Proceedings of 34th International Business Research Conference 4 - 5 April 2016, Imperial College, London, UK, ISBN: 978-1-925488-02-9 Board Characteristics and Investment Efficiency: Evidence from Egypt Ahmed Sayd Rasheda and Ebtehag Mostafa Abdel Rahmanb This paper examines the relationship between board of director's characteristics (board size, board independence and Leadership structure) and investment efficiency in a sample of 35 firms listed on the EGX100 in the Egyptian exchange securities for the period 2006-2013 using panel data analysis. The results show that board size has a significant negative relationship with investment efficiency. In contract to our expectations the number of independent directors has a significant negative relationship with investment efficiency, but insignificant with leadership structure. These finding imply that the request for a minimum number (one-third of the board) of independent directors on the board by decreasing information asymmetry and facilitating the monitoring of investment decisions. Keywords: board of director's characteristics, investment efficiency, panel data analysis. 1. Introduction The Financial crisis showed high weakness features in the financial control systems, which lead to spread financial, accountancy and managerial corruption as a result executive manager's overriding on firm performance and utilization to achieve private shareholders. High firms restored to use loans to cover lower revenues and financing activities, which lead to bankruptcy high firms in the 2000 year as a resulting weakness internal control mechanisms so, require the need to develop internal mechanisms to control in the firm (Kim and Nofsinger, 2007). Prior studies indicate that the problems of asymmetric information and agency have a major impact on the investment efficiency (Chen, 2012) due to a conflict the interests between shareholders and a majority of managers and also a conflict between a majority and minority shareholders which reduce the efficiency of corporate investment. agency problem is one of a major part in the economic literature that attempt to eliminate the conflicts between the interests of managers and shareholders, which that the payout cash to shareholders reduce the available resources to the control of managers, which reduce the strengths of managers and then increasing the likelihood that incur these managers a monitoring task of the capital markets when the firm obtains a new capital (Jensen, 1986). Board characteristics are important internal mechanisms of corporate governance (Fama and Jensen, 1983: Jensen1993). Board characteristics consist of three mechanisms: board size, board independence and leadership structure. Fama and Jensen (1983) argue that boards are controlled by the executive and independence managers. Independence managers are able to a monitoring to avoid manipulating _________________________________________________________ a b College of Business, Cairo University, postcode 12613, Egypt. College of Business, Cairo University, postcode 12613, Egypt. Proceedings of 34th International Business Research Conference 4 - 5 April 2016, Imperial College, London, UK, ISBN: 978-1-925488-02-9 earning and then contribute with increase incentives. The remainder of the paper proceeds as follows. In Section 2. We review the literature and discuss our research hypotheses. Section 3 describes the sample and summary statistics. Section 4 presents our main results and Section 5 provides the final section concludes. 2. Literature Review and Hypothesis Development Many studies showed that board characteristics deal with agency problems through implementing efficient investment decisions and also improve firm performance (Chen, 2012). Those mechanisms include board size; board independence and leadership structure .We discuss how each mechanism effects on investment efficiency in the Egyptian stock market. 2.1. Board Characteristics 2.1.1. Board Size Theoretical studies refer to the important role that played board of directors in the decision making and then may affect to the quality of the managerial decisions (Fama and Jensen, 1983). Smaller boards should hold of non-executive directors because these directors enjoyed with independence, ability to control on executive managers, ability to protect the interests of shareholders and improve the financial performance for a firm (Yermack, 1996). Smaller boards may reduce from rushing in the decision making, which diversified firms with smaller boards are more likely capital allocation (Chen, 2012). Small boards are Supervisory function relatively better compared to large boards (see: Beasley (1996), Xie et al. (2003), Kao&Chen (2004), Jensen (1993), Yermack (1996), Eisenberg et al. (1998) , Beiner et al. (2004). While Large-sized boards will reduce the duties of the Board of Directors of the difficulty of achieving coordination and decision - making and effective communication between the board members (see:Kao and Chen (2004), Lipton and Lorsch (1992) and Jensen (1993). But some of the other studies that indicate that there is a large-sized boards are better, such as: Pearce and Zahra (1991) that focused on Large size board to help in strengthening the relationship between the environment and corporate firms as well as providing advice on strategic alternatives where you play a critical role in the creation of the company's corporate identity. Boone et al (2007) explained the relationship between board structure and capital expenditure, this study showed that Board size related to a negative relationship with value firm and increase capital expenditures and also showed that independence board decrease with increase value firm and capital expenditures. This study suggests that large firms are working in various fields require investment decisions are valid to accuracy and then ratification from managerial boards are the most developed to be in frequent with diverse industries. This confirms the correctness that diversification firms are composed of higher boards and then increase investment efficiency. Cheng (2008) study differs from other studies that highlighted that firms have higher boards become lower volatile with performance. This study concluded that increase board size with decrease value of the firm. While Yermack (1996) study agreed with theories that seen small boards are the most effectively via use Tobin's Q as an indicator for evaluation market. This study has evaluated financial and legal studies to decrease board size from managers so, showed Proceedings of 34th International Business Research Conference 4 - 5 April 2016, Imperial College, London, UK, ISBN: 978-1-925488-02-9 that board size related negative relationship with firm value (see Cheng, 2008; Boone et al. 2007). Criticized both Lipton and Lorsch (1992) and Jensen (1993) higher firms' performance that refers to disconnect problems and decision making Overshadowed the effectiveness of the board of directors. The results indicate that board size has a strong negative impact on firm value (see Yermack. 1996; Cheng, 2008; Boone et al. 2007). The negative relationship appears between board size and firm value in a convex shape which indicates a large proportion of the lost value in small and medium board size. This study confirms on that there is no evidence consistent with the belief argues that firms changed boards' size caused firm performance in last. Chen and Najjar (2012) study have conducted in order to determine the relationship between board size and financial indicators such as: firm size, firm age and firm value. The results indicate that board size has a negative relationship between board independence and firm value and also a positive relationship between board independence. The authors found that board size is significantly positively correlated with firm size. According to this study board size is not relationship from both leverage and firm age. This study has highlighted about the percentage of non-executive managers in Chinese firms which committed increase the percentage to 33% in the 2003 year as a result Chinese firms committed with a legal framework for governance, but this compulsory condition has effects of complex for instance: firms have implemented just to cram so, its performance become non effectiveness, which leads to finding the governance problem through the non active role for non-executive managers. Lin et al. (2004) study examine determines board structure through trade off additional information about factors that impact on firm value, extra coordinators expenses and free rider problems in a large board size. This trade off differs between firms, industries and also optimal board sizes. This study argues that future expectation about firm size and growth opportunities is one of the most important limitations from board structure. This study argues that board structures are determined simultaneously with ways conducted from value maximization. The results indicate that board size has that board size has a positive impact on firm size and also a negative impact on growth opportunities, but there is no relationship between board size and firm performance;. Hence, based on the above discussion we hypothesize the following: Hypothesis 1. There is a negative relationship between board size and investment efficiency. 2.1.2. Board Independence Independence boards is a Significance for companies that want to pursue administrative decisions issued by the board of directors effectively, and there is scientific evidence to support the importance of the independence of the Board of Directors Examples of such studies: Byrd and Hickman (1992), Rosenstein and Wyatt (1990) that Indicate that the proportion of nonexecutive directors and independent on the board more effective in the evaluation of the executive management of the company, Where defiance of managerial discretion. Whenever the greater the proportion of non-executive directors led to increased financial performance of companies. There are some other studies such as: Agrawal and Knoeber (1996), Franks et al. (2001), Chen and Najjar (2012) that believes that boards of directors dominated by nonexecutives directors are ineffective due to lack of available information they have about the company and they do not have the skills required to perform these tasks. Anderson et al. (2000) study examines board structure in diversification and concentrated firms. The results indicate that diversification firms are high level of independence which leads to be Proceedings of 34th International Business Research Conference 4 - 5 April 2016, Imperial College, London, UK, ISBN: 978-1-925488-02-9 more effective in monitoring managerial decision and enhance its value so. Investment decision is the most efficient for diversification firms by giving further of independence for board of directors. Mashayekhi and Bazaz (2008) study investigates impact corporate governance mechanisms on firm performance in Iran. This study confirms found a negative relationship between board size and firm performance (see: Lipton and Lorsch, 1992; Jensen, 1993; Cheng, 2008; Boone et al., 2007; Yermack, (1996). this study pointed out that there is no relationship between leadership structure and firm performance and also no relationship between institutional ownership and firm performance. the results refer to that independence board increase with higher firm performance. This study indicates that Islamic culture in Iran can impact on those results. Müller (2014) study is one of the academic literature that indicate the relationship between corporate governance and financial performance, which showed results that independence board related with a strong positive relationship with current or future firm performance (see: Mashayekhi and Bazaz, 2008; Anderson et al., 2000) . Guo and Kumara (2012) examine the relationship between corporate governance mechanisms and firm performance in the Colombo Stock Exchange in Sri Lanka. The results indicate that non executive managers related to a negative relationship with firm value rather than this relationship is not significant and also found a negative relationship between non executive managers and firm performance while there is no relationship between leadership structure and firm performance. Agrawal and Knoeber (1996) study have review chose the firms to mix from mechanisms that use to eliminate agency problems between managers and shareholders. This study showed that there is a negative relationship for both outside directors and a debt ratio with related to firm performance. This study supported found a negative relationship between compost board of directors and firm performance because the board of directors involved with lots of outside directors. Kumar and Singh (2013) supported a negative relationship between board size and firm value and also confirm that this relationship declines with large firms compared with small firms. This study has progressed, evidence of a negative relationship between board independence and firm value which indicate that Indian firms suffer from the problem of financial distress as a result financial crisis. Large Board of directors has not been able to important strategic decision making caused the problems of coordinating and connecting which, lead to decrease firm value. Hence, based on the above discussion, we hypothesize the following: Hypothesis 2. There is a negative relationship between board independence and investment efficiency. 2.1.3. Leadership Structure Leadership structure means separation between CEO and chairman authority which lead to impact positively on board effectiveness. Fama and Jensen (1983) indicate that from the perspective of agency problem that leadership become ineffective in the case of combining between chairman and CEO roles which, CEO played by chairman role has been impacted negatively on firm value (Bai et al., 2004). Proceedings of 34th International Business Research Conference 4 - 5 April 2016, Imperial College, London, UK, ISBN: 978-1-925488-02-9 Brickley et al. (1997) indicate that from the common perspective from the leadership structure through some of academics and financial report's analysis and organizers whose, it is the best separate between the chairman and CEO positions instead of combining for both it. There are 2025% of the American firms supported separate between each position which, lead to increase firm value. Dual leadership agreements are ignoring separation costs between CEO and chairman positions which, it included agency problems to control in chairman behaviour and information costs and exchange firms for consequence operators in addition to other costs such as: conflicted decision making with common authority. There isn't evidence from the theoretical background that leadership structure is better rather than from the reality indicate that it is probably differed the optimal leadership structure by various economic conditions that faced the firm and also asymmetry information costs related to separation between each position as an important limitation for a leadership structure due to decrease agency problem and asymmetry information costs. Legislative reforms forced firms to separate between each position, but these legislators are deceptive legislated because it is a necessity to estimate benefits and costs of alternative leadership structures before reaching for a lot of final conclusions. Goyal and Park (2002) study indicate the CEO role and its effects on firm performance, which, CEO role and its effects become much less when CEO and chairman become at the same person, hence, this study consistent with the belief that the lack of independent leadership in firms that combine the position of executive directors and chairman which, it makes it difficult for the board improve firm performance Brickley et al. (1997). Lin and Zhao (2006) suggested combing the positions of executive director and chairman of the same person. Although the combination of the two posts contributes effectively in diversified firms, but the chairman may miss the required expertise in industrial fields carried out by those firms. Bekiris (2013) Supports the idea of dual ownership structure and based on the separation between Chairman and Chief Executive Officer roles in order to increase board independence. The results showed that a negative relationship between board size and board independence, which, this result is contrasted in agency problem that considers that manager entrenched for themselves by adopting the idea, large boards. This study supported the small board because it is the most independence comparisons of large boards, therefore, eliminates agency costs. Brigham&Ehrhardt (2005) indicate that shareholders seek to maximize the wealth while seeking managers to achieve their own goals and then if did not happen consensus between the interests of shareholders and managers, it will not be to maximize firm value and as a result of the conflict of interests produces Agency problems where the managers do with their own interests by using the assets of an entity for the benefit of the expense of shareholders as well as the manipulation and fraud in estimating the assets of an entity which leads to the emergence of agency costs. Hence, based on the above discussion we hypothesize the following: Hypothesis 3. There isn't relationship between leadership structure and investment efficiency. Proceedings of 34th International Business Research Conference 4 - 5 April 2016, Imperial College, London, UK, ISBN: 978-1-925488-02-9 3. Research Method 3.1 Sample The sample frame is comprised of all firms listed on the EGX100 in the Egyptian stock market during the period 2006-2013. The dataset consist of 213 firms listed on the EGX100 (32 firms outside the cabin). The final sample consists of 35 firms due to missing relevant information about CGM over the period. 3.2 Measurement of variables 3.2.1 Investment efficiency Our Investment proxy, Capex means average future investment for each sample year, which Capext+1 defined as capital expenditures scaled by lagged property plant and equipment. This measure ignores other types of non-capital investments such as research and development, but it has been widely used in previous research (Lara et al. 2009) 3.2.2 Independent variables Board size is a number of directors serving on the board. Board independence is a Fraction of outside directors on the board, where outside directors are directors who do not have an executive position in the firm, have not had such a position in the past, or are not related to an executive. Leadership structure is a Dummy variable that equals one when the chairman of the board also serves as CEO, and zero otherwise. 3.2.3 Control variables. We control for other determinants of Investment efficiency identified in the existing literature that is firm size, debit ratio and Tobin's Q measured as follows: - Firm size is the log of total assets (Log Asset). - Debit ratio is the ratio of total debt to total assets. - Tobin's Q is the ratio of the market value of total assets to the book value of total assets. 3.3 Statistical analyses The regression model utilized to test the relationship between the board characteristics and Investment efficiency is as follows: Capext+1= α + β1 BS + β2 BI+ β3 LS + β4 FS + β5 DR + β6 Q +εt+1 Where, Capext+1 = capital expenditures scaled by lagged property, plant and equipment; BS =board size; BI = board independence; LS = leadership structure; FS = firm size; DR = debit ratio; Q = Mkt-to-Book and ε = error term. Proceedings of 34th International Business Research Conference 4 - 5 April 2016, Imperial College, London, UK, ISBN: 978-1-925488-02-9 4. Findings Table 1 reports the descriptive statistics of investment efficiency and the independent variables. The mean of investment efficiency (Capext+1) of prior years' property, plant and equipment across all firms throughout the study period is 1.86 which isn't consistent with figures reported by Biddle et al. (2008) and Lara et al. (2009) .The average of investment efficiency listed firms in this study is low compared to the findings by Biddle et al. (2008) and Lara et al. (2009). The table also shows that the average number of directors on the board (BS) in the Egyptian firms is 9 which is consistent with study Chen and Al-Najjar (2012). The mean of board independence is 0.53 which refer to half of board of directors consists of non-executive mangers that is consistent with prior studies (Müller (2014), Mashayekhi and Bazaz (2008) and Anderson et al. (2000). The mean for leadership structure is 0.54 which conflict with governance rules in Egypt. Table (1) Descriptive statistics Variables N Min Max Mean SD Capex 279 0.10 266.2 66.. 26.2 BS 279 5.00 606.. 86.. 26.6 BI 279 0.20 .6.. .660 .660 LS 279 0.001 66.. .660 .66. FS 279 7.22 6.68. 8668 .6.. DR 279 0.02 66600 6600 668. Q 279 0.21 006.6 2620 06.. Table (2) Regression results Dependent Variable: INV Method: Panel Least Squares Sample: 2006 2013 Periods included: 8 Cross-sections included: 35 Total panel (unbalanced) observations: 279 Variable Coefficient Std. Error t-Statistic Prob. Constant BS BI LS FS DR Q -0.88 -0.21 -3.59 0.09 0.71 -0.05 0.04 1.99 0.06 1.22 0.31 0.21 0.08 0.04 -0.44 -3.57 -2.94 0.30 3.28 -0.69 1.05 0.65 0.00 0.00 0.76 0.00 0.48 0.29 Adjusted R square: 0.07; F-stat: 4.54; Sig.: 0.000 Proceedings of 34th International Business Research Conference 4 - 5 April 2016, Imperial College, London, UK, ISBN: 978-1-925488-02-9 The results presented in Table 2 show that the regression model is significant (F=4.54, P<0.000) with an adjusted R square of 0.07. The table (2) reveals that there is sufficient evidence to infer that there is a linear relationship between all measures of board characteristics and Investment efficiency across all listed firms during the period study. We find evidence that board size is negative and significant associated with investment efficiency (BS= -0.22, t-stat =-3.57) which these finding consistent with prior studies (Lipton and Lorsch (1992) , Jensen(1993), Cheng (2008) , Yermack (1996) , Kumar and Singh (2013), Boone et al. (2007) and Mashayekhi and Bazaz (2008) in contrast there are some studies interfered with that result (Lee and Chen (2011) , Chen and Najjar (2012) . the coefficient of board independence is negative and significant related to investment efficiency(BI= -3.59, , tstat= -2.94) and then these result are consistent with Agrawal and Knoeber (1994) , Guo and Kumara (2012), Kumar and Singh (2013) but these finding conflict with Müller (2014) , Chen (2012), Anderson et al. (2000) . Leadership structure does not influence of investment efficiency (LS= 0.09, t-stat= 0.30). This finding is similar to the findings by Brickley et al. (1997), Bai et al. (2004), Goyal and Park (2002), Guo and Kumara (2012) and Mashayekhi and Bazaz (2008) which that the best leadership structure probably differs according to economic conditions facing the company, and that there is no independent leadership to the Board of Directors will improve the company's performance and thus increase investment efficiency. The regression results also show that the relationship between the control variables and investment efficiency., However, the coefficient is positive, suggesting that there is significant positive relationship between firm size and investment efficiency ( FS = 0.71 , t-stat = 3.28) which these findings are supporting with prior studies (Boone et al. (2007) and Chen and Najjar (2012) . in contrast debt ratio is insignificant related with investment efficiency although the coefficient is negative (DR=-0.06,t-stat= -0.69) and also market to book (Tobin's Q) is insignificant rather than positive (Q=0.05 , t-stat=1.06) . 5. Conclusion This study provides evidence that board characteristics have a negative impact on investment efficiency Which imply that the request for a minimum number (one-third of the board) of independent directors on the board by decreasing information asymmetry and facilitating the monitoring of investment decisions; (2) by increasing managerial incentives to throw over poorly performing projects earlier .Using 35 firms listed on the EGX100 for the period 2006-2013. The results showed that board size influenced negatively on investment efficiency and also board independence has negatively impact on investment efficiency. Leadership structure isn't impact on investment efficiency. 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