International Journal of Economics and Financial

Issues
ISSN: 2146-4138

available at http: www.econjournals.com

International Journal of Economics and Financial Issues, 2016, 6(S3) 99-108.

Special Issue for “Asia International Conference (AIC 205), 5-6 December 2015, Universiti Teknologi Malaysia, Kuala Lumpur, Malaysia”

Ownership Structure, Corporate Governance and Firm

Performance

Pang Elvin1*, Nik Intan Norhan Bt Abdul Hamid2

Faculty of Management, Universiti Teknologi Malaysia, Malaysia, 2Faculty of Management, Universiti Teknologi Malaysia,
1

Malaysia. *Email: [email protected]

ABSTRACT
Based on previous studies, ownership structure is not standardized across different country and economic sectors. In other words, each country or
economic sector might have different types of sustainable ownership structure that contribute to the competitive and healthiness of a firm. Failure to
establish a sustainable ownership structure may produce a result that is contradicted from what is expected by the shareholders. This situation frames
a picture that ownership structure is a vital determinant in enhancing firm performance. By highlighting the corporate governance components that
normally used in the academic research, this study tends to identify the important components that applied in the reforms of the Malaysian corporate
governance. This study is needed as a tool to proof whether the ownership structures and corporate governance practices are truly influenced firm
performance. The purpose of the study is to investigate the relationship between firms’ ownership structures, corporate governance practices and
firm performance. Specifically, this study narrows the ownership structures categories into; institutional, government, family, foreign, managerial
and concentrated. Besides, this study focuses on ten corporate governance components which include board structure, CEO duality, board size,
independent board of directors, directors’ professionalism/qualification, board meeting, board committee, directors’ remuneration, transparency and
disclose, merger and acquisition. Firm performance will be measured in the aspect of accounting profitability-return on asset and return on equity; and
market performance - Tobin-Q, price to earnings and price to book value. The participating firms of this study are non-financial public firms that are
actively listed in the main market of Bursa Malaysia during the 5-year period (2010-2014). The sample will be tested and analyzed by using empirical
quantitative method, linear regression, multiple regression and panel data regression analysis.
Keywords: Ownership Structure, Corporate Governance, Bursa Malaysia
JEL Classifications: H5, H7, P4

1. INTRODUCTION Proffitt, 2000; Cuevas-Rodríguez et al., 2012) showed that

agency theory plays as an important link between the ownership
The financial performance of a firm can be analyzed in terms of structure and firm performance. According to Shleifer and
profitability, dividend growth, sales turnover, asset base, capital Vishny (1986), agency cost is one of the critical factors that
employed among others (Almajali et al., 2012). However, there affects a firm’s financial and nonfinancial performance. Berger
is still debate among several disciplines regarding how the and Patti (2000) stated the ownership structure of a firm should
performance of firms should be measured and the factors that affect be considered when examining empirically financing issues.
financial performance of companies (Liargovas and Skandalis, This is because differences in ownership structures impact on
2008). A single factor cannot reflect every aspect of a company efficiency of aligning the objectives of insiders (manager) with
performance and therefore the use of several factors allows a better those of providers of finance (shareholders). Firm performance
evaluation of the financial profile of firms. is very essential to a firm’s ownership structure and corporate
governance practice as it is an outcome which has been achieved
Numerous of strategic management and finance literatures by an individual or a group of individuals in an organization
(Jensen and Meckling, 1976; Bolton and Scharfstein, 1990; related to its authority and responsibility in achieving the goal

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 Elvin and Hamid: Ownership Structure, Corporate Governance and Firm Performance

legally, not against the law, and conforming to the morale and Indeed, the relationship between ownership structure and firm
ethic (Maury, 2006). performance has been an issue of interest among academics,
investors and policy makers because it is also a key issue in
Pedersen and Thomsen (2000) stated that different countries understanding the effectiveness of alternative governance system.
posit different controlling identities such as government and Implementing a good corporate governance practice could
cooperatives which need to be addressed separately due to their ensure the flow of firm operation and the return on investment
different objectives in firms. Claessens et al. (1999) stated that the of owner and investors. Denoted from agency theory, corporate
ownership structure in East Asian corporations grouped into four governance problem arises with self-interest behavior (Shleifer and
different categories which includes; families, the state, widely Vishny, 1986). The agency problem in this context refers to the
held financial institutions such as banks and insurance companies, investors concerns on their funds are not expropriated or wasted
and widely held corporations. Consequently, each firm in different on unattractive projects. In order to minimize firm agency costs,
ownership structure applied their own operation arrangement and a good corporate governance system should provide some kind
strategies to run their operation and thus affect firm performance of legal protection for the rights of both large and small investors
in different way. (Loh and Zin, 2007).

According to Claessens et al. (2002), unlike other listed companies The existing corporate governance literatures has largely dealt
in economically advanced countries where ownership is diversified with an analysis of institutional arrangements in American, British,
owing to numerous shareholders, most East Asian companies are Australian, German and Japanese firms, with much less attention
owned and controlled by family groups. In other words, the majority paid to firms from emerging markets (Elston and Goldberg, 2003,
of family firms have relatively concentrated equity ownership in Galbreath and Galvin, 2008; Switzera and Tang, 2009). According
Malaysia. Claessens et al. (2002) and Samad (2004) indicated that to Sulong and Nor (2008), the corporate governance environment
many listed firms in Malaysia are owned or controlled by family in East Asian is much more different in develop markets such
members and that these companies appear to be inherited by their as United States and United Kingdom. As a result, the study of
own descendants. There are two theoretical viewpoints on the relationship between corporate governance and firm’s performance
role of family ownership (Anderson and Reeb, 2003; Lee, 2006;
does not reach a consensus among researchers. Nevertheless, the
Jiraporn and Dadalt, 2007; Pindado and Requejo, 2014). First,
variance in results may be related to the firm’s sector and time
founding families firms will limit managers’ ability to manage
framework in which the studies were conducted. Sun et al. (2010)
earnings and second, there is a likelihood that the controlling
pointed out that corporate governance research in Asia has not
families engage in expropriation of minority shareholders’ interest
received attention from Western researchers and publications,
that would result in lower performance. For example, members of
making Asia a fertile ground for future research in corporate
the controlling family usually hold top management positions and
governance mechanisms. Further, due to structural differences in
can exercise control over the board which in turn may provide them
the national political economies, corporate governance practices
with opportunities to expropriate minority shareholders.
needs to be understood in the context of specific legal, political,
According to Ball et al., (2003), Malaysia is identified as a and regulatory systems. Against this backdrop, it is far less known
country with high political connection and high concentrated about the corporate governance mechanisms in emerging markets
shareholding that may reduce the level of financial reporting such as Malaysia.
quality. Prior literatures on corporate disclosure orientation in
government owned companies suggest that agency conflicts As being mentioned, each type of ownership structures influences
in these companies are relatively higher than private owned the firm performance in a different way. The ownership structure
companies (Eng and Mak, 2003; Luo et al., 2006). Prior studies plays an important role in determines a firm ultimate success.
found that the extent of government intervention on firm’s Nevertheless, the same issue goes to firms’ corporate governance
performance is mixed due to two different perspectives. Some practice. Derived from previous studies, ownership structure
firms with government intervention performed better as they are and corporate governance practice are not standardizing across
under the “watchful eyes of the public” and thus more concerned different economic situation as there are differences in areas
to maximize the shareholders’ value (Ang and Ding, 2006; Lau such as corporate law and investor protection (Ugurlu, 2000;
and Tong, 2008; Najid and Rahman, 2011) while other firms with Shakir, 2008). In other words, the effects of ownership structures
high government ownership are restricted on their innovation and and corporate governance may be mediated by country-specific
more focus on public service which resulted in poor performance factors, such as national culture, business practices, national tax
(Ball et al., 2003; Wei and Varela, 2003). According to Najid and incentives, and differences in national legal structures. In sum,
Rahman (2011), Government-linked Companies (GLCs) have each economic sector might have different types of sustainable
been criticized for being too risk-averse and lacking sufficient ownership structure and corporate governance practice that
entrepreneurial drive and also been charges that certain GLCs’ contribute to the competitive and healthiness of the firm. Failure
investments have been politically rather than commercially to establish a sustainable ownership structure and corporate
motivated. The primary objectives of enhancing the national governance may produce result that is contradicted from what
welfare and other non-profit considerations may not be consistent is expected by the shareholders. This situation frames a picture
with value maximization objective of other private commercial that ownership structure and corporate governance are vital
enterprises, thus contributing to the high agency costs. determinants in enhancing firm performance.

100 International Journal of Economics and Financial Issues | Vol 6 • Special Issue (S3) • 2016
 Elvin and Hamid: Ownership Structure, Corporate Governance and Firm Performance

2. LITERATURE REVIEW theory may improve modeling methods and therefore clarification
of existing theoretical work. To address this problem, this study
2.1. Agency Theory includes ownership structure and corporate governance variables
According to Jensen and Meckling (1976), agency relationship in explaining firm performance. Consequently, be expected that
has arisen when; an agent (manager) acts as a decision maker in study of the agency relationship will aid the understanding on
the firm on behalf for the principal (owner or shareholders). The ownership structures and therefore to identify the most efficient
manager of the firm is essentially an agent of the shareholders. In way to govern a firm.
other words, a firm’s shareholders considered to be the principal
and manager to be the agent. The principal-agent model enriches 2.2. Past Studies on the Relationship between
a chain of command. For example, a principal, a supervisor, and Ownership Structure and Corporate Governance and
an agent or one principal and many agents, or other steps towards the Hypotheses Development
a full-fledged an organization tree. Generally, the principal and Mak and Li (2001) examined the relationship between corporate
the agent have agreed upon a fee schedule to be paid to the agent ownership and board structure in Singapore, by using a sample of
for his or her services toward the firm (Jensen, 1993). 147 firms listed on Stock Exchange of Singapore in year 1995, the
result shown that managerial ownership, government ownership
To be more precise about principal-agent model, the agent’s and board size are negatively related to the proportion of outside
contribution is to expand shareholders’ wealth through the growth directors whereas block holder ownership is positively related
of the firm’s profitability and market stock price (Shleifer and to dual leadership structure (CEO duality). Booth et al. (2002)
Vishy, 1986). Basically, the agent receives payment from the examined whether internal monitoring mechanisms control for
principal at the same time he or she has to take a costly action agency conflicts in a firm. By using 100 largest non-financial
(supply effort) to produce any output (Jensen and Meckling, 1976). firms on Fortune’s Custom Ranking in year 1999, Booth et al.
However, it is difficult to measure the effort and contribution of an (2002) found that the percentage of outside directors is negatively
agent. Especially for multiple-agent firm, it is sometimes difficult related to managerial ownership and CEO duality less likely when
to define and measure their contribution to firm value (Jensen, managerial ownership increased. Based on the study conducted
1993). In addition, the nature of strategic interaction among by Bekiris (2013) that using an extensive sample of Greek listed
principals and agents becomes an important facet of the problem. firms, the results of the study show CEO is also the chairman
As a result, principal is hard to predict the long-run consequences of the board tends to have fewer outside directors and lower
of an agent’s actions based on the observation of short-run block holder ownership. The paper also provides evidence that
contribution. Bolton and Scharfstein (1990) stated the central idea independent boards are more likely to be employed by firms with
behind the principal-agent model is the principal might too busy higher external block holder shareholdings and whose board size
with works and so hires an agent to conduct a firm’s operation. is negatively correlated with managerial ownership and board
Consequently, being too busy also means the principal cannot independence. These results demonstrate that ownership structure
monitor the agent perfectly. The difficulty arises in monitoring has significant effects on the composition of corporate boards.
the act that the agent chooses (decision-making). According to
Proffitt (2000), chain of command (ownership structures) may The incentive conflict arising from the separation of the
affects agency costs and thereby influences firm performance. management and ownership of corporate resources has been
extensively researched. Based on the study conducted by Claessens
A principal-agent problem arises in many spheres of economic et al. (1999) which examined 2,980 publicly-traded firms in East
activity (Jensen and Meckling, 1976; Shleifer and Vishy, 1986). Asian, the result of the study shows that the separation of ownership
Commonly, the agent performs the expected tasks in a way and control is most pronounced among family-controlled firms
contrary to the principal’s best interests. However, there could and among small firms. Large family-controlled firms in Korea,
also be disagreements on the allocation of fund between principal Singapore, and Taiwan display a significant wedge between
and agent in some cases. The problem here is that the principal ownership and control. In addition, the study also found older
cannot verify that the agent has behaved appropriately. Jensen firms are more likely family controlled and more than two-thirds of
and Meckling (1976) explored the ownership structure of firms, listed firms are controlled by a single shareholder. Claessens et al.
involving how equity ownership by managers aligns managers’ (1999) claimed that a dominant and large shareholder with CEO
interests with those of owners. As a result, Jensen and Meckling duality is increases managerial opportunism and expropriation of
(1976) found that if the contract between the principal and agent is minority shareholders in family firms. By using a sample of 128
outcome based; the agent is more likely to behave in the interests publicly-listed firms in Hong Kong in year 2003, Lam and Lee
of the principal. (2008) argued neither agency theory nor stewardship theory can
effectively explain the duality-performance relationship. They
The theory of agency is one part of a broad research program in found CEO duality is good for non-family firms, while non-duality
evaluating firm performance. Although the agency framework is good for family-controlled firms.
is quite broad, however, it provides the applications and fertile
ground for further work. The basic issue is whether principal and In brief, the composition of boards of directors is related to the
agent relationship can persist with generating efficient outcomes effectiveness of an organization. However, with the mixed results,
in the firm. This study focuses on isolating the extent of the there is no clear understanding on board structure, CEO duality
principal-agent problem. The oriented towards enrichment of the and independence board of directors measures with ownership

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 Elvin and Hamid: Ownership Structure, Corporate Governance and Firm Performance

structures (shareholding statistic). Furthermore, there are not much H5: Ownership structure has a positive significant influence on
empirical evidences who clarify this relationship in Malaysian director’s professionalism and qualification.
context. Accordingly, based on the discussion in the literatures,
to answer the research questions and to respond to this conflict Based on the foregoing, an understanding of the frequency of
the following hypotheses are developed: board meetings and its determinants should presumably shed light
on the effectiveness with which the board carries out its oversight
H1: Ownership structure has a positive significant influence on functions. From the face of it, the number of meetings held by the
board structure. board could be evidence of how effective the board has been in
H2: Ownership structure has a positive significant influence on monitoring management. According to Vafeas (1999), Hahn and
CEO duality. Lasfer (2007), for a board to be effective it need not necessarily
H3: Ownership structure has a positive significant influence on meet frequently. Board effectiveness could be a function of number
board size. of other factors (i.e., existence of standing committees of the
H4: Ownership structure has a positive significant influence on board, independence of directors, director ownership, presence
independence board of directors. of block holders and the financial position and performance of
the company). How these factors influence the frequency of
It is essential to refer to studies that have attempted to identify board meetings is not at all clear. Determining the direction of
a relationship between demographic characteristics of board of the relationship between the factors and meeting frequency is
directors and organizational performance. Juravich (2012) found thus a question that requires empirical testing. This study aims
that average educational level of directors is positively associated to identify how ownership structure influences board activity
with the level of innovation. Nevertheless, the same authors as measured by board meeting frequency. Hence, the following
found no association between innovation and heterogeneity hypothesis is presented:
of educational specialities/educational background variety.
Horvath and Spirollari (2012) suggested that a lower age favors H6: Ownership structure has a positive significant influence on
risks propensity in strategic decision-making and firms with board meeting.
younger mangers will experience greater growth and variability
The relationship between the various characteristics of ownership
in profitability from industry averages than will firms with older
structure and corporate governance is an open empirical question.
mangers. On the other hand, Koufopoulos et al. (2008) used a
Corporate boards perform important decision control tasks, such
sample of 27 chairman of Greek corporations listed in the Athens
as determining executive compensation, reviewing the financial
stock exchange, the authors, found a positive relationship between
statements and nominating new executives and directors (Hayes
age and competitive positioning which indicates that, the older the
et al., 2004). These functions are thought to be suited best for
chairperson, the better the competitive positioning. Whereas, the
non-executive directors, since they require board members to act
relationship between age and overall firm performance was found
as monitors over management. Conversely, corporate boards also
to be negative, indicating that even if the chairperson is older and
perform tasks of decision management, such as setting long-term
more experienced the possibly efficient performance of the firm strategy and making suitable investing and financing decisions.
does not depend on that. Klein (1998) provides an interesting insight into this issue by
observing that executive directors should be most useful serving
Based on this extensive review, it seems that the results of earlier in standing board committees focusing on decision management
studies on the relationship between a director’s characteristics and tasks (investment and finance committees), and non-executive
firm performance are not very conclusive. It seems that although directors in committees focusing on decision control tasks (the
previous studies have adopted mostly accounting-based measures remuneration, nomination, and audit committees). This discussion
of performance, they have shown contradictory findings that therefore suggests that the standing board committees is what is
imply that they have not been successful in finding a clear link. important, and not the composition of the board as a whole.
Additionally whilst the role of the chief executive continues to
receive great scrutiny there is limited research on the role of the Interestingly, most empirical research studying the relationship
board of directors (Koufopoulos et al., 2008). Previous studies between ownership structure and corporate structure uses data in
contribute to the corporate governance literature by identifying developed countries such as United States and provides mixed
a specific set of demographic and directors’ characteristics and results (Klein, 1998; Hermalin and Weisbach, 2003; Brick and
testing how those are linked with organizational performance. In Chidambaran, 2010). Importantly, the generalizability of these
short, this study aims to employ a methodology to shed new light results regarding the corporate governance practices may not
onto the professionalism/qualification of board directors nexus extend across national boundaries. While the assumption of a
across a variety of ownership structure. This study aims to advance utility maximizing agent is universal, each country’s regulatory and
the corporate governance research agenda by investigating the link economic environment, the strength of capital markets, and current
between the ownership structure and professionalism/qualification governance practices are different. As a result, the importance
of board directors. The research also indicates that understanding and value of various governance structures should be separately
the variables that influence top management team enhances value examined in each country. This paper focuses on corporate
creation to investors and shareholders. Accordingly, the related governance in the Malaysia and the results presented here are of
hypothesis is as follow: potential interest to regulators, managers, shareholder activists,

102 International Journal of Economics and Financial Issues | Vol 6 • Special Issue (S3) • 2016
 Elvin and Hamid: Ownership Structure, Corporate Governance and Firm Performance

and investors in the Malaysia, as well as to academic researchers. Conversely, the results goes different in the study conducted by
In particular, put in the backdrop of the recommendations of the Eng and Mak (2003), the results shown that lower managerial
Malaysia Code on Corporate Governance (2012), these results are ownership and significant government ownership are associated
enlightening as to the role of government in corporate governance. with increased disclosure and the blockholder ownership is not
More broadly, this study points to the empirical examination of related to disclosure. The results also reveal that an increase in
corporate governance in Malaysia contexts as a fruitful task in outside directors reduces corporate disclosure while larger firms
understanding alternative governance structures. Accordingly, the had greater disclosure. Bekiris (2013) examined 41 listed firms
related hypothesis is as follow: on Bahraini stock exchange in year 2010, the analysis of the study
shows that there is a significant negative association between block
H7: Ownership structure has a positive significant influence on holder ownership and voluntary disclosures. However, managerial
board committee. ownership and governmental ownership are not associated with
voluntary disclosures. Based on these conflicting results, it is not
Past studies have shown mixed results regarding the relationship clear whether the ownership structure are able to affect company
between ownership and directors’ remuneration. For example, disclose and transparency. Furthermore, it is not clear which
Wahab and Rahman (2009) examined 434 firms listed measures has highest relative content with firms’ transparency
on Bursa Malaysia from year 1999 to 2003, they found a and disclose. Accordingly, the related hypothesis is as follow:
negative relationship between institutional ownership and
director remuneration and suggesting the result is by reason H9: Ownership structure has a positive significant influence on
of the effectiveness of institutional monitoring. Similarly, by transparency and disclose.
using a sample of 546 firms publicly traded in UK over the
period of year 2000-2004, Dong and Ozkan (2007) stated Ownership has a role in the probability of a firm engaged in merger
that institutions are more involved in corporate governance or acquisition. Caprio et al. (2011) analyze how the ownership
and serve a better monitoring and disciplining. Jaafar et al. stake of the largest shareholder and family control affect mergers
(2012) stated that ownership concentration bring impacts on and acquisitions decisions. By using 777 Continental European
directors’ remuneration in certain firms. For instance, a family- firms in the period of year 1998-2008 as the sample of study,
owned firm can manipulate remuneration through combine Caprio et al. (2011) found that increase in the size of the largest
power and control to mitigate effectiveness monitoring by shareholder’s voting rights lowers the probability of an acquisition,
remuneration committee, which provided an opportunity for and family control further decreases it. The result also reveal that
them to expropriate private benefit. This actions might results family firms are less likely to make acquisitions than non-family
in losses for minority shareholders due to fewer dividends firms. The same results goes to the study conducted by Shim and
available for pay out. From an investor’s point of view, directors’ Okamuro (2011). They analyze the differences in merger decisions
remuneration is one of the measures of a company performance. and the consequences between family and non-family by using a
The directors’ remuneration is calculated at a given amount, unique Japanese dataset from a period of high economic growth
but, in order to assess performance over time, the difference or (1955-1973), the results suggest that family firms are less likely
change in directors’ remuneration from one date to another can to merge than non-family firms are and non-family firms benefit
be determined to see whether shareholder value has been created more from mergers than family firms do. Based on this extensive
or destroy. Regarding the important of directors’ remuneration review, it seems that the ownership structure is one of the important
as proxy of created shareholder value; this study emphasized determinants in forming mergers and acquisitions. Hence, the
the dimension of created shareholder value process and its following hypothesis is presented:
relationship with company performance criteria. Therefore, the
following hypothesis is presented: H10: Ownership structure has a positive significant influence on
merger and acquisition.
H8: Ownership structure has a positive significant influence on
directors’ remuneration. According to one definition, corporate governance is the system by
which business corporations are directed and controlled (OECD,
Derived from a study of voluntary disclosure by Hong Kong 2004). Corporate governance delimits the distribution of rights and
and Singapore firms, Chau and Gray (2002) report a positive duties amongst the different participants in the firm, and sets rules
relationship between outside ownership and disclosure. Xiao and procedures for making decisions. Corporate governance also
and Yuan (2007) using an ordinary least-squares-regression provides structures through which aims and objectives are set, and
model to test the relationship among ownership structure, board through which monitoring is carried out (McKinsey and Company,
composition and the level of voluntary disclosure. Their results 2000). Bebchuk et al. (2008) and Khatab et al. (2011) stated that
show higher blockholder ownership and foreign shares ownership corporate governance decreases shareholder risk through the
is associated with increased disclosure. However, managerial legal protection of shareholder rights and creating mechanisms of
ownership, state ownership, and legal-person ownership are company management that allow shareholders to be assured that
not related to disclosure. An increase in independent directors the management uses the investment efficiently. In other words,
increases corporate disclosure while CEO duality is associated corporate governance is generally considered be important in
with lower disclosure. Their paper also found that larger firms contributing to owners’ rights and benefits and through strategic
had greater disclosure. policies enhancing performance and creating wealth. A firm

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 Elvin and Hamid: Ownership Structure, Corporate Governance and Firm Performance

corporate governance practices affect its overall operation and Their study found that firms with duality leadership shows higher
performance. Comprehensive cross-industry comparisons of return on asset (ROA) compared to firms with separate leadership.
corporate performance are extremely difficult to carry out and The study also reveal a significant positive relationship between
to interpret. In order to extend the literatures, this study tends the number of external directors and ROE, this means that the
to examine the association between ownership structures and a more external directors, the better the performance.
comprehensive set of corporate governance variables.
Gupta et al. (2006) used a sample of 178 firms in S&P/TSX
2.3. Past Studies on the Relationship between index (year 2002-2004) and correlating the composite corporate
Ownership Structure, Corporate Governance and governance scores (board composition; board and CEO
Firm Performance and the Hypotheses Development compensation; shareholder rights; and board governance
Amran and Ahmad (2009) used 896 firms that were listed on Bursa disclosure) with various financial and market measures (Tobin’s
Malaysia from year 2000 to 2003 as the sample of their study, the Q, price to book value [PTBV] and ROA). Overall, the study
findings reveal that not all elements of governance mechanisms did not find any association between the composite corporate
are significant and the effects differ between family-businesses governance scores and various measures of firm performance. The
and non-family businesses. The results indicate that board size same results goes to study conducted by Ghazali (2010) whose
and leadership structure affect the firm value for all sample. tested 87 non-financial firms that listed on Bursa Malaysia in year
Businesses do practice separate leadership structure outperform 2001, the results showed that board size and independence were
than duality leadership. Further analysis shows that smaller board not statistically significant in explaining corporate performance.
size contributes positively towards better performance in non- However, the study found that government as a substantial
family firms. Tham and Romuald (2012) examined relationship shareholder and foreign ownership were statistically significantly
between corporate governance mechanisms and firm performance associated with Tobin’s Q.
by using panel data of 20 public listed firms in Bursa Malaysia
from the period of year 2006 to 2010, consistent with the study While many previous studies have examined the direct effect of
conducted by Amran and Ahmad (2009), they found smaller board ownership structure, corporate governance and firm performance,
size leads to better firms’ performance. The study also suggested there is a need of comprehension on how the different types
that higher proportion of managerial ownership (directors who of ownership structures and corporate governance practices
are also owner) tend to benefit firm performance. impact on the firm performance. Hence, this study intends to
investigate the joint effects of corporate governance mechanisms
Conversely, based on the study conducted Fauzi and Locke on the relationship between types of ownership structure and firm
(2012) examined 79 firms that listed in New Zealand stock performance. In addition, this study tends to identify which type of
exchange, the result reveals that board size, board committees, ownership structure and corporate governance practice are more
and managerial ownership have a significant impact on firm feasible, practical and profitable in each type of economic sector
performance. Fauzi and Locke (2012) claimed that large boards in Malaysia since most researches concentrating on ownership
improve firms’ performance as it can provide greater monitoring. structure, corporate governance and firm performance were
Meanwhile, non-executive directors, female directors on the board conducted overseas with little research actually taking place in
and concentrated ownership lower the firm performance. Sulong Malaysia. In order to achieve these objectives, the hypotheses
and Nor (2008) examined the relationships between dividends, developed in this study are as below:
types of ownership structure and board governance variables on
firm performance among Malaysian listed companies. By using H11: Ownership structure has a positive significant influence on
406 firms non-financial listed in Bursa Malaysia for the period of firm accounting profitability.
year 2002-2005 as the sample of their study, the result shows that H12: Ownership structure has a positive significant influence on
dividend has a positive significant effect on firm performance. The firm market performance.
finding suggests that dividends can play its important monitoring H13: Corporate governance has a positive significant influence
role in reducing agency costs among Malaysian listed firms. on firm accounting profitability.
Whereas ownership concentration, managerial ownership and H14: Corporate governance has a positive significant influence
on board governance variables (board size, independent board of on firm market performance.
directors and CEO duality) provided insignificant effect to firm H15: Ownership structure and corporate governance have a
performance in their study. positive significant influence on firm accounting profitability.
H16: Ownership structure and corporate governance have a
Krivogorsky (2006) examined 81 firms from nine European positive significant influence on firm market performance.
countries, the results indicate a strong positive relation between
the level institutional ownership, portion of independent directors 3. RESEARCH METHODOLOGY
on the board and profitability ratios. However, there is no strong
relation between the portion of inside directors or level of In competitive business environment, the ownership structure
managerial ownership and profitability in these 81 European firms. and corporate governance have played and will continue to play
Dehaene et al. (2011) whose analyzed a sample of 122 Belgian a strong role in facilitating business growth by putting in place
firms and verified whether the board composition has an impact on procedures and regulations that will support a business-friendly
the firm performance, as measured by return on equity and assets. environment. This study aims to achieve few results, firstly,

104 International Journal of Economics and Financial Issues | Vol 6 • Special Issue (S3) • 2016
 Elvin and Hamid: Ownership Structure, Corporate Governance and Firm Performance

to identify the relationship between ownership structures and The population of the study is the firms that publicly listed
corporate governance (Hypotheses 1-10), secondly, to examine the in the main market of Bursa Malaysia from the year 2010 to
effects of ownership structure on firm performance (Hypotheses 2014. However, all finance-related firms, banks, insurance,
11 and 12), thirdly, to examine the effects of corporate governance unit trusts and utilities companies were excluded from the
on firm performance (Hypotheses 13 and 14), and lastly, to sample due to their difference in the regulatory requirements,
identify the relationship between ownership structure, corporate financial reporting standards and compliance (Claessens et al.
governance and firm performance associate with control variables 2002; Sulong and Nor, 2008). Firms that are classified as PN4
(CVs) (Hypotheses 15 and 16). In sum, the relations between these companies and industries with less than eight firms were also
variables in this study is summarized in the research conceptual excluded from the sample (Davidson et al., 2005; Hashim and
framework (Figure 1). Devi, 2008). Finally, this study was left with the sample of 696
firms covering the sectors of construction, consumer products,
This study aims to investigate the relationship between firms’ industrial products, plantation, properties, technology, trading
ownership structures, corporate governance and firm performance. and services. The larger numbers of firms sample were expected
Specifically, this study narrow the ownership structures categories to make the study more transparent and representative of firms
into; institutional-owned, government-owned, family-owned, in Malaysia.
foreign-owned, managerial-owned and concentrated-owned. This
study focuses on ten corporate governance components which In the case of 5 years financial data analysis, the period is 5
include board structure, CEO duality, board size, independent calendar years (cover from 1st January 2010 to 31st December
board of directors, directors’ professionalism/qualification, board 2014). This study collects firms’ information continuously and
meeting, board committee, directors’ remuneration, transparency then aggregates the results over a specific time period (5-year).
and disclose, mergers and acquisitions. Firm performance will The information and financial data of firms are collected through
be measured in the aspect of accounting profitability- ROA and the audited company annual report. Data related to ownership
return on equity (ROE); and market performance- Tobin-Q, price structure (e.g., shareholding statistic) and corporate governance
to earnings (PE) and PTBV. (e.g., board composition, board size and leadership structure) will
manually collected from firms’ annual reports, whilst accounting
This study conduct long-term post-performance evaluation which performance measures were retrieved from the Datastream
covering 5 years financial data period starting from year 2010 to provided by Universiti Teknologi Malaysia. After collecting data,
the end of year 2014. Specifically, the study will be carried out the data will be entered to the software (Statistical Package for
by empirical analysis which is based on the available firms’ data the Social Sciences and Eview) for processing and developing
provided by Bursa Malaysia. According to Glasow (2005), 5 years information patterns related to the context of testing research
post-performance evaluation provide more current information hypotheses. A 95% confidence level is the conventionally accepted
about areas that have changing population and/or characteristics level for most business researches, most commonly expressed by
because they are based on the data from the previous year and denoting the significant level as P ≤ 0.05 (Hamid, 2010; Nakhaei,
data that are less than 5-year-old. Moreover, long-term post- 2014). The analyzing of data involves three parts: (i) Descriptive
performance evaluation is based on larger sample sizes and will statistics, (ii) linear and multiple regression (iii) panel data
therefore be more reliable (Hooy and Tee, 2009; Liu, 2011). The regression analysis.
5 years post-performance evaluation is based on five times as many
sample cases than the short term evaluation (1-3 years). For some The variables of the study are categorized into three types: The
characteristics this increased sample is needed for the evaluation independent variables (IVs), dependent variable (DVs) and
to be reliable enough for use in certain applications. CVs. For the purpose of achieving the research objective and
hypotheses, the DVs for this study is firm performance. The firm
Figure 1: Research conceptual framework performance is proxy by the accounting profitability and market
based performance while the IVs are types of ownership structures
and corporate governance components. Table 1 shows all the
variables that will employ in the study including the measurement
for each of them.

4. CONCLUSION

The subject of financial performance has received significant

attention from scholars in the various areas of business and
strategic management. It has also been the primary concern of
business practitioners in all types of organizations since financial
performance has implications to organization’s health and
ultimately its survival. High performance reflects management
effectiveness and efficiency in making use of company’s resources
and this in turn contributes to the country’s economy at large. The
importance of the study emerges from the fact that ownership

International Journal of Economics and Financial Issues | Vol 6 • Special Issue (S3) • 2016 105
 Elvin and Hamid: Ownership Structure, Corporate Governance and Firm Performance

Table 1: Summarization of variables and the measurements

Variables Measurements
IVs
Ownership structures
Government ownership Percentage of ordinary shares held by government ownership in firm
Institutional ownership Percentage of ordinary shares held by institutional ownership in firm
Family ownership Percentage of ordinary shares held by family members ownership in firm
Foreign ownership Percentage of ordinary shares held by foreign company ownership in firm
Managerial ownership Percentage of ordinary shares held by director/executive ownership in firm
Concentrated ownership Percentage of ordinary shares held by top ten shareholders ownership in firm
Corporate governance
Board structure Composition of board
CEO duality A CEO that also serves as a chairman
Board size The number of directors
Independent board of directors Proportion of non‑executives independent directors
Professionalism/qualification Directors attended the mandatory accreditation program
Board meeting The number of board meeting per annum
Board committee The number of board committee
Remuneration Total cash amount of directors’ remuneration
Transparency and disclose Transparency and disclosure scorecard
Mergers and acquisitions Mergers or acquisitions activities occurred
DVs
Accounting profitability
ROA Net income/total assets
ROE Net income/total equity
Market performance
Tobin’s Q Market capitalization+total debt/total asset
PEs Current market price/earning per Share
PTBV Current market price/book value per share
CVs
Firm size The natural log of total assets
Firm age Continuous variable which begins from the firm’s date of corporation
Leverage The ratio of total debt to total assets
ROA: Return on assets, ROE: Return on equity, CVs: Control variables, PEs: Price to earnings, PTBV: Price to book value, DV: Dependent variables, IV: Independent variables

structures and corporate governance plays a significant role in With the objective of identification on which type of ownership
enhancing firm performance, and providing critical information structure and corporate governance component has the most
to researchers, shareholders, manager and investors. impact on firm performance, the result of this study is relevant
in the evaluation of possibility for existing firms to reform their
With the mixed result from previous research papers, the study ownership structures and corporate governance practices in order
of the ownership structures and corporate governances are great to achieve superior performance. In other words, this research aims
important to explore as they brings impact on firm performance. to explore the benefit of generates new models for more effective
Different types of ownership structures and corporate governances deliberation and exceptional ownership structure and corporate
mechanisms that applied in each firms resulted in diverse firm’s governance practice. Besides, the result of the study would
performance. From a risk tolerance perspective, it is important to enhances the understanding of the role of ownership structures and
consider the identity and position of each entity in the ownership corporate governance components in each economic sector which
structure and how it may be exposed to firm performance or other is an issue that is surprisingly neglected in the literatures. There
risks through their involvement in the board. It is questionable that is a need of comprehension on the different types of ownership
shareholders are most certainly focuses on the financial beneficial structures and corporate governance practice that suitable to each
while some managers are looking for intense managerial authority economic sector.
rather than pursuing firm goal.
This study will empirically implement a comprehensive analytical
Besides provides a significant proof, a study that focus on each framework of firm performance in the case of listed firms on
economic sector in Bursa Malaysia is needed as an added literature Bursa Malaysia. This study meant to answer the question of
which is currently lack of compared to develop market studies. which type of ownership structure and corporate governance
On the surface, every economic sector is different. To understand practice have the greatest impact on the firm performance in the
sector competitiveness and profitability, one must look beyond aspect of accounting profitability and market performance in each
their differences and view industries at a deeper level. An analysis sector. In other words, this study tends to identify which type of
of firms in a specific sector reveals the roots of the sector’s ownership structure and corporate governance practice are more
profitability at any point in time while providing a framework for feasible, practical and profitable in each type of economic sector in
anticipating and influencing changes in sector competitiveness and Malaysia. The information of the study can be used as a guideline
profitability over time. for firms in considering which types of ownership structures and

106 International Journal of Economics and Financial Issues | Vol 6 • Special Issue (S3) • 2016
 Elvin and Hamid: Ownership Structure, Corporate Governance and Firm Performance

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