THE IMPACT OF CORPORATE GOVERNANCE ON FRIM … fileEkonomi (SE) at the Sebelas Maret University By: RAHMAH FITRIANI F0308007 FACULTY OF ECONOMICS SEBELAS MARET UNIVERSITY SURAKARTA

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THE IMPACT OF CORPORATE GOVERNANCE ON FRIM

PERFORMANCE: EVIDENCE FROM MALAYSIA

SKRIPSI

Submitted As Partial Fulfillment Of Requirement For The Degree of Sarjana

Ekonomi (SE) at the Sebelas Maret University

By:

RAHMAH FITRIANI

F0308007

FACULTY OF ECONOMICS

SEBELAS MARET UNIVERSITY

SURAKARTA

2012


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ABSTRACT

THE IMPACT OF CORPORATE GOVERNANCE ONFIRM

PERFORMANCE: EVIDENCE FROM MALAYSIA

Rahmah Fitriani

NIM F0308007

The objective in this research is to investigate the impact of corporate governance mechanisms on firm performance in Malaysia. Specifically, this research examines the effect of chairman characteristics, board structure, independent committees, and family control on return on assets.

This research focuses on manufacture companies that listed in Bursa Malaysia Berhad for period 2010. The research data were collected from financial statements and annual reports which published by companies. Purposive sampling method was used to determine research sample and 200 samples were collected. Hypothesis was tested by Ordinary Least Square (OLS) regression model using SPSS 17.00 software

The results of this research show that corporate governance mechanism simultaneously impact on return on assets. Only board meetings that partially and significantly had effect on return on assets. Additionally, the interaction between chairman tenure and chairman executive partially and significantly had effect on return on assets. Keywords: Corporate Governance, Chairman Characteristics, Board Structure, Independent Committees, Family Control, Firm Performance.


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MOTTO

· “If you ask, ask Allah. If you seek help, seek help from Allah.”

(Prophet Muhammad SAW)

· “Be, and It is.” (QS 36:82)

· “Remembrance of death saves one from this world’s deceit.” (Ali RA)

· “Wasting time is worse than death, because death separates you from

this world whereas wasting time separates you from Allah.” (Ibn

Qayyim)

· “The only way to live is to put in effort.” (Baekhyun, EXO-K member)

· “Don’t ask Allah to make your life easier. Instead ask Allah to make

you a stronger person.”

· “Hope for the best, plan for the worst” (The Bourne Ultimatum)

· Man Jadda Wajadda (Negeri 5 Menara)


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DEDICATION

This work and all things that I achieved,

Truly I dedicated to:

My Beloved Family

For all supports and love and everything for me.

I love you.


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ACKNOWLEDGEMENT

Assalamu’alaikum Wr. Wb.

Researcher will be grateful to Allah SWT for all the mercy and bless so

that she was able to finish this research well. This Skripsi is proposed to complete

all the requirements of achieves the degree of Sarjana Ekonomi of Accounting

Department, Sebelas Maret University, Surakarta.

Researcher realizes that she could not have finished this skripsi without the

supports and involvement of many parties both directly and indirectly. I owe a

very great debt and thanks to:

1. Dr. Wisnu Untoro, M.S., as the Dean of Economics Department, Sebelas

Maret University, Surakarta.

2. Drs. Santoso M.Si., Ak., as the Head of Accounting Department,Sebelas

Maret University, Surakarta.

3. Drs. Muh Agung Prabowo, M.Si., Ph.D, Ak., as my supervisor. I wish to

express my deepest thanks to Mr. Agung for his considerable help to give

advices and a very closely improved result.

4. Dra. Muthmainah, M.Si., Ak., as my academic advisor, thanks for all your

support and advices.

5. My beloved family. Ibu, ibu, ibu. Ibu for my number one inspiration and my

spirit and all things that I can’t express. I love you, bu, I really do. Bapak,

who always give the biggest support, I love you and thank you. My sister

Rina, don’t forget to study hard okay? I love you.


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6. My other family; Mama, Ayah, Rizky, and Faiz. Mami, Mas Arhan and

Ravin. I love you and thank you.

7. All lectures and staff in Faculty of Economics, Sebelas Maret University who

have provided knowledge, guidance, and service.

8. My TILEND friends; Dyla, Mita, Rintan, Weni, Shali, Aruf, Ridwan, Andit,

Risal, Dani who always brighten my days with all cheerfulness, stupidity and

our friendship. TILL END, friends!

9. My friends Nita (you know we will never end!), Anes (thank you for all you

help^^), Sinta (when will you married?) and Hilda (thank you for

everything!). Hope you guys won’t forget me and forget our stories.

10. My Dzakia Mumtaz partners; Ajeng (someday you will meet M and C, trust

me, and don’t forget our plan to attend SMTown), Oki (thank you for all

things we disscuss through bbm and I hope you will find your soulmate very

soon! P.s: SMTown, we need to attend it), Juma (you’re good, you’re the

best! I’ve learned a lot from you), and Priska although she graduated earlier.

And for the rest of Dzakia Mumtaz’s members, thank you.

11. My partner in crime, Muh Andi DHBA, finally we made it!

12. My friends Akuntansi 2008; Ayuk, Ocha, Windi, Wulan, Eva, Denny, Berlin,

Evy, Sharin, and all of Akuntansi 2008 crew.

13. All of my friends in HMJ Akuntansi, especially HMJ 2008, thank you :)

14. My tlist on my 2nd account and 3rd twitter account, thank you very much for

bring lot laughter to me! For Yesa, you’re the Kyungsoo to my Kaisoo :)

don’t fell asleep again when you’re in the middle of exams okay?


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15. SNSD and EXO, for accompany me through these difficult days. Tiffany

unnie, the shining smile, who taught me how to be a good person (because

you have an angelic heart) and Baekhyun, who taught me not to give up on

my dreams. We will meet someday, I do believe that!

16. My blue blitz and my pink toshiba… you’re rock!

17. For all people that Researcher could not mention one by one, I thank for all

your support in the last four years.

Researcher realizes that this research is far from being perfect. This study

has a lot of constraint, thus any suggestions and critics are expected for the sake of

improving this study.

As I close this acknowledgment, I expect that this writing will be useful to

all parties.

Wassalammu’alaikum Wr. Wb

Surakarta, July 22 , 2012

Rahmah Fitriani


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TABLE OF CONTENTS

Page

PAGE OF TITLE ............................................................................. i

ABSTRACT ..................................................................................... ii

PAGE OF ADVISOR’S APPROVAL.......................... ................... iii

PAGE OF APPROVAL ................................................................... iv

PAGE OF MOTTO .......................................................................... v

PAGE OF DEDICATION ............................................................... vi

ACKNOWLEDGEMENT ............................................................... vii

TABLE OF CONTENT ................................................................... x

LIST OF TABLES ........................................................................... xiii

LIST OF APPENDIXES .................................................................. xiv

CHAPTER 1 INTRODUCTION ................................................... 1

A. Background ........................................................................ 1

B. .................................................................................... Problem

Statements .......................................................................... 3

C. Research Objectives ........................................................... 3

D. Research Benefits .............................................................. 5

E. Organization of Literature ................................................. 6

CHAPTER II THEORETICAL FRAMEWORK .......................... 7

A. Agency Theory .................................................................. 7

B. Corporate Governance ....................................................... 8


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C. Return on Assets ................................................................ 9

D. Hypothesis Development ................................................... 10

CHAPTER III RESEARCH METHODS ...................................... 16

A. Research Design ................................................................ 16

B. Population and Sample ...................................................... 17

C. Source and Data Collecting Technique ............................. 17

D. Operational Definition and Measurement of Variables ..... 18

1. ................................................................................. Independent

Variables ....................................................................... 18

2. ................................................................................. Dependent

Variable ......................................................................... 19

3. ................................................................................. Control

Variables ....................................................................... 20

E. Data Analysis Methods ...................................................... 20

1. ....................................................................................... Classic

Assumption Test............................................................ 20

2. ....................................................................................... Descriptive

Statistics and Univariate ................................................ 22

3. ....................................................................................... Multivariate

....................................................................................... 22

CHAPTER IV DATA ANALYSIS ............................................... 24

A. Total Data Collection ......................................................... 24

B. Classic Assumption Analysis............................................. 25


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C. Descriptive Statistics and Univariate ................................. 25

D. Multivariate ....................................................................... 30

1. ................................................................................. The Impact of

Corporate Governance on

Return on Assets ........................................................... 30

2. ................................................................................. The Interaction

of Corporate Governance on

Return on Assets .......................................................... 34

CHAPTER V CONCLUSION ....................................................... 40

A. Conclusions ........................................................................ 40

B. Research Constraints ......................................................... 41

C. Research Suggestions ........................................................ 42

REFERENCES................................................................................. 43

APPENDIXES


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LIST OF TABLES

TABLE PAGE

IV.1 Sample Selection…………………………………………… 23

IV.2 Variable Definition…………………………………………. 25

IV.3 Descriptive Statistics ……………………………………….. 26

IV.4 Pearson Correlation………………………………………… 28

IV.5 Linear Regression (A)………………………………………. 35

IV.6 Linear Regression (B)……………..………………………… 36

IV.7 Regression with Interaction Effect (A)……………………… 37

IV.8 Regression with Interaction Effect (B)…………….………… 38


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LIST OF APPENDIXES

Appendix I Previous Studies

Appendix II List of Companies

Appendix III Corporate Governance and Return on Assets

Appendix IV Results of Linear Regression


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ABSTRACT

THE IMPACT OF CORPORATE GOVERNANCE ONFIRM PERFORMANCE:

EVIDENCE FROM MALAYSIA

Rahmah Fitriani

NIM F0308007

The objective in this research is to investigate the impact of corporate governance mechanisms on firm performance in Malaysia. Specifically, this research examines the effect of chairman characteristics, board structure, independent committees, and family control on return on assets.

This research focuses on manufacture companies that listed in Bursa Malaysia Berhad for period 2010. The research data were collected from financial statements and annual reports which published by companies. Purposive sampling method was used to determine research sample and 200 samples were collected. Hypothesis was tested by Ordinary Least Square (OLS) regression model using SPSS 17.00 software

The results of this research show that corporate governance mechanism simultaneously impact on return on assets. Only board meetings that partially and significantly had effect on return on assets. Additionally, the interaction between chairman tenure and chairman executive partially and significantly had effect on return on assets. Keywords: Corporate Governance, Chairman Characteristics, Board Structure, Independent Committees, Family Control, Firm Performance.


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CHAPTER I

INTRODUCTION

A. Background

Corporate governance is a system that aim and supervise firms and it

concerns the effects of board structure on a firm’s performance. Corporate

governance includes all needed mechanisms that discipline organizations and

ensure that the resources of the firm are managed efficiently.

Corporate governance has become an important issue in Malaysia since

the emergence of the Asia financial crisis in mid-1997. This crisis had been forced

some companies to liquidated because they could not lasted their business. This

crisis has taught corporate Malaysia that adding standards of corporate

governance can improve investor’s confidence and increase capital inflow to the

country.

The investors mostly use annual report in valuing financial performance.

Return on assets (ROA) comes as one of those methods to understand financial

performance of firms. ROA is an indicator of how profitable a company is relative

to its total assets. ROA gives an idea as to how efficient management is at using

its assets to generate earnings. ROA is calculated by dividing a company's annual

earnings by its total assets. ROA is displayed as a percentage. Sometimes this is

referred to as return on investment. Some investors add interest expense back into

net income when performing this calculation because they'd like to use operating

returns before cost of borrowing.

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Malaysia’s progress in strengthening its corporate governance framework

has received international recognition. Malaysia has consistently been ranked 4th

for investor protection in the World Bank Doing Business Report during 2006–

2010 (Malaysia Corporate Governance Blue Print 2011).

Bursa Malaysia underscores the importance of having independent

directors on boards by its Revamped Listing Requirements by ensuring the board

of directors of Malaysian public listed companies has a sufficient independent

element to safeguard the interest of investors. The role of independent directors on

the board of directors is to effectively monitor and control firm activities in

reducing opportunistic managerial behaviors and expropriation of firm resources

(Fama and Jensen 1983, Brickley et al. 1994).

Over the last three decades, corporate governance became an interesting

research issue for many researchers. Researchs on corporate governance had

evolved not only research on the implementation of GCG in the company but also

research on how far the companies disclose the corporate governance practices

within the company’s annual report. Corporate governance reporting is a report of

crucial information related to management, monitoring, transparency and

accountabilities which is presented to users of annual reports. With these kinds of

information the users will be able to distinguish between the good and the bad

company. Information about good corporate governance practices might help the

investor to invest their capital in the industries that have a low agency cost.

The Malaysian Code of Corporate governance states that good corporate

governance rests firmly with board of directors and the Code required at least one


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third of the board to comprise of independent directors. The term independent as

described by the Malaysian Governance Code refers to independence from

management and significant shareholders. The literature suggests that increases in

the proportion of outside directors on the board increases firm performance as

they can more effectively monitor managers (Adams and Mehran, 2003).

Previous empirical findings on the relationship between corporate

governance elements such as board leadership structure, board composition, board

size and ownership structure, and financial performance, have provided mixed

results. Numerous studies has evidenced that the proportion of independent

directors is correlated to firm performance (Agrawal and Knoeber 1996).

Companies with more independent directors tend to be more profitable than those

with fewer independent directors (You et al. 1986). There were other views which

are totally different. The relationship between the proportion of independent

director and firm performance was found to be negative (Klein 1998, Agrawal and

Knowber 1996, Yermack 1996).

The two main issues in this research are corporate governance and firm

performance. However, empirical evidences from previous research from several

countries about relationship between corporate governance and firm performance

are mixed. Hence it becomes very important to investigate the relationship

between corporate governance and firm performance in Malaysia especially with

their consistent rank on investor protection in the World Bank Doing Business

Report during 2006–2010.


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B. Problem statements

The problem statements for this study consists of:

1. Do chairman characteristics (chairman tenure, chairman financial

background and executive chairman) have impacts to return on assets?

2. Do board of directors (independent board, size of board and board meeting)

have impacts to return on assets?

3. Does committee independence (remuneration committee independence,

audit committee independence, and nomination committee independence)

have impacts to return on assets?

4. Does family controlling (family involvement on board and family

ownership on companies) have impacts to return on assets?

C. Research Objectives

Main objective in this study is to find empirical evidence about:

1. The impact of chairman tenure related to return on assets in Malaysian

companies.

2. The impact of chairman financial background related to return on assets in

Malaysian companies.

3. The impact of executive chairman related to return on assets in Malaysian

companies.

4. The impact of board director numbers related to return on assets in



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5. The impact of board independence related to return on assets in Malaysian

companies.

6. The impact of board meeting related to return on assets in Malaysian

companies.

7. The impact of remuneration committee independence related to return on

assets in Malaysian companies.

8. The impact of nomination committee independence related to return on

assets in Malaysian companies.

9. The impact of audit committee independence related to return on assets in


10. The impact of family involvement related to return on assets in Malaysian

companies.

11. The impact of family ownership related to return on assets in Malaysian

companies.

D. Research Benefits

1. Investors, this paper could enhance investors’ understanding on how

corporate governance affects firm performance.

2. Literature improvement about corporate governance, with large corporate

governance proxies; chairman characteristics which proxies as chairman

tenure, chairman financial background and executive chairman, board of

directors which proxies as independent board, size of board and board

meetings, adding committee monitoring which proxies as remuneration


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committee independence, audit committee independence and nomination

committee independence and family controlling on board which proxies as

family involvement in board and family ownership.

E. Organization of Skripsi

Chapter I : Introduction

This chapter contains introduction, problem statement, research

objectives, research benefits and organization of skripsi.

Chapter II : Theoretical Framework

This chapter contains literature review which leads the way to

hypotheses development and research model.

Chapter III : Research Method

Population, sample, measurements of variables and data

analysis method are discussed.

Chapter IV : Data Analysis and Interpretation

The comprehensive interpretation of result in descriptive

statistics and regression analysis are the body of this chapter.

Chapter V : Conclusion

This chapter presents the research result in broad outline. It

discloses research constrains and future research suggestion.


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CHAPTER II

THEORITICAL FRAMEWORK

A. Agency Theory

The perspective of agency relationship is the basic principle to understand

how corporate governance works. Agency theory stated that an agency

relationship exists whenever one or more individuals (principals) hire another

person (agent) to perform a service where individuals are motivated solely by self-

interest (Jensen and Meckling, 1976). Agency theory explaining the relationship

between the company’s executives as an agent with the shareholder or owners as

an principal. The relationship between shareholders and company managers is

accompanied by conflicting interests. This is the result of a separation of

ownership and control, different objectives and an information asymmetry

between managers and shareholders. Managers have the incentive and capability

of working in line with their personal interests. As a result, their actions and

decisions don’t necessarily maximize the wealth and utility of the owners

(Sarikhani and Ebrahimi, 2011).

Agency relationships rely on the contract as the first best solution in order

to mitigate the divergence of interests between those of contracting parties (Hart,

1995). Therefore contracts are written, often containing accounting based

constraints especially earnings, to restrict manager’s value reducing behaviors.

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Considering the fact that signing these contracts and following their clauses are

costly (Warfield et al., 1995) and not enough to align the interests of the managers

and the owners, the shareholders have the necessary incentive to create solutions

to supervise the activities of the managers and monitor their opportunistic

behavior. Therefore, the issue of solutions for company governance can be

mentioned as another solution in the line of reducing representative conflicts (Dey,

2008).

B. Corporate Governance

Corporate governance is a system to aim and to supervise a company.

Corporate governance is primarily concerned with how equity investors induce

managers to provide them with an appropriate return on their invested capital

(Cook, Hogan and Kieschnick, 2003). Corporate governance distributed the rights

and the responsibilities between parties such as directors, managers, shareholders,

officers, and other, and to explain the rules and procedure to make decisions.

Effective monitoring from internal corporate governance is very important

to ensure reliable and complete financial report. Since earnings management

misleads users of financial statements by providing them with false information

about firm’s true operating performance, the internal corporate governance serves

a monitoring role in constraining the occurence of earnings management (Chen et

al, 2006). The implementation of corporate gorvernance mechanism in company

could protect investor and creditor from management opportunistic behavior. This

mechanism can be internal mechanism and external mechanism.


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C. Return on Assets

ROA is an indicator of how profitable a company is relative to its total

assets. ROA gives an idea as to how efficient management is at using its assets to

generate earnings. ROA is calculated by dividing a company's annual earnings by

its total assets. ROA is displayed as a percentage. Sometimes this is referred to as

return on investment. Some investors add interest expense back into net income

when performing this calculation because they'd like to use operating returns

before cost of borrowing.

Return on assets is use to measure firm performance. Empirical researches

on corporate governance use either market-based measures or accounting-based

measures to assess firm performance. Klein (1998) uses return on assets (ROA)

and Lo (2003) uses return on equity (ROE) as an operating performance indicator.

Brown and Caylor (2005) use ROE and ROA as their two operating performance

measures. Managers are directly responsible for the operations of the business and

therefore the utilization of the firms’ assets. Thus, return on assets allows users to

assess how well a firms’ CG mechanism is in securing and motivating efficient

management of the firm. In the present study, return on assets is defined as net

income before interest expense for the fiscal period divided by total assets for that

same period (Barro, 1990 and Angbazo and Narayanan, 1997).


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D. Conceptualization And Hypotheses Development

Chairman Characteristics

Chairman knowledge and experience are significant elements in making

sure the effectiveness of board monitoring function. CEO characteristic is an

importance aspect of corporate governance and corporate governance reporting

(Shen 2003). The difference stages of CEO tenure would influence either CEO

leadership development or control of managerial opportunism. According to

Gabarro (1987), new CEOs normally need one or two years to acquire needed task

knowledge before they can take major actions to reshape their organizations. It

takes additional time for these actions to show substantial impacts on their firms'

competitive positions in the market and financial returns. Thus, the newly

appointed CEO of the company will seek to reveal (disclose) more about

corporate governance practices. In other words, CEOs with shorter tenure will

perform control towards the important informations as their contribution to the

corporate.

Tyler and Steensma (1998) and Barker and Mueller (2002) find that the

type of degree that the CEO holds has an impact on the firms’ research and

development funding. For example, Graham, Harvey and Rajgopal (2005) find

that CEOS holding MBAs were more likely than other executives to use

techniques such as net present value (NVP) for capital budgeting and the capital

asset pricing in cost of capital calculations. Hence,the type of degree that the CEO

holds has an impact to firm’s performance.


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Agency theory suggests separation of duties may lead to efficient

monitoring over the board process (Fama and Jensen, 1983). The involvement of a

chairman on board, either as director or chairman may create bias and

inappropriately influence board decisions. Similarly, conflicts of interest may

occur if a chairman is also an executive who is involved in the company

management (Ismail et al., 2010). In such a firm, the executive chairman has more

power over the board and firm without being supervised and evaluated. Jensen

(1993) claimed that boards are less effective when the chief executive officer is

also the chairman. Thus the following hypothesis is developed:

H1a : Chairman tenure is related to return on assets.

H1b : Chairman financial background is related to return on assets.

H1c : Executive chairman is related to return on assets.

Board of directors

Bursa Malaysia underscores the importance of having independent

directors on boards by its Revamped Listing Requirements by ensuring the board

of directors of Malaysian public listed companies has a sufficient independent

element to safeguard the interest of investors. The role of independent directors on

the board of directors is to effectively monitor and control firm activities in

reducing opportunistic managerial behaviors and expropriation of firm resources

(Fama and Jensen 1983, Brickley et al. 1994).

Numerous studies has evidenced that the proportion of independent

directors is correlated to firm performance (Agrawal and Knoeber 1996).


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Companies with more independent directors tend to be more profitable than those

with fewer independent directors (You et al., 1986). There were other views

which are totally different. The relationship between the proportion of

independent director and firm performance was found to be negative (Klein 1998,

Agrawal and Knowber 1996, Yermack 1996).

The Malaysian Code of Corporate governance states that good corporate

governance rests firmly with board of directors and the Code required at least one

third of the board to comprise of independent directors. The term independent as

described by the Malaysian Governance Code refers to independence from

management and significant shareholders. The literature suggests that increases in

the proportion of outside directors on the board increases firm performance as

they can more effectively monitor managers (Adams and Mehran, 2003).

Board size is the number of directors on the board and an important factor

in the effectiveness of the board in making return on assets higher or lower.

Jensen (1993) opines that limiting board size improves firm performance because

the benefits by larger boards of monitoring are overshadowed by the poorer

communication and decision-making of larger groups.

Conger et al. (1998) views board meetings as an important resource in

improving the effectiveness of the board. Effectiveness of a board depends on

how often the board members meet to discuss the various issues facing a firm

(Vafeas, 1999).Increase in board meetings is considered to represent the intensity

of board activity. From the agency perspective, the main responsibility of the


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board is management monitoring to mitigate agency costs and appropriation by

the managers. Thus the following hypothesis is developed:

H2a : The proportion of board inpedendent is related to return on assets.

H2b: The total number directors on the board is related to return on

assets.

H2c : The total meeting is related to return on assets.

Independent Committee

The primary function of the audit committee is to review management

information, financial statements and internal control system (Klein, 1998). The

importance of audit committees as a corporate monitoring mechanism has been

emphasized by many researchers in recent years. Number of audit committee

meetings with impendent and financially literate directors will work as ineffective

monitor for the audit committee.

The presence of remuneration committee is consistent with agency theory,

which advocates the separation of management from control (Barkema and Mejia,

1998). The main function of remuneration committees is to determine and review

remuneration packages for senior management of the firm (Klein,1998). There has

been an increasing demand for greater accountability for remuneration (Bosch,

1995).

The ability of non-executive directors to perform the monitoring function

is related to their independence, which in turn is related to director selection by

the nomination committee (Conyon and Peck, 1998). The presence of independent


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nomination committe is important for board board effectiveness and monitoring

ability because it takes away the CEO’s power in nominating new member to the

board (Chtourou et al., 2001). Klein (2002), find that there is a negative

association between board independence and whether the CEO sits on the

nomination committee. Thus the following hypothesis is developed:

H3a : Nomination committe independence is related to return on assets.

H3b : Remuneration committe independence is related to return on assets.

H3c : Audit committe independence is related to return on assets.

Family Controlling

The family controlled firm or family ownership is the most common form

of business organization in the world and developing countries mostly have large

firms which are controlled by family ownership. According to the study of

Clasessens et al (2000) on the separation of ownership and control in nine East

Asian corporations (Hong Kong, Indonesia, Japan South Korea, Malaysia,

Philippines, Singapore, Taiwan and Thailand), Malaysia has the third highest

concentration of control after Taiwan and Indonesia.

Due to controlling power in company, the dominant family is able to

influence appointments of top managers as well as board members. Based from

previous study, Prabowo and Simpson (2010) find that controlling family

ownership and the family involvement on the board are found to have negative

relationship with firm performance.


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Thus the following hypothesis is developed:

H4a : The presence of director who is the family member on the board is

related to return on assets.

H4b : The proportion of family ownership is related to return on assets.


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CHAPTER III

RESEARCH METHODS

A. Research Design

This study is a hypothesis testing study because it aims to test variables that

have impact on dependent variable. This study was conducted to test and examine

the effect of coporate governance mechanism to return on assets. This is a cross

sectional studies which means that the data were only taken once (2010).

Independent variables in this research consist of chairman tenure, chairman

financial background, chairman executive, board size, independent board, board

meeting, remuneration committee independent, nomination committee

independent, audit committee independent, family involvement, and family

ownership. Dependent variable is return on assets.

B. Population and Sample

Population refers to the entire group of people, events, or things of interest

that researcher wishes to investigate (Sekaran, 2000). Population of this research

is annual reports of manufacturing companies listed in Bursa Malaysia Stock

Berhard in 2010.

Sampling is the process of selecting sufficient number of elements from the

population, so that by studying the samples and understanding of the

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characteristics of the samples subjects, it would be possible to generalize the

characteristics of population elements (Sekaran, 2000). Sample methods for this

research is using purposive sampling which aims to obtain the representative

samples along with researcher needs. For each company, the 2010 annual reports

was obtained from Malaysia stock exchange website. The criteria of sample are

determined by:

1. The firm is manufacturing company which listed in Bursa Malaysia during

the period 2010.

2. Annual report is in English or at least has the English version.

3. Complete data on coporate governance and return on assets.

C. Source and Data Collecting Technique

This study uses secondary data which means data that refers to information

that obtained from sources. The data taken from annual reports in Bursa Malaysia

Berhard (Bursamalaysia.com). Data used in this research:

1. List of manufacturing companies in 2010 is taken from Bursa Malaysia

Berhard website.

2. Company’s corporate governance data is based on annual reports

disclosures which published by the company.

3. Return on assets is obtained from the financial statements of companies.


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D. Operational Definition and Measurement of Variables

This study uses the independent variables, dependent variable, and control

variables. The operational definition and measurement of the variables are

described as follows:

1. Independent Variables

Independent variable in this study is good coporate governance which can

be explained by chairman tenure, chairman financial background, chairman

executive, board size, independent board, board meeting, remuneration committee

independent, nomination committee independent, audit committee independent,

family involvement, and family ownership.

a. Chairman tenure is measured by duration of chairman tenure until year t.

b. Chairman financial background is dummy variable. If chairman has

financial education background = 1, otherwise = 0

c. Chairman executive is dummy variable. If chairman on the board is

executive= 1, otherwise = 0

d. Board size is measured by the total number of board members on the board.

e. Independent board is measured by the proportion of independent directors

on the board, expressed as a percentage.

f. Board meeting is measured by total number of board meeting which held

annualy by the board of directors.

g. Remuneration committee independence is measured by the percentage of

remuneration committe independent to total committee.


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h. Nomination committee independence is measured by the percentage of

nomination committe independent to total committee.

i. Audit committee independence is measured by the percentage of audit

committe independent to total committee.

j. Family involvement is measured using ratio family members on the board to

total number of directors.

k. Family ownership is measured by using percentage of direct shares owned

by family control directors.

l. Firm size is measured by nantural logarithm of total assets.

m. Leverage is measured by ratio of total debt to total assets.

n. Type of indsutry is dummy variables (1,2,..,5)

2. Dependent Variable

Dependent variable in this study is return on assets. Return on assets define

as eaning before interest and taxes divided by total assets. Return on assets is use

to measure firm performance. Barro (1990) and Klein (1998) use return on assets

(ROA) as an operating performance indicator. Brown and Caylor (2005) use ROE

and ROA as their two operating performance measures. Managers are directly

responsible for the operations of the business and therefore the utilization of the

firms’ assets. Thus, return on assets allows users to assess how well a firms’ CG

mechanism is in securing and motivating efficient management of the firm. In the

present study, return on assets is defined as net income before interest expense for

the fiscal period divided by total assets for that same period (Barro, 1990 and

Angbazo and Narayanan, 1997).


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3. Control Variables

Control variables in this study is explained by firm size, leverage and type

of industry.

a. Firm size is control variable which measured by nantural logarithm of total

assets.

b. Leverage is control variable which measured by ratio of total debt to total

assets.

c. Type of indsutry is dummy variables which represented by give score (1,2,..,5)

on each type of manufacturing companies.

E. Data Analysis Methods

In this study, OLS analysis regression is used to analyze the realationship

between independent variables, dependent variable, and control variables. SPSS

17.00 for Windows is used as an analytical data tool to test the regression model.

Theoretically, the model will give the valid value if classical assumption test are

fulfilled.

1. Classical Assumption Test

Before testing the hypothesis, classical assumption test is important to

ensure that study results are valid. Classical assumption test consist of several

kinds of tests including normality test, multicollinearity test, autocorrelation test,

and heteroscedasticity test.


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a. Normality Test

Normality test is used to determine whether the residual value in regression

model is well- modeled by a normal distribution (Ghozali, 2006). T-test

and F-test is done with underlying assumption that residual value is

normally distributed. Kolmogorov-Smirnov test is applied to test this

assumption. Criteria that operate in this test are two tailed test, comparing p-

value with significance level. This study use significance level 0.05. If p-

value > 0.05 then the data is normally distributed.

b. Multicollinearity Test

Multicollinearity test is used to determine whether two or more independent

variables in a multiple regression model are highly correlated (Ghozali,

2006). Tolerance value and variance inflation factors (VIF) could provide

measurement to detect if multicollinearity exist. These measurements

can show which independent variables are explained by other independent

variables. If tolerance value < 0.05 and VIF > 5, then multicollinearity exist.

c. Autocorrelation Test

Autocorrelation test is used to determine whether there is a correlation

between values of the process at different points in time, as a function of the

two times or of the time difference. If there is no correlation between

residual value, then the residual value is random (Ghozali, 2006). This study

use run test to detect autocorrelation. Criteria that operate in this test are two


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tailed test, comparing p-value with significance level. This study use

significance level 0.05. If p-value > 0.05 then the residual is random.

d. Heteroscedasticity Test

Heteroscedasticity test is used to determine whether the variance of the

error terms differ across observations (Ghozali, 2006). Tests to detect

existance of heteroscedasticity is look at the graph scatterplot between the

predicted value of the dependent variable (ZPRED) and the residual

(SRESID). When the dots result is spread and random, then there is no

heteroscedasticity.

2. Descriptive Statistics and Univariate

Descriptive statistics used to find the average (mean), standard deviation,

and maximum and minimum value from variables tested in the study. This

analysis is intended to provide idea of distribution and behavior data samples

(Ghozali, 2006).

3. Multivariate

From the hypothesis above, the research model can be explained by this

formula:

ROA = return on assets

β = parameters (i = 1,2,3,...11)

CTE = chairman tenure

CFB = chairman financial background

ROA = β0 + β1CTE + β2CFB + β3CEX + β4BDIND+ β5BDSZ + β6BDM + β7NOM + β8REM+ β9AUD + β10FAM + β11OWN +e


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CEX = chairman executive

BDIND = board independent

BDSZ = board size

BDM = board meeting

NOM = nomination committe independent

REM = remuneration committe independent

AUD = audit committe independent

FAM = family involvement

OWN = family ownership

e = error terms

a) Significance Silmutaneous Test (F-Test)

F-Test is used to prove whether all independent variables have a

simultaneously effect on dependent variables.

b) Coeffcient of Determination (R 2 - Test)

Coefficient of determination is used to explain how much of the variability

of regression model can be caused or explained by its relationship to dependent

variable. Each additional independent variable will make R2 increase.

c) Partial Regression Test (t-test)

This test is to determine whether the independent variables in the partial

will affect the dependent variable, assuming the other independent variables

constant. Criteria of test:

a. If significant value > alpha (5%, 1% , or 10%), it means an individual

independent variable has no effect on the dependent variable.

b. If significant value < alpha (5%, 1% , or 10%), it means an individual

independent variable affect on the dependent variable.


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CHAPTER IV

DATA ANALYSIS

This chapter will describe the data analysis and research results about

corporate governance and ROA, which are about data research collection, data test,

data test analysis. Analytical model used in this study is multiple linear

regressions using SPSS release 17.0.

A. Data Collection Analysis

The population from this research is all Malaysian main market companies

which listed in Bursa Malaysia Berhard in 2010. Based on the sample criteria

discussed above, this study obtained 200 samples.

Table IV.1 Data Research Collection

Explanation 2010 Total companies

Total non-manufacturing companies

Total unpublished annual report of manufacturing companies until

the end of 2010

Total manufacturing companies with incomplete data

828

(448)

(98)

(82)

Total samples 200

Source: Bursa Malaysia Berhard (2012)

24


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B. Classic Assumptions Test

The result from this test is prepared in appendix. Based on the results, the

data in this study is passed from classic assumptions test which include normality

test, multicollinearity test, autocorrelation test, and heteroscedasticity test.

C. Descriptive Statistics

Descriptive statistics in this study is use to find mean value and deviation

standard, minimum and maximum from the variables. Table IV.2 is prepared to

define the variables that used in this study.


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Table IV.2

Variable Definition

Variables Acronym Operational Definition

Return On Assets ROA Return on assets of the company on year t

Chairman tenure CTE Chairman’s duration of tenure until year t

Education background of chairman

CFB If chairman has financial education background = 1, otherwise = 0

Chairman Executive CEX Chairman executive = 1, chairman non-executive = 0

Proportion of board independent

BDIND The proportion of independent directors on board

Size of board BDSZ The size of board on year t

Board Meetings BDMET Total number of board meeting held annualy by the board of directors

Nomination committee independence

NOM Percentage of nomination committe independence to total committee on year t

Remuneration committee independence

REM Percentage of remuneration committe independence to total committee on year t

Audit committee independence

AUD Percentage of audit committe independence to total committee on year t

Family involvement FMI Percentage of family involvement on the board

Family ownership OWN Percentage of direct shares owned by family on the board

Asset AST Natural logarithm of total assets

Leverage LEV Ratio of total debt to total assets

Industry IND Industry dummy variables


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Table IV.3 represents the result of descriptive statistics.

Table IV.3

Descriptive Statistics

Min Max Mean SD ROA -0.970 0.610 0.05490 0.149945 CTE 0.00 31.00 6.9350 6.51560 CFB 0.00 1.00 0.3050 0.46156 CEX 0.00 1.00 0.3900 0.48897 BDIND 0.00 1.00 0.4587 0.12677 BDSZ 3.00 14.00 7.2750 1.88604 BDME 0.00 25.00 5.4000 2.41228 NOM 0.00 1.00 0.7943 0.26049 REM 0.00 1.00 0.6517 0.24993 AUD 0.60 1.00 0.8878 0.14936 FAM 0.00 0.80 0.2190 0.22133 OWN 0.00 0.74 0.0687 0.14442 AST 17.16 23.36 19.5344 1.18664 LEV 0.03 1.42 0.4204 0.22945 IND 1.00 5.00 3.1200 1.05887

ROA has minimum score on -97% and maximum score 61% with 0,54%

as the average score. It means some companies still has negative value on

returning their assets and still have low score. The average of chairman tenure is 7

years with some companies with a very new chairman (0 year) and the longest

duration is 31 years with 31% of them have financial education background. This

reveals that less than half of chairmen have financial background on their

education and the averages of chairmen are on their medium tenure. The average

position of chairman is 39% as executive member.

The average proportion of independent directors on board is met with what

Malaysian’s government requires. The proportion should at least contain one third

independent directors and the result is 46%; which means the number of


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independent members is above requirement. All companies have 8 members of

their board directors on average, with 3 members at its minimum and maximum

14 members, with having 6 meetings for 2010.

Nomination committee from all companies has 80% independent members,

while remuneration committee has 65% independent member and audit committee

has 88% independent members. The number of audit committee has met with the

rule which stated one third of the members should commit as independent

members.

All of companies in this study have 22% of family relationship on board,

with minimum number zero and maximum number is 80%. The average family

ownership of the companies is not as big as its maximum number (80%) which is

only 0,7%. It means not all families have their ownership on the company.

Control variables for this study are company size (AST), leverage (LEV),

and type of industry (IND). The average score of company size is 19.5344 with a

lowest score 17.16 and a highest score 23.36. Leverage has an average score

0.4204 with a lowest score 0.03 and a highest score 1.42. Type of industry (IND)

is a dummy variables with minimum value 1, maximum value 5 and an average

score 3,12.


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Table IV.4

Pearson Correlation

ROA CTE CFB CEX BDIND BDSZ BDME NOM REM AUD FMI OWN AST LEV IND

ROA 1 CTE 0.082 1

CFB 0.060 -0.090 1

CEX 0.145* 0.021 -0.129 1

BDIND -0.062 -0.122 0.187** -0.066 1

BDSZ 0.039 0.110 0.007 -0.062 -0.371** 1

BDME -0.242** -0.131 0.034 -0.133 0.042 0.063 1

NOM -0.031 -0.056 -0.125 0.133 0.260** -0.066 -0.057 1

REM 0.040 -0.128 0.019 0.110 0.295** -0.208** 0.091 0.610** 1

AUD 0.104 -0.004 0.027 0.076 0.379** 0.115 -0.040 0.320** 0.249** 1

FAM -0.043 0.188** -0.146* 0.177* -0.201** 0.161* -0.162* 0.006 -0.127 0.145* 1

OWN 0.032 0.040 -0.106 0.064 -0.044 0.011 -0.133 0.086 0.036 0.072 0.407** 1

AST 0.238** 0.071 0.106 -0.008 -0.095 0.274** 0.116 -0.067 -0.075 0.035 -0.067 -0.032 1

LEV -0.375** -0.167* -0.022 -0.228** 0.027 -0.058 0.374** 0.023 0.033 -0.116 -0.032 -0.046 0.027 1

IND 0.073 0.038 0.069 -0.013 0.061 0.104 0.184** 0.102 0.181* 0.158* 0.005 0.017 0.257** 0.059 1

*Correlation is significant at 5%, **Correlation is significant at 10%


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Table IV.4 shows the coefficient between independent independent variables

are relatively low so there is no multicollinearity issues. Independent variables as

stated as chairman tenure (CTE) and board meeting (BDME) significantly

correlated to return on assets. Otherwise, the variable chairman financial

education background (CFB), executive chairman (CEX), independent board

(BDIND), board size (BDSZ), independent nomination (NOM), independent

remuneration (REM), independent audit (AUD), family involvement (FMI) and

family ownership (OWN) insignificantly correlated to return on assets. The

control variable; leverage (LEV) significantly correlated to earnings management,

while company size (AST) and type of industry (IND) are insignificantly

correlated to earnings management.

D. Multivariate

1. Corporate Governance and Return on Assets

Table IV.5 shows the results of linear regression in this study between

corporate governance and control variables with return on assets. Corporate

governance is proxies as chairman characteristics, board structure and family

involvement. All regressions together make a significant impact to return on

assets. This reveals that corporate governance is playing a role to make return on

assets better or worse.

F values show that all regressions significantly impact return on assets

with the highest adjusted R2 score on model 2. The highest score is 31,2% which

means all the variables on chairman and board of directors could be explained by


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the dependent variables as 31,2%; and the rest 68,8% is explained by other factors

aside from model.

However, for each regression, only board meetings significantly effect to

return on assets as shows in model 2, model 4 and model 6. Hypothesis H2c stated

that the total meeting is related to return on asset is accepted at the 10% level.

This finding consistent to Vafeas (1999), Lawler et al. (2002) and Triki et al.

(2011). Meetings bring benefits such as more time to discuss, set strategy, and

monitor management, however, there are also cost associated with board meetings,

for example managerial time, travel expense and director fees (Vafeas, 1992).

Fancis, Hasan and Wu (2012) argues that board meetings activity is important

channel through which directors can obtain firm-specific information, monitor

management, and determine strategic responses to different events. This finding

however incosistent with Bathula (2008) and Kreyeboah-Coleman (2007) who

found that board meetings insignificantly related to return on assets. They argue

board meetings are only a small part of corporate governance that actually makes

a big impact on return on assets.

All regressions for chairman tenure are insignificant to return on assets. It

means that H1a is rejected; the chairman tenure does not have any impact to the

better or worse return on assets. This, however, inconsistent with Kakabadse and

Kakabadse (2005) who argues that in UK and Australian companies which

consistently exhibited higher performance have their chairman being in role

between 12 to 15 years and US chairmen and board members considered length of

tenure equally necessary to make a consistent difference to the performance board


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and firm. The models in this study show that chairman financial background is not

a significant factor in terms of the firm having better or worse return on assets.

This finding is consistent with Gottersman & Morey (2001) who specifically

found that firms with a CEO who holds an MBA do not have significantly

different performance than firms with a CEO who holds a non-liberal arts

undergraduate degree. Thus, H1b is rejected. All regressions for executive

chairman show that it insignificantly has impact on return on assets. This however

inconsistent with Mishra et al. (2003) who found in India CEO duality is

significantly affect firm performance. In Malaysia, whether the chairman sits as

chairman or as CEO it does not matter because they are not tend to make return on

assets higher or lower.

The coefficients for percentage independent directors on the board are

insignificant to return on assets. Hence, H2a is rejected. It can be inferred that

some directors seems to be independent but do not have an effective and complete

role in controlling the opportunistic behavior of management (Chaghadari, 2011).

All regressions reveal that board size insignificantly have impact on return on

assets. It means that firms with having good corporate governance measures

perform as well as compared to the firms having no or less corporate governance

practices (Khatab and Masood and Zaman and Saleem and Saeed, 2010).

Originally, for large companies (non-R&D based companies) the larger board size

they have the biggest effect they have to firm performance. However, in Malaysia,

it does not matter if they have small or large size of board since it insignificantly

impact on return on assets. Thus, hypothesis H2b is rejected.


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All regressions for nomination and remuneration committees which are

independent directors insignificantly have impact on return on assets. Thus, H3a

and H3b are rejected. These findings inconsistently with Lam and Lee (2010) who

found that nomination and remuneration committees are related to the firm

performance in Hong Kong. They stated that Hong Kong firms’ performance is

affected by nomination and remuneration committees. Audit committes varible in

this study show that it insignificantly has effect on return on assets. This

consistent to Weir and Laing et al (2002) who reported that boards with audit

committes had no effect on firm performance. Hence, H3c is rejected. These

findings show that in Malaysia committee composition either independent or non-

independent, either they have outside or inside members, it insignificantly have

impact to return on assets.

Similarly, the regressions of family involvement are insignificantly impact

on return on assets. These findings is consistent with Prabowo and Simpson

(2010) who find that controlling family ownership and the family involvement on

the board are found to have insignificantly had negative relationship with firm

performance. Thus, H4a and H4b rejected. This show although some companies

have family controlling on their board, it does not make return on assets lower or

higher.

In addition, each of control variables on each model shows that they

significantly related to return on assets. Asset affects return on assets on positive

way while leverage affects return on assets on negative way.


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Table IV.6 shows the regression each chairman characteristic and board of

directors for each regression insignificantly impact to return assets. Controlling

variables, such as leverage and assets, however, always significantly impact to

return on assets.

2. Interaction Corporate Governance with Return on Assets

Table IV.7 shows the regression results with the interaction effects of

variables and board chairman. All regressions together make an significant impact

to return on assets.

Model 1 shows the interaction between chairman tenure (CTE) and

chairman executive (CEX) impacts significantly to return on assets. This shows an

executive chairman with longer duration of work tend to enhanced or lower return

on assets number. Model 2 shows the interaction between chairman tenure (CTE)

and chairman financial background (CFB) insignificantly impact to return on

assets. Model 3 shows the interaction between chairman education (CED) and

chairman executive (CEX) insignificantly have any impact to return on assets.

Model 4 shows the interaction between board independent (BDIND) and

board meeting (BDME) insignificantly impact to return on assets. Model 5 shows

the interaction between board independent (BDIND) and board size (BDSZ)

insignificantly impact to return on assets. Model 6 shows the interaction between

board size (BDSZ) and board meeting (BDME) insignificantly impact to return on

assets. Thus, interactions between chairman and board variables except


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independent board had no impact on return on assets. However model 1, 2, 3, and

5 show board meetings significantly impact on return on assets.

Table IV.8 represents the result of the interaction impact between

chairmen with board of directors. All regressions together make an significant

impact to return on assets.

Model 1 shows the interaction between chairman executive (CEX) and

board independent (BDIND) insignificant have impact to return on assets. Model

3 shows the interaction between CEX and BDME insignificantly impact to ROA.

Model 4 shows the interaction between BDIND and CFB insignificantly impact to

ROA. Model 5 shows the interaction between BDIND and CTE significantly

impact to ROA. Thus, interactions between chairman and board variables

insignificantly impact to ROA. However, all models show that board meetings

(BDME) significantly have impact to ROA and on model 5 chairman tenure

significantly have impact to ROA as well.


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Table IV.5 Linear Regression (A)

1 2 3 4 5 6 (Constant) -0.406c

(-2.715) -0.352c

(-2.246) -0.452a

(-2.832) -0.350b

(-2.203) -0.452b

(-2.812) -0.403b

(-2.480)

CTE 0.000

(-0.216) 0.000

(-0.352) 0.000

(-0.099) 0.000

(-0.230)

CFB 0.005

(0.264) 0.008

(0.413) 0.001

(0.070) 0.006

(0.298)

CEX 0.013

(0.672) 0.009

(0.475) 0.011

(0.572) 0.006

(0.314)

BDIND -0.074

(-0.973) -0.079

(-1.014) -0.133

(-1.466)

BDSZ -0.006

(-1.129) -0.006

(-1.062) -0.006

(-1.088)

BDME -0.007c

(-1.662) -0.007c

(-1.661) -0.008c

(-1.832)

NOM -0.046

(-1.040) -0.047

(-1.045) -0.050

(-1.085)

REM 0.066

(1.420) 0.063

(1.332) 0.070

(1.452)

AUD 0.036

(0.554) 0.036

(0.555) 0.088

(1.208)

FAM -0.021

(-0.640) -0.028

(-0.611) -0.012

(-0.246) -0.027

(-0.581) -0.016

(-0.333) -0.032

(-0.651)

OWN -0.037

(-0.546) -0.048

(-0.611) -0.042

(-0.616) -0.047

(-0.691) -0.040

(-0.590) -0.050

(-0.741)

AST 0.03a (3.816)

0.032a (4.041)

0.031a (3.949)

0.032a (3.950)

0.031a (3.877)

0.033a (3.999)

LEV -0.333a (-8.1660)

-0.315a (-7.556)

-0.335a (-8.567)

-0.312a (-7.180)

-0.331a (-8.007)

-0.303a (-6.920)

IND yes yes

Yes Yes

yes yes

yes yes

yes yes

yes yes

R2 0.325 0.340 0.332 0.342 0.333 0.355 R2-Adj. 0.297 0.312 0.304 0.303 0.294 0.307 F 11.510 12.295 11.866 8.874 8.541 7.283 Sig. 0.000 0.000 0.000 0.000 0.000 0.000 The t-values are given in the brackets a, b, and c represent significant at 1%, 5% aand 10% respectively.


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Table IV.6

Linear Regression (B)

1 2 3 4 5 6 (Constant) -0.451b

(-2.822) -0.452b

(-2.822) -0.453b

(-2.834) -0.419 -2.582

-0.457b (-2.861)

-0.445b (-2.812)

CTE 0.000

(0.897)

CFB 0.000

(0.016)

CEX 0.011

(0.576)

BDIND -0.091

(-1.123)

BDSZ -0.004

(-0.796)

BDME -0.008

(-1.995)

NOM -0.046

(0.302) -0.046

(0.309) -0.048

(-1.078) -0.044

(-0.986) -0.044

(-0.997) -0.058

(-1.312)

REM 0.065

(0.163) 0.066

(1.409) 0.064

(1.365) 0.072

(1.535) 0.058

(1.231) 0.077

(1.665)

AUD 0.036

(0.585) 0.036

(0.550) 0.037

(0.569) 0.065

(0.932) 0.042

(0.640) 0.038

(0.584)

FAM -0.011

(-0.236) -0.012

(-0.260) -0.017

(-0.366) -0.025

(-0.540) -0.007

(-0.148) -0.021

(-0.467)

OWN -0.042

(-0.619) -0.042

(-0.613) -0.040

(-0.594) -0.040

(-0.589) -0.044

(-0.653) -0.051

(-0.757)

AST 0.031a (3.938)

0.031a (3.926)

0.031a (3.920)

0.030a (3.782)

0.033a (4.019)

0.032a (4.103)

LEV -0.336a (-8.440)

-0.335a (-8.542)

-0.330a (-8.180)

-0.332a (-8.473)

-0.337a (-8.588)

-0.305a (-7.283)

IND yes yes

Yes yes

yes yes

yes yes

yes yes

Yes yes

R2 0.332 0.332 0.333 0.336 0.334 0.346 R2-Adj. 0.300 0.300 0.302 0.305 0.303 0.315 F 10.495 10.492 10.548 10.702 10.598 11.154 Sig. 0.000 0.000 0.000 0.000 0.000 0.000 The t-values are given in the brackets a, b, and c represent significant at 1%, 5% aand 10% respectively.


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Table IV. 7

Regression with Interaction Effect (A)

1 2 3 4 5 6 (Constant) -0.410b

(-2.548) -0.043a

(-2.464) -0.399b

(-2.449) -0.347b

(-1.946) -0.451b

(-2.235) -0.408b

(-2.178) CTE 0.003

(1.386) 0.000

(-0.164) 0.000

(-0.264) 0.000

(-0.300) 0.000

(-0.242) 0.000

(-0.234) CFB 0.004

(0.176) 0.008

(0.253) 0.014

(0.577) 0.007

(0.318) 0.007

(0.322) 0.006

(0.299) CEX 0.051c

(1.814) 0.006

(0.310) -0.025

(-0.569) 0.006

(0.325) 0.006

(0.305) 0.006

(0.314) CTExCEX -0.006b

(-2.187)

CTExCFB 0.000 (-0.067)

CFBxCEX -0.025 (-0.581)

BRIND -0.100 (-1.099)

-0.133 (-1.463)

-0.129 (-1.422)

-0.268 (-1.354)

-0.031 (-0.115)

-0.133 (-1.461)

BRSZ -0.006 (-1.020)

-0.006 (-1.080)

-0.006 (-1.134)

-0.006 (-1.041)

0.001 (0.030)

-0.005 (-0.370)

BDME -0.007c (-1.722)

-0.008c (-1.809)

-0.008c (-1.868)

-0.020 (-1.217)

-0.008c (-1.865)

-0.007 (-0.404)

BDINDxBDME 0.024 (0.769)

BDINDxBDSZ -0.016 (-0.398)

BDMExBDSZ 0.000 (-0.050)

NOMIND -0.048 (-1.068)

-0.050 (-1.083)

-0.051 (-1.111)

-0.048 (-1.058)

-0.051 (-1.100)

-0.050 (-1.083)

REMIND 0.062 (1.290)

0.070 (1.439)

0.068 (1.398)

0.069 (1.421)

0.071 (1.468)

0.070 (1.449)

AUDIND 0.084 (1.168)

0.088 (1.206)

0.090 (1.242)

0.085 (1.176)

0.085 (1.158)

0.087 (1.189)

FAMILY -0.043 (-0.894)

-0.031 (-0.642)

-0.029 (-0.590)

-0.030 (-0.629)

-0.032 (-0.654)

-0.031 (-0.648)

OWN -0.056 (-0.833)

-0.050 (-0.732)

-0.049 (-0.715)

-0.050 (-0.740)

-0.048 (-0.707)

-0.031 (-0.741)

AST 0.031a (3.875)

0.033a (3.970)

0.032a (3.920)

0.033a (4.051)

0.033a (4.009)

0.033a (3.985)

LEV -0.299a (-6.905)

-0.303a (-6.896)

-0.300a (-6.812)

-0.304a (-6.941)

-0.301a (-6.805)

-0.303a (-6.608)

IND yes yes

yes yes

yes yes

yes yes

yes yes

yes yes

R2 0.372 0.355 0.357 0.357 0.356 0.355 R2-Adj. 0.320 0.303 0.304 0.305 0.303 0.303 F 7.256 6.762 6.796 6.822 6.778 6.761 Sig. 0.000 0.000 0.000 0.000 0.000 0.000


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The t-values are given in the brackets a, b, and c represent significant at 1%, 5% and 10% respectively.

Table IV.8 Regression with Interaction Effect (B)

1 2 3 4 5 (Constant) -0.411b

(-2.519) -0.417b

(-2.523) -0.404b

(-2.454) -0.396b

(-2.406) -0.478b

(-2.956) CTE 0.000

(-0.107) 0.000

(-0.253) 0.000

(-0.230) 0.000

(-0.249) 0.014b

(2.659) CFB 0.009

(0.426) 0.005

(0.242) 0.006

(0.295) -0.016

(-0.199) 0.010

(0.479) CEX 0.063

(0.799) 0.041

(0.560) 0.007

(0.140) 0.005

(0.279) 0.016

(0.839) BRIND -0.106

(-1.085) -0.134

(-1.478) -0.133

(-1.462) -0.146

(-1.437) 0.073

(0.638) BRSZ -0.007

(-1.194) -0.004

(-0.630) -0.006

(-1.082) -0.006

(-1.088) -0.006

(-1.110) BDME -0.008c

(-1.860) -0.008c

(-1.800) -0.008c

(-1.659) -0.008c

(-1.823) -0.007c

(-1.727) CEXxBDIND -0126

(-0.744)

CEXxBDSZ -0.005 (-0.494)

CEXxBDME 0.000 (-0.025)

BDINDxCFB 0.045 (0.287)

BDINDxCTE -0.030 (-2.828)

NOMIND -0.050 (-1.098)

-0.050 (-1.096)

-0.050 (-1.082)

-0.049 (-1.067)

-0.058 (-1.290)

REMIND 0.069 (1.429)

0.071 (1.469)

0.070 (1.448)

0.069 (1.434)

0.069 (1.451)

AUDIND 0.090 (1.240)

0.090 (1.232)

0.088 (1.205)

0.085 (1.171)

0.089 (1.248)

FAM -0.031 (-0.641)

-0.031 (-0.649)

-0.032 (-0.650)

-0.031 (-0.064)

-0.050 (-1.305)

OWN -0.050 (-0.730)

-0.050 (-0.734)

-0.051 (-0.739)

-0.051 (-0.742)

-0.012 (-0.176)

AST 0.032a (3.974)

0.033a (3.985)

0.033a (3.976)

0.033a (3.995)

0.032a (3.940)

LEV -0.300a (0.000)

-0.304a (-6.921)

-0.303a (-6.902)

-0.304a (-6.902)

-0.300a (-6.987)

IND Yes yes

yes yes

yes yes

Yes Yes

Yes yes

R2 0.357 0.356 0.355 0.356 0.382 R2-Adj. 0.305 0.304 0.303 0.303 0.332 F 6.818 6.786 6.761 6.770 7.588 Sig. 0.000 0.000 0.000 0.000 0.000

The t-values are given in the brackets a, b, and c represent significant at 1%, 5% aand 10% respectively.


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CHAPTER V

CONCLUSIONS

A. Conclusions

As mentioned in the previous chapters, this research aims whether

corporate governance has impacts to return on assets (ROA). Samples were

taken from annual reports of companies listed in Bursa Malaysia Berhad at

the end 2010 which conclude 200 companies. Independent variables in this

research consists of chairman tenure, chairman financial background,

executive chairman, board size, independent board, board meetings,

remuneration committee independence, nomination committee independence,

audit committee independence, family involvement, and family ownership.

Dependent variable in this research is firm performance which proxies as

return on assets.

The result of classic assumption explained that the residual data have

been normally distributed and there is no multicollinearity between

independent variables. Run test also shows that there is no autocorrelation

and by using scatterplot graphic shows that there is no heteroscedasticity.

Therefore, the data in this study passed from classic assumption test which

include normality, multicollinearity, autocorrelation, and heteroscedasticity.

This study also use descriptive statistics analysis to find the average (mean),

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standard deviation, and maximum and minimum value from variables tested

in the study.

From the regression analyses that were done, this research shows

several conclusions. First, simultaneously, corporate governance in Malaysia

significantly has impacts on firm performance. This shows that corporate

governance has big effects on enhanced or lowered firm performance. Second,

in partial, only board meetings that significantly have impact on return on

assets. Meetings bring such benefit as more time to discuss, set strategy, and

monitor management. Hence, only H2c accepted. Partially, other independent

variables such chairman characteristics, board characteristics, independence

committees, and family controlling are not the biggest impact on firm

performance since they are insignificantly have impact to firm performance in

Malaysia. Independence committees and family controlling, however, as the

research gap with previous study, still not give big contribution to firm

performance. Fourth, on the interaction regression, it shows that executive

chairmen that have longer duration work significantly have impact on return

on assets.

B. Research Constraints

Some of research constraints in this research are:

1. This research is using only ROA, while financial performance can be

measured by ROA, ROE and Tobin’s Q. It makes this research only giving

concentration on return on assets.


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2. Although it was easy to gather all data needed, some companies reported their

annual reports very late.

3. Not every company in this research has remuneration committees and

nomination committees.

C. Research Suggestion

The following are suggestions to future research development:

1. Future research can enlarge sample size, example expanding countries

examined (e.g. Malaysia-Indonesia-Singapore, Asia-Pasific, ASEAN) or use

larger samples from Malaysia companies.

2. Future research can use other than only using ROA; it can use ROE and

Tobin Q. Adding other financial performance indicator will improve our

knowledge of financial performance of companies.

Documents

THE IMPACT OF CORPORATE GOVERNANCE ON FRIM … fileEkonomi (SE) at the Sebelas Maret University By: RAHMAH FITRIANI F0308007 FACULTY OF ECONOMICS SEBELAS MARET UNIVERSITY SURAKARTA