Journals A-Z
All Subjects
Free Journals
sciepub.com
Journal of Finance and Accounting
ISSN (Print): 2333-8849 ISSN (Online): 2333-8857 Website: https://www.sciepub.com/journal/jfa Editor-in-chief: Apply for this position
Open Access
Journal Browser
Go
Issue 4, Volume 2
Article Metrics
  • 38521
    Views
  • 28994
    Saves
  • 4
    Citations
  • 41
    Likes
Export Article
Journal of Finance and Accounting. 2014, 2(4), 82-99
DOI: 10.12691/jfa-2-4-2
Open AccessArticle

Board of Directors and Tobin’s Q: Evidence from U.K.Firms

Ramadan El-Faitouri1,

1Lecturer in accounting and financeat the Faculty of Economics, Omar Al-Mukhtar University, Al Bayda – Libya

Pub. Date: July 28, 2014
View Full Text Full Text PDF (380 KB) Full Text ePUB(412 KB)

Cite this paper:
Ramadan El-Faitouri. Board of Directors and Tobin’s Q: Evidence from U.K.Firms. Journal of Finance and Accounting. 2014; 2(4):82-99. doi: 10.12691/jfa-2-4-2

Abstract

This study investigates whether board of director characteristics have an impact on corporate performance. Recent studies highlight that findings that such characteristics do have an impact may be affected by endogeneity issues in the data, which could lead to biased results. This study responds to this concern by using a generalised method of moments regression model) developed by WintoDYki et al. (2011). Data for the analysis are extracted from BoardEx, FAME, and Datastream databases for the period 1999 – 2009. The final sample includes a total of 634 UK firms listed in the London Stock Exchange. The results suggest that board structure is partly determined by past corporate performance. Considering this, the results document that there is no relation between characteristics of the board of directors and corporate performance measured by Tobin’s Q. This is inconsistent with much prier empirical studies and policy recommendations on corporate governance that suggests that corporate governance mechanisms develop corporate performance. In addition, this result indicates that the findings of the earlier corporate governance studies that do not take into account the dynamic nature of corporate governance may be affected by bias.

Keywords:
 corporate governance board of directors duality board size director ownership board subcommittees performance

Creative CommonsThis work is licensed under a Creative Commons Attribution 4.0 International License. To view a copy of this license, visit http://creativecommons.org/licenses/by/4.0/

References:

[1]  Adams, R.B. & Mehran, H., 2005. Corporate Performance, Board Structure and its Determinants in the Banking Industry. SSRN eLibrary.
 
[2]  Agrawal, A. & Knoeber, C.R., 1996. Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders. Journal of Financial & Quantitative Analysis, 31, 377-397.
 
[3]  Aidong, H. & Kumar, P., 2004. Managerial Entrenchment and Payout Policy. Journal of Financial & Quantitative Analysis, 39, 759-790.
 
[4]  Baranchuk, N. & Dybvig, P.H., 2009. Consensus in Diverse Corporate Boards. Review of Financial Studies, 22, 715-747.
 
[5]  Barnhart, S.W. & Rosenstein, S., 1998. Board composition, managerial ownership, and firm performance: An empirical analysis. Financial Review, 33, 1.
 
[6]  Baysinger, B. & Hoskisson, R.E., 1990. The Composition of Boards of Directors and Strategic Control: Effects on Corporate Strategy. Academy of Management Review, 15, 72-87.
 
[7]  Baysinger, B.D. & Butler, H.N., 1985. Corporate Governance and the Board of Directors: Performance Effects of Changes in Board Composition. Journal of Law, Economics, & Organization, 1, 101-124.
 
[8]  Bebchuk, L., Cohen, A. & Ferrell, A., 2009. What Matters in Corporate Governance? The Review of Financial Studies, 22, 783-827.
 
[9]  Bennedsen, M., Kongsted, H.C. & Nielsen, K.M., 2008. The causal effect of board size in the performance of small and medium-sized firms. Journal of Banking & Finance, 32, 1098-1109.
 
[10]  Berle, Adolf & Means, 1932. The Modern Corporation and Private Property New York: Macmillan.
 
[11]  Bhagat, S. & Black, B., 2002. The Non-Correlation between Board Indpendence and Long-Term Firm Performance. Journal of Corporation Law, 27, 231-273.
 
[12]  Black, B.S., Jang, H. & Kim, W., 2006. Does Corporate Governance Predict Firms' Market Values? Evidence from Korea. The Journal of Law, Economics, & Organization, 22, 366-413.
 
[13]  Black, B.S. & Kim, W., 2011. The Effect of Board Structure on Firm Value: A Multiple Identification Strategies Approach Using Korean Data. Journal of Financial Economics (JFE), 2011.
 
[14]  Boone, A.L., Casares Field, L., Karpoff, J.M. & Raheja, C.G., 2007. The determinants of corporate board size and composition: An empirical analysis. Journal of Financial Economics, 85, 66-101.
 
[15]  Bound, J., Jaeger, D.A. & Baker, R.M., 1995. Problems with Instrumental Variables Estimation When the Correlation Between the Instruments and the Endogeneous Explanatory Variable is Weak. Journal of the American Statistical Association, 90, 443-450.
 
[16]  Boyd, B.K., 1995. CEO Duality and Firm Performance: A Contingency Model. Strategic Management Journal, 16, 301-312.
 
[17]  Bozec, R., 2005. Boards of Directors, Market Discipline and Firm Performance. Journal of Business Finance & Accounting, 32, 1921-1960.
 
[18]  Bozec, R. & Breton, G., 2003. The impact of the corporatization process on the financial performance of Canadian state-owned enterprises. International Journal of Public Sector Management, 16, 27-47.
 
[19]  Bozec, R., Dia, M. & Bozec, Y., 2010. Governance–Performance Relationship: A Re-examination Using Technical Efficiency Measures. British Journal of Management, 21, 684-700.
 
[20]  Brennan, N., 2006. Boards of Directors and Firm Performance: is there an expectations gap? Corporate Governance: An International Review, 14, 577-593.
 
[21]  Cadbury, A., 1992. Report of The Committee on The Financial Aspects of Corporate Governance. London, 9-61.
 
[22]  Cheng, S., 2008. Board size and the variability of corporate performance. Journal of Financial Economics, 87, 157-176.
 
[23]  Chhaochharia, V. & Grinstein, Y., 2009. CEO Compensation and Board Structure. The Journal of Finance, 64, 231-261.
 
[24]  Clarke, T. (ed.) (2004) Theories of corporate governance: the philosophical foundations of corporate governance, London: Routledge.
 
[25]  Conger, J.A., Finegold, D. & Lawler Iii, E.E., 1998. Appraising boardroom performance. Harvard Business Review, 76, 136-148.
 
[26]  Coughlan, A.T. & Schmidt, R.M., 1985. Executive compensation, management turnover, and firm performance: An empirical investigation. Journal of Accounting and Economics, 7, 43-66.
 
[27]  Dahya, J., Dimitrov, O. & Mcconnell, J.J., 2008. Dominant shareholders, corporate boards, and corporate value: A cross-country analysis. Journal of Financial Economics, 87, 73-100.
 
[28]  Dahya, J., Garcia, L.G. & Bommel, J.V., 2009. One Man Two Hats: What's All the Commotion! Financial Review, 44, 179-212.
 
[29]  Dahya, J. & Mcconnell, J., 2007. Board Composition, Corporate Performance, and the Cadbury Committee Recommendation. Journal of Financial & Quantitative Analysis, 42, 535-564.
 
[30]  Dalton, D.R., Daily, C.M., Ellstrand, A.E. & Johnson, J.L., 1998. Meta-Analytic Reviews of Board Composition, Leadership Structure, and Financial Performance. Strategic Management Journal, 19, 269-290.
 
[31]  Davies, J.R., Hillier, D. & Mccolgan, P., 2005. Ownership structure, managerial behavior and corporate value. Journal of Corporate Finance, 11, 645-660.
 
[32]  Dedman, E., 2000. An Investigation into the Determinants of UK Board Structure Before and After Cadbury. Corporate Governance: An International Review, 8, 133-153.
 
[33]  Demsetz, H. & Lehn, K., 1985. The Structure of Corporate Ownership: Causes and Consequences. The Journal of Political Economy, 93, 1155-1177.
 
[34]  Demsetz, H. & Villalonga, B., 2001. Ownership structure and corporate performance. Journal of Corporate Finance, 7, 209-233.
 
[35]  Denis, D.J., Denis, D.K. & Sarin, A., 1997. Agency Problems, Equity Ownership, and Corporate Diversification. Journal of Finance, 52, 135-160.
 
[36]  Donaldson, L., 1990. The Ethereal Hand: Organizational Economics and Management Theory. Academy of Management Review, 15, 369-381.
 
[37]  Donaldson, L. & Davis, J.H., 1991. Stewardship Theory or Agency Theory: CEO Governance and Shareholder Returns. Australian Journal of Management, 16, 49.
 
[38]  Donaldson, L. & Davis, J.H., 1994. Boards and Company Performance - Research Challenges the Conventional Wisdom. Corporate Governance: An International Review, 2, 151-160.
 
[39]  Durisin, B. & Puzone, F., 2009. Maturation of Corporate Governance Research, 1993–2007: An Assessment. Corporate Governance: An International Review, 17, 266-291.
 
[40]  Eisenberg, T., Sundgren, S. & Wells, M.T., 1998. Larger board size and decreasing firm value in small firms. Journal of Financial Economics, 48, 35-54.
 
[41]  Faccio, M. & Lasfer, M., 1999. Managerial Ownership, Board Structure and Firm Value: The UK Evidence. SSRN.
 
[42]  Fama, E.F., 1980. Agency Problems and the Theory of the Firm. Journal of Political Economy, 88, 288-307.
 
[43]  Fama, E.F. & Jensen, M.C., 1983a. Agency Problems and Residual Claims. Journal of Law and Economics, 26, 327-349.
 
[44]  Fama, E.F. & Jensen, M.C., 1983b. Separation of Ownership and Control. Journal of Law and Economics, 26, 301-325.
 
[45]  Ferris, S.P., Jagannathan, M. & Pritchard, A.C., 2003. Too Busy to Mind the Business? Monitoring by Directors with Multiple Board Appointments. Journal of Finance, 58, 1087-1111.
 
[46]  Filatotchev, I. & Boyd, B.K., 2009. Taking Stock of Corporate Governance Research While Looking to the Future. Corporate Governance: An International Review, 17, 257-265.
 
[47]  Florackis, C., Kostakis, A. & Ozkan, A., 2009. Managerial ownership and performance. Journal of Business Research, 62, 1350-1357.
 
[48]  Gillan, S.L., 2006. Recent Developments in Corporate Governance: An Overview. Journal of Corporate Finance, 12, 381-402.
 
[49]  Glen, J., Lee, K. & Singh, A., 2001. Persistence of profitability and competition in emerging markets. Economics Letters, 72, 247-253.
 
[50]  Goodstein, J., Gautam, K. & Boeker, W., 1994. The Effects of Board Size and Diversity on Strategic Change. Strategic Management Journal, 15, 241-250.
 
[51]  Griffith, J.M., 1999. CEO ownership and firm value. Managerial and Decision Economics, 20, 1-8.
 
[52]  Gschwandtner, A., 2005. Profit persistence in the ‘very’ long run: evidence from survivors and exiters. Applied Economics, 37, 793-806.
 
[53]  Guest, P.M., 2008. The determinants of board size and composition: Evidence from the UK. Journal of Corporate Finance, 14, 51-72.
 
[54]  Guest, P.M., 2009. The impact of board size on firm performance: evidence from the UK. European Journal of Finance, 15, 385-404.
 
[55]  Haniffa, R. & Hudaib, M., 2006. Corporate Governance Structure and Performance of Malaysian Listed Companies. Journal of Business Finance & Accounting, 33, 1034-1062.
 
[56]  Haniffa, R.M. & Cooke, T.E., 2002. Culture, Corporate Governance and Disclosure in Malaysian Corporations. Abacus, 38, 317-349.
 
[57]  Hansen, L.P. & Singleton, K.J., 1982. Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models. Econometrica, 50, 1269-1286.
 
[58]  Hansmann, H., 1992. The ownership of enterprise: Cambridge, MA: Harvard University Press.
 
[59]  Harris, M. & Raviv, A., 1988. Corporate control contests and capital structure. Journal of Financial Economics, 20, 55-86.
 
[60]  Harrison, J.R., 1987. The strategic use of corporate board committees. Organizational approaches to strategy, 30, 109-125.
 
[61]  Heath, J., 2009. The Uses and Abuses of Agency Theory. Business Ethics Quarterly, 19, 497-528.
 
[62]  Hermalin, B.E. & Weisbach, M.S., 1988. The determinants of board composition. RAND Journal of Economics, 19, 589-606.
 
[63]  Hermalin, B.E. & Weisbach, M.S., 1991. The Effects of Board Composition and Direct Incentives on Firm Performance. FM: The Journal of the Financial Management Association, 20, 101-112.
 
[64]  Hermalin, B.E. & Weisbach, M.S., 1998. Endogenously Chosen Boards of Directors and Their Monitoring of the CEO. The American Economic Review, 88, 96-118.
 
[65]  Hermalin, B.E. & Weisbach, M.S., 2003. Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature. SSRN.
 
[66]  Higgs, D., 2003. Review of the role and effectiveness of non-executive directors. London: The Department of Trade and Industry.
 
[67]  Hillier, D. & Mccolgan, P., 2006. An Analysis of Changes in Board Structure during Corporate Governance Reforms. European Financial Management, 12, 575-607.
 
[68]  Himmelberg, C.P., Hubbard, R.G. & Palia, D., 1999. Understanding the determinants of managerial ownership and the link between ownership and performance. Journal of Financial Economics, 53, 353-384.
 
[69]  Holderness, C.G., 2009. The Myth of Diffuse Ownership in the United States. Review of Financial Studies, 22, 1377-1408.
 
[70]  Jensen, M.C., 1993. The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems. The Journal of Finance, 48, 831-880.
 
[71]  Jensen, M.C. & Meckling, W.H., 1976. Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3, 305-360.
 
[72]  Jiraporn, P., Singh, M. & Lee, C.I., 2009. Ineffective corporate governance: Director busyness and board committee memberships. Journal of Banking & Finance, 33, 819-828.
 
[73]  John, K. & Senbet, L.W., 1998. Corporate governance and board effectiveness. Journal of Banking & Finance, 22, 371-403.
 
[74]  Karamanou, I. & Vafeas, N., 2005. The association between corporate boards, audit committees, and management earnings forecasts: An empirical analysis. Journal of Accounting Research, 43, 453-486.
 
[75]  Kiel, G.C. & Nicholson, G.J., 2003. Board Composition and Corporate Performance: how the Australian experience informs contrasting theories of corporate governance. Corporate Governance: An International Review, 11, 189-205.
 
[76]  Klein, A., 1998. Firm Performance and Board Committee Structure. Journal of Law and Economics, 41, 275-303.
 
[77]  Laing, D. & Weir, C.M., 1999. Governance structures, size and corporate performance in UK firms. Management Decision, 37, 457-464.
 
[78]  Laux, C. & Laux, V., 2009. Board Committees, CEO Compensation, and Earnings Management. Accounting Review, 84, 869-891.
 
[79]  Lehn, K.M., Patro, S. & Zhao, M., 2009. Determinants of the Size and Composition of US Corporate Boards: 1935-2000. Financial Management (Blackwell Publishing Limited), 38, 747-780.
 
[80]  Letza, S., Xiuping, S. & Kirkbride, J., 2004. Shareholding Versus Stakeholding: a critical review of corporate governance. Corporate Governance: An International Review, 12, 242-262.
 
[81]  Linck, J.S., Netter, J.M. & Yang, T., 2008. The determinants of board structure. Journal of Financial Economics, 87, 308-328.
 
[82]  Lipton, M. & Lorsch, J.W., 1992. A modest proposal for improved corporate governance. Business Lawyer, 48, 59-77.
 
[83]  Loderer, C. & Martin, K., 1997. Executive stock ownership and performance tracking faint traces. Journal of Financial Economics, 45, 223-255.
 
[84]  Macneil, I. & Xiao, L., 2006. “Comply or Explain”: market discipline and non-compliance with the Combined Code. Corporate Governance: An International Review, 14, 486-496.
 
[85]  Mallin, C.A., 2009. Corporate Governance, Third ed. Oxford: Oxford University Press Inc.
 
[86]  Mcconnell, J.J. & Servaes, H., 1990. Additional evidence on equity ownership and corporate value. Journal of Financial Economics, 27, 595-612.
 
[87]  Mcconnell, J.J. & Servaes, H., 1995. Equity ownership and the two faces of debt. Journal of Financial Economics, 39, 131-157.
 
[88]  Mcconnell, J.J., Servaes, H. & Lins, K.V., 2005. Changes in Equity Ownership and Changes in the Market Value of the Firm. SSRN.
 
[89]  Mcknight, P.J. & Weir, C., 2009. Agency costs, corporate governance mechanisms and ownership structure in large UK publicly quoted companies: A panel data analysis. The Quarterly Review of Economics and Finance, 49, 139-158.
 
[90]  Morck, R., Shleifer, A. & Vishny, R.W., 1988. Management ownership and market valuation: An empirical analysis. Journal of Financial Economics, 20, 293-315.
 
[91]  Netter, J., Poulsen, A. & Stegemoller, M., 2009. The rise of corporate governance in corporate control research. Journal of Corporate Finance, 15, 1-9.
 
[92]  Nicholson, G.J. & Kiel, G.C., 2007. Can Directors Impact Performance? A case-based test of three theories of corporate governance. Corporate Governance: An International Review, 15, 585-608.
 
[93]  Ozkan, A. & Ozkan, N., 2004. Corporate cash holdings: An empirical investigation of UK companies. Journal of Banking & Finance, 28, 2103-2134.
 
[94]  Peasnell, K.V., Pope, P.F. & Young, S., 2003. Managerial Equity Ownership and the Demand for Outside Directors. European Financial Management, 9, 231-250.
 
[95]  Pfeffer, J., 1973. Size, Composition, and Function of Hospital Boards of Directors: A Study of Organization-Environment Linkage. Administrative Science Quarterly, 18, 349-364.
 
[96]  Raheja, C.G., 2005. Determinants of Board Size and Composition: A Theory of Corporate Boards. Journal of Financial and Quantitative Analysis, 40, 283-306.
 
[97]  Rosenstein, S. & Wyatt, J.G., 1997. Inside directors, board effectiveness, and shareholder wealth. Journal of Financial Economics, 44, 229-250.
 
[98]  Sappington, D.E.M., 1991. Incentives in Principal-Agent Relationships. The Journal of Economic Perspectives, 5, 45-66.
 
[99]  Shivdasani, A. & Yermack, D., 1999. CEO Involvement in the Selection of New Board Members: An Empirical Analysis. The Journal of Finance, 54, 1829-1853.
 
[100]  Short, H. & Keasey, K., 1999. Managerial ownership and the performance of firms: Evidence from the UK. Journal of Corporate Finance, 5, 79-101.
 
[101]  Solomon, J., 2010. Corporate Governance and Accountability, Third ed. Chichester, UK: John Wiley & Sons.
 
[102]  Staiger, D. & Stock, J.H., 1997. Instrumental Variables Regression with Weak Instruments. Econometrica, 65, 557-586.
 
[103]  Stock, J.H. & Yogo, M., 2005. Testing for Weak Instruments in Linear IV Regression. In D.W.K. Andrews & J.H. Stock (eds.) Identification and Inference for Econometric Models Essays in Honor of Thomas Rothenberg. Cambridge: Cambridge University Press, 80-108.
 
[104]  Stulz, R., 1988. Managerial control of voting rights: Financing policies and the market for corporate control. Journal of Financial Economics, 20, 25-54.
 
[105]  Sun, J. & Cahan, S., 2009. The Effect of Compensation Committee Quality on the Association between CEO Cash Compensation and Accounting Performance. Corporate Governance: An International Review, 17, 193-207.
 
[106]  Vafeas, N., 1999a. Board meeting frequency and firm performance. Journal of Financial Economics, 53, 113-142.
 
[107]  Vafeas, N., 1999b. The Nature of Board Nominating Committees and Their Role in Corporate Governance. Journal of Business Finance & Accounting, 26, 199-225.
 
[108]  Vafeas, N. & Theodorou, E., 1998. The relationship between board structure and firm performance in the UK. The British Accounting Review, 30, 383-407.
 
[109]  Van Ees, H., Gabrielsson, J. & Huse, M., 2009. Toward a Behavioral Theory of Boards and Corporate Governance. Corporate Governance: An International Review, 17, 307-319.
 
[110]  Walsh, J.P. & Seward, J.K., 1990. On the Efficiency of Internal and External Corporate Control Mechanisms. The Academy of Management Review, 15, 421-458.
 
[111]  Weir, C., Laing, D. & Mcknight, P.J., 2002. Internal and External Governance Mechanisms: Their Impact on the Performance of Large UK Public Companies. Journal of Business Finance & Accounting, 29, 579-611.
 
[112]  Weisbach, M.S., 1988. Outside directors and CEO turnover. Journal of Financial Economics, 20, 431-460.
 
[113]  Wild, J.J., 1994. Managerial Accountability To Shareholders: Audit Committees And The Explanatory Power of Earnings For Returns. The British Accounting Review 26, 353-374
 
[114]  Wintoki, M.B., Linck, J.S. & Netter, J.M., 2011. Endogeneity and the Dynamics of Internal Corporate Governance. Journal of Financial Economics, Forthcoming.
 
[115]  Wintoki, M.B., Linck, J.S. & Netter, J.M., 2012. Endogeneity and the Dynamics of Internal Corporate Governance. Journal of Financial Economics, Forthcoming.
 
[116]  Wooldridge, J.R.M., 2002. Econometric Analysis of Cross Section and Panel Data London: The MIT Press.
 
[117]  Yermack, D., 1996. Higher market valuation of companies with a small board of directors. Journal of Financial Economics, 40, 185-211.
 
Manuscript template