship which is operated by the inside
management
8
(b) Family Ownership
Family ownership is a type ofownership that is owned entirely by the members
of a single family in a corporation The family ownership of corporate governance
is mostly operated by Asian firms According to Hashim and Devi (2008) family
ownership provides incentives to reduce the agency cost by aligning shareholders
and managerial interest They found that there is a positive and significant
relationship between family ownership and earnings quality They also proved that
family members who have greater expertise on firms operations can operate the
firms activities effectively to reduce the agency cost Nevertheless Villalonga and
Amit (2006) argued that family ownership makes profits for corporation when the
founder is active in the firm as the Chi~fExecutive Officer (CEO) or Chairman with
a hired CEO They also found that the agency conflicts exist between minority
shareholders and managers when the corporate government is performed by
descendant-CEO
(c) Institutional Ownership
Institutional ownership is an ownership of flllancial institution which includes
pension funds mutual funds closed-end fund life insurance companies savings
institutions and trust department of commercial banks (Joher et aI 2006)
According to Hashim and Devi (2008) the participation of institutional investors in
9
corporate governance plays an important role to protect minority shareholders
interest and mitigate the agency problem It is noted that there is a positive and
significant relationship between institutional ownership and earnings quality Thus
it indicates that the institutional have greater incentives to monitor firms activities
and the corporate government practices are improved by the involvement of
institutional investors participation
13 Definition of Corporate Debt Policy
Corporate debt policy is a non-government debt security which is divided into
short-term debt and long-term debt The short-term debt is issued as commercial
paper and long-term debt is issued as bonds It normally includes the council tax
housing rents business rates benefit overpayments legal costs and debtors
Besides the corporate debt policy is responsible to collect debt form citizens and
provides advice and practical help in the management ofvarious debts (Leeds City
Council Corporate Debt Policy 2010) It sets out the principles to maximize
collection performance from collecting debt Therefore it is the provision of
support mechanisms to all customer~
10
14 The Determinants of Capital Structure
According to the pecking order theory and agency theory the detenninants of
capital structure cover the profitability finn size tangibility growth opportunity
and firm risk These determinants of ownership structure will affect the firms
leverage or debt ratio
Banchuenvijit (2011) defined profitability as the determinant of capital
structure The pecking order theory prefers internal financing in which profitable
fInns will employ higher retained earning with higher profitability to hold less debt
Many empirical studies have found that there is a negative relationship between
~
profitability and leverage The fInn uses its own cash flow instead ofusing debt to
fmance its operations and investment opportunities when there is a negative sign
However Cespedes et al (2008) proved that the relationship between profitability
and leverage is a positive based on trade-off theory This is because the trade-off
theory is expected to show a positive sign when the firms debt level is higher It
implies that the higher the firms profitability the higher the potential tax shields
Pandey (2001) argued that the finn will employ high debt to gain tax benefits to get
higher profits based on interest tax sliield hypothesis proposed in the theory by
Modigliani and Miller (1963)
11
Besides firm size is found to be a positive detenninant of capital structure as
indicated in many previous studies However it implies a negative relation between
size and leverage when larger firms are expected to have less information
asymmetries in issuing debt or equity (Banchuenvijit 20 11) Chu and Cheah (2004)
pointed out that large firm size indicates the firm will share the risk and less asset
will be shared specificity between the firms founders On the other hand smaller
firm size and net cash flow will share the risk with large concentrated ownership
As stated by Pandey (200 I) large firms will employ higher amount of debt than
small firms because smaller firms would have less long-term debt and more
short-term debt due to the shareholders-lenders conflict Lamba and Stapledon
(2009) mentioned that larger firms tend to issue more shares than smaller finns and
are less likely to have a controlling shareholder
The term tangibility refers to tangible assets act as collateral and provides
security to lenders iffmancial distress based on trade-off hypothesis The firms are
expected have a high level of debt because of the higher tangible assets (Pandey
2001) Furthermore Banchuenvijit (2011) stated that there is a positive relationship
between tangibility and leverage when the firms are expected to issue high level of
debt can borrow on favorable terms with tangible assets that can be used as
collateral However there is a negative relationship between tangibility and
leverage when the firm has lower information asymmetries with tangible assets
Therefore it will cause equity issue to be less costly and lower the leverage ratios
12
(b) Family Ownership
Family ownership is a type ofownership that is owned entirely by the members
of a single family in a corporation The family ownership of corporate governance
is mostly operated by Asian firms According to Hashim and Devi (2008) family
ownership provides incentives to reduce the agency cost by aligning shareholders
and managerial interest They found that there is a positive and significant
relationship between family ownership and earnings quality They also proved that
family members who have greater expertise on firms operations can operate the
firms activities effectively to reduce the agency cost Nevertheless Villalonga and
Amit (2006) argued that family ownership makes profits for corporation when the
founder is active in the firm as the Chi~fExecutive Officer (CEO) or Chairman with
a hired CEO They also found that the agency conflicts exist between minority
shareholders and managers when the corporate government is performed by
descendant-CEO
(c) Institutional Ownership
Institutional ownership is an ownership of flllancial institution which includes
pension funds mutual funds closed-end fund life insurance companies savings
institutions and trust department of commercial banks (Joher et aI 2006)
According to Hashim and Devi (2008) the participation of institutional investors in
9
corporate governance plays an important role to protect minority shareholders
interest and mitigate the agency problem It is noted that there is a positive and
significant relationship between institutional ownership and earnings quality Thus
it indicates that the institutional have greater incentives to monitor firms activities
and the corporate government practices are improved by the involvement of
institutional investors participation
13 Definition of Corporate Debt Policy
Corporate debt policy is a non-government debt security which is divided into
short-term debt and long-term debt The short-term debt is issued as commercial
paper and long-term debt is issued as bonds It normally includes the council tax
housing rents business rates benefit overpayments legal costs and debtors
Besides the corporate debt policy is responsible to collect debt form citizens and
provides advice and practical help in the management ofvarious debts (Leeds City
Council Corporate Debt Policy 2010) It sets out the principles to maximize
collection performance from collecting debt Therefore it is the provision of
support mechanisms to all customer~
10
14 The Determinants of Capital Structure
According to the pecking order theory and agency theory the detenninants of
capital structure cover the profitability finn size tangibility growth opportunity
and firm risk These determinants of ownership structure will affect the firms
leverage or debt ratio
Banchuenvijit (2011) defined profitability as the determinant of capital
structure The pecking order theory prefers internal financing in which profitable
fInns will employ higher retained earning with higher profitability to hold less debt
Many empirical studies have found that there is a negative relationship between
~
profitability and leverage The fInn uses its own cash flow instead ofusing debt to
fmance its operations and investment opportunities when there is a negative sign
However Cespedes et al (2008) proved that the relationship between profitability
and leverage is a positive based on trade-off theory This is because the trade-off
theory is expected to show a positive sign when the firms debt level is higher It
implies that the higher the firms profitability the higher the potential tax shields
Pandey (2001) argued that the finn will employ high debt to gain tax benefits to get
higher profits based on interest tax sliield hypothesis proposed in the theory by
Modigliani and Miller (1963)
11
Besides firm size is found to be a positive detenninant of capital structure as
indicated in many previous studies However it implies a negative relation between
size and leverage when larger firms are expected to have less information
asymmetries in issuing debt or equity (Banchuenvijit 20 11) Chu and Cheah (2004)
pointed out that large firm size indicates the firm will share the risk and less asset
will be shared specificity between the firms founders On the other hand smaller
firm size and net cash flow will share the risk with large concentrated ownership
As stated by Pandey (200 I) large firms will employ higher amount of debt than
small firms because smaller firms would have less long-term debt and more
short-term debt due to the shareholders-lenders conflict Lamba and Stapledon
(2009) mentioned that larger firms tend to issue more shares than smaller finns and
are less likely to have a controlling shareholder
The term tangibility refers to tangible assets act as collateral and provides
security to lenders iffmancial distress based on trade-off hypothesis The firms are
expected have a high level of debt because of the higher tangible assets (Pandey
2001) Furthermore Banchuenvijit (2011) stated that there is a positive relationship
between tangibility and leverage when the firms are expected to issue high level of
debt can borrow on favorable terms with tangible assets that can be used as
collateral However there is a negative relationship between tangibility and
leverage when the firm has lower information asymmetries with tangible assets
Therefore it will cause equity issue to be less costly and lower the leverage ratios
12
corporate governance plays an important role to protect minority shareholders
interest and mitigate the agency problem It is noted that there is a positive and
significant relationship between institutional ownership and earnings quality Thus
it indicates that the institutional have greater incentives to monitor firms activities
and the corporate government practices are improved by the involvement of
institutional investors participation
13 Definition of Corporate Debt Policy
Corporate debt policy is a non-government debt security which is divided into
short-term debt and long-term debt The short-term debt is issued as commercial
paper and long-term debt is issued as bonds It normally includes the council tax
housing rents business rates benefit overpayments legal costs and debtors
Besides the corporate debt policy is responsible to collect debt form citizens and
provides advice and practical help in the management ofvarious debts (Leeds City
Council Corporate Debt Policy 2010) It sets out the principles to maximize
collection performance from collecting debt Therefore it is the provision of
support mechanisms to all customer~
10
14 The Determinants of Capital Structure
According to the pecking order theory and agency theory the detenninants of
capital structure cover the profitability finn size tangibility growth opportunity
and firm risk These determinants of ownership structure will affect the firms
leverage or debt ratio
Banchuenvijit (2011) defined profitability as the determinant of capital
structure The pecking order theory prefers internal financing in which profitable
fInns will employ higher retained earning with higher profitability to hold less debt
Many empirical studies have found that there is a negative relationship between
~
profitability and leverage The fInn uses its own cash flow instead ofusing debt to
fmance its operations and investment opportunities when there is a negative sign
However Cespedes et al (2008) proved that the relationship between profitability
and leverage is a positive based on trade-off theory This is because the trade-off
theory is expected to show a positive sign when the firms debt level is higher It
implies that the higher the firms profitability the higher the potential tax shields
Pandey (2001) argued that the finn will employ high debt to gain tax benefits to get
higher profits based on interest tax sliield hypothesis proposed in the theory by
Modigliani and Miller (1963)
11
Besides firm size is found to be a positive detenninant of capital structure as
indicated in many previous studies However it implies a negative relation between
size and leverage when larger firms are expected to have less information
asymmetries in issuing debt or equity (Banchuenvijit 20 11) Chu and Cheah (2004)
pointed out that large firm size indicates the firm will share the risk and less asset
will be shared specificity between the firms founders On the other hand smaller
firm size and net cash flow will share the risk with large concentrated ownership
As stated by Pandey (200 I) large firms will employ higher amount of debt than
small firms because smaller firms would have less long-term debt and more
short-term debt due to the shareholders-lenders conflict Lamba and Stapledon
(2009) mentioned that larger firms tend to issue more shares than smaller finns and
are less likely to have a controlling shareholder
The term tangibility refers to tangible assets act as collateral and provides
security to lenders iffmancial distress based on trade-off hypothesis The firms are
expected have a high level of debt because of the higher tangible assets (Pandey
2001) Furthermore Banchuenvijit (2011) stated that there is a positive relationship
between tangibility and leverage when the firms are expected to issue high level of
debt can borrow on favorable terms with tangible assets that can be used as
collateral However there is a negative relationship between tangibility and
leverage when the firm has lower information asymmetries with tangible assets
Therefore it will cause equity issue to be less costly and lower the leverage ratios
12
14 The Determinants of Capital Structure
According to the pecking order theory and agency theory the detenninants of
capital structure cover the profitability finn size tangibility growth opportunity
and firm risk These determinants of ownership structure will affect the firms
leverage or debt ratio
Banchuenvijit (2011) defined profitability as the determinant of capital
structure The pecking order theory prefers internal financing in which profitable
fInns will employ higher retained earning with higher profitability to hold less debt
Many empirical studies have found that there is a negative relationship between
~
profitability and leverage The fInn uses its own cash flow instead ofusing debt to
fmance its operations and investment opportunities when there is a negative sign
However Cespedes et al (2008) proved that the relationship between profitability
and leverage is a positive based on trade-off theory This is because the trade-off
theory is expected to show a positive sign when the firms debt level is higher It
implies that the higher the firms profitability the higher the potential tax shields
Pandey (2001) argued that the finn will employ high debt to gain tax benefits to get
higher profits based on interest tax sliield hypothesis proposed in the theory by
Modigliani and Miller (1963)
11
Besides firm size is found to be a positive detenninant of capital structure as
indicated in many previous studies However it implies a negative relation between
size and leverage when larger firms are expected to have less information
asymmetries in issuing debt or equity (Banchuenvijit 20 11) Chu and Cheah (2004)
pointed out that large firm size indicates the firm will share the risk and less asset
will be shared specificity between the firms founders On the other hand smaller
firm size and net cash flow will share the risk with large concentrated ownership
As stated by Pandey (200 I) large firms will employ higher amount of debt than
small firms because smaller firms would have less long-term debt and more
short-term debt due to the shareholders-lenders conflict Lamba and Stapledon
(2009) mentioned that larger firms tend to issue more shares than smaller finns and
are less likely to have a controlling shareholder
The term tangibility refers to tangible assets act as collateral and provides
security to lenders iffmancial distress based on trade-off hypothesis The firms are
expected have a high level of debt because of the higher tangible assets (Pandey
2001) Furthermore Banchuenvijit (2011) stated that there is a positive relationship
between tangibility and leverage when the firms are expected to issue high level of
debt can borrow on favorable terms with tangible assets that can be used as
collateral However there is a negative relationship between tangibility and
leverage when the firm has lower information asymmetries with tangible assets
Therefore it will cause equity issue to be less costly and lower the leverage ratios
12
Besides firm size is found to be a positive detenninant of capital structure as
indicated in many previous studies However it implies a negative relation between
size and leverage when larger firms are expected to have less information
asymmetries in issuing debt or equity (Banchuenvijit 20 11) Chu and Cheah (2004)
pointed out that large firm size indicates the firm will share the risk and less asset
will be shared specificity between the firms founders On the other hand smaller
firm size and net cash flow will share the risk with large concentrated ownership
As stated by Pandey (200 I) large firms will employ higher amount of debt than
small firms because smaller firms would have less long-term debt and more
short-term debt due to the shareholders-lenders conflict Lamba and Stapledon
(2009) mentioned that larger firms tend to issue more shares than smaller finns and
are less likely to have a controlling shareholder
The term tangibility refers to tangible assets act as collateral and provides
security to lenders iffmancial distress based on trade-off hypothesis The firms are
expected have a high level of debt because of the higher tangible assets (Pandey
2001) Furthermore Banchuenvijit (2011) stated that there is a positive relationship
between tangibility and leverage when the firms are expected to issue high level of
debt can borrow on favorable terms with tangible assets that can be used as
collateral However there is a negative relationship between tangibility and
leverage when the firm has lower information asymmetries with tangible assets
Therefore it will cause equity issue to be less costly and lower the leverage ratios
12