Purpose of Study

CORPORATE GOVERNANCE IN JAMAICA:

A RISK MANAGEMENT APPROACH

Dr. Twila Mae LoganDr. Doreen Gooden

Florida International University

Purpose of StudyTo examine:

The impact of board composition and ownership structure on the riskiness and value of publicly traded non-financial firms in Jamaica

Background The late 1990’s financial crisis in Jamaica – increased the awareness for appropriate governance mechanism resulting in

- Tightening of banking laws and regulations - Company Act Legislation-

BackgroundCapital Market poorly developed

Emergence of junior stock market

Trading is relatively thin

Corporate Bond market is virtually non-existent

Jamaica Stock Exchange (JSE) established in 1968 - only 18 non-financial firms trading on the main index - 13 non-financial firms on the junior market

Background (Cont’d)Thus – need for research to determine best practices in corporate governance: - to enhance investors confidence - further development of capital market.

Few studies done on Jamaica publicly traded firms.

LITERATURE REVIEW – Board Composition and Risk

DAMODARAN (2008) – Risk taking behavior is related to individual traits and characteristics

- women in senior positions less risk averse than male counterparts- more experienced persons are more risk averse than naïve persons.

LITERATURE REVIEW – Board Composition and Risk

Rachdi and Ameur (2011) – 11 Tunisian Banks – smaller boards associated with better performance and more risk taking.

Independent directors (outside, non-executive) had lower performance and no significant effect on risk taking.

LITERATURE REVIEW – Board Composition and Risk

Kyereboah-Coleman & Biekpe (2007) – firm risk level decreased with outside directors

- firm risk increased with increasing board size.

Brick and Chidambaran (2008)negative relationship between firm risk and the level of board monitoring

LITERATURE REVIEW – Ownershipand Risk

Jensen & Meckling (1976) Jensen & Murphy (1990)

- shareholders by corporate insiders result in greater risk taking.

Gadhoum and Ayadi (2003) positive relationship between firm risk taking and insider holdings.firm’s risk is negatively related to ownership structure

LITERATURE REVIEW – Ownershipand Risk

Wright et.al. (1996)Increasing insider’s stake may represent a significant portion of person wealth – hence less incentive for reducing risk.

Growth opportunities can influence risk taking.

LITERATURE REVIEW – Ownershipand Value

Shliefer & Visny (1986)

McConnell & Searves (1990) both foundOwnership structure affects the value of firms

Turki & Sedrine (2012) found that- increased ownership concentration is associated with lower firm performance- increased managerial ownership is consistent with better firm performance.

MethodsUni-variate descriptive statistics

Multiple regression with small samplesRobust regression

Reduces the influence of outliers

Data

Publicly traded non-financial firms17 main exchange8 junior exchange

Dependent variables : Weekly returns and standard deviation from October 2010 – October 2012

Independent variables: board and ownership composition

Results – Board Composition

Board Size – Average of 8.6 directors (median 8),

On average 17% were female directors (median 17%)

Average of 28% of board members were insiders (median 29%)

Ownership CompositionTop ten shareholders held on average 79%

(median of 87%)

Institutional investors held on average 12% (median 7%)

Insiders held on average almost 30% of the shareholdings.

The average board shareholding was 36% with a median of 20%.

The average managerial shareholding was 19% while the median was 1.5%,

Riskiness/Volatility of Returns

Models R2 : 26% and 30%

In addition to weekly returns, the riskiness of the firm was increasing in insider percentage, and the largest ten shareholders, but decreasing in board shareholdings.

Not significantPercentage of female directors listed on the junior market

DiscussionInsiders are in a better to position to engage in riskier projects. [Jensen & Meckling (1976) and Jensen & Murphy (1990) Gadhoum and Ayadi (2003)]

Increases in board shareholdings result in lower risk. This is consistent with directors being risk averse - loss of personal diversification [Wright et. al., 1996].

Returns/ValueModel R2: 40% and 42%

Increases in managerial share ownership resulted in larger weekly returns (value).

Positive but insignificant coefficients on Top ten block share holdings institutional shareholdings was positive

but not significant.Number of insiders

DiscussionIncreases in managerial share ownership result in larger weekly returns. [see Morck et.al., (1988), Jensen and Meckling, (1976].

The coefficient on institutional shareholdings was positive but not significant [Ming &Gee, (2008)]

Discussion (cont’d)More insiders did not significantly increase the weekly returns even though more insiders are associated with increased risk.

Implications/Conclusions

Managerial Ownership and Value Investing strategyPolicy to encourage greater equity stakes.

Implications and Conclusions

Inside Directors and value and riskIncreased riskiness is only beneficial if

this results in greater returnsPolicy on proportion of inside directors

for publicly traded firms.