CORPORATE GOVERNANCE IN
JAMAICA:
A RISK MANAGEMENT
APPROACH
Dr. Twila Mae Logan
Dr. Doreen Gooden
Florida International University

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

 The late 1990’s financial crisis in Jamaica – increased the awareness for appropriate governance mechanism resulting in
-
- Tightening of banking laws and regulations -
Company Act Legislation


Capital Market poorly developed

Emergence of junior stock market
 Trading is relatively thin
 Corporate Bond market is virtually non-existent

Jamaica Stock Exchange (JSE) established in 1968
- only 18 non-financial firms trading on the main index
- 13 non-financial firms on the junior market

 Thus – need for research to determine best practices in corporate governance:
- to enhance investors confidence
- further development of capital market.
 Few studies done on Jamaica publicly traded firms.

LITERATURE REVIEW – Board
Composition and Risk
DAMODARAN (2008) – Risk taking behavior is related to individual traits and characteristics
- women in senior positions less risk averse than male counterparts
- more experienced persons are more risk averse than naïve persons.

LITERATURE REVIEW – Board
Composition and Risk

Rachdi and Ameur (2011) – 11 Tunisian Banks – smaller boards associated with better performance and more risk taking.
 Independent directors (outside, non-executive) had lower performance and no significant effect on risk taking.

LITERATURE REVIEW – Board
Composition and Risk

Kyereboah-Coleman & Biekpe (2007)
– firm risk level decreased with outside directors
- firm risk increased with increasing board size.
Brick and Chidambaran (2008) negative relationship between firm risk and the level of board monitoring

LITERATURE REVIEW – Ownership and Risk

Jensen & Meckling (1976) Jensen & Murphy (1990)
- shareholders by corporate insiders result in greater risk taking.
 Gadhoum and Ayadi (2003) positive relationship between firm risk taking and insider holdings.
firm’s risk is negatively related to ownership structure

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

LITERATURE REVIEW – Ownership and Value

Shliefer & Visny (1986)

McConnell & Searves (1990) both found
Ownership structure affects the value of firms
 Turki & Sedrine (2012) found that
- increased ownership concentration is associated with lower firm performance
- increased managerial ownership is consistent with better firm performance.


Uni-variate descriptive statistics

Multiple regression with small samples

Robust regression
 Reduces the influence of outliers

Data

Publicly traded non-financial firms

17 main exchange

8 junior exchange
 Dependent variables : Weekly returns and standard deviation from October 2010 – October 2012
 Independent variables: board and ownership composition


Board Size – Average of 8.6 directors (median 8),

On average 17% were female directors (median 17%)
 Average of 28% of board members were insiders
(median 29%)


Top ten shareholders held on average 79% (median of 87%)

Institutional investors held on average 12% (median 7%)

Insiders held on average almost 30% of the shareholdings.

The average board shareholding was 36% with a median of
20%.

The average managerial shareholding was 19% while the median was 1.5%,


Models R 2 : 26% and 30%

In addition to weekly returns, the riskiness of the firm was increasing in insider percentage, and the largest ten shareholders, but decreasing in board shareholdings.

Not significant

Percentage of female directors
 listed on the junior market


Insiders are in a better to position to engage in riskier projects. [Jensen & Meckling (1976) and Jensen &
Murphy (1990) Gadhoum and Ayadi (2003)]
 Increases in board shareholdings result in lower risk.
This is consistent with directors being risk averse - loss of personal diversification [Wright et. al., 1996].


Model R 2 : 40% and 42%

Increases in managerial share ownership resulted in larger weekly returns (value).
 Positive but insignificant coefficients on

Top ten block share holdings
 institutional shareholdings was positive but not significant.

Number of insiders


Increases in managerial share ownership result in larger weekly returns. [see Morck et.al., (1988),
Jensen and Meckling, (1976].
 The coefficient on institutional shareholdings was positive but not significant [Ming &Gee, (2008)]


More insiders did not significantly increase the weekly returns even though more insiders are associated with increased risk.


Managerial Ownership and Value

Investing strategy

Policy to encourage greater equity stakes.


Inside Directors and value and risk

Increased riskiness is only beneficial if this results in greater returns

Policy on proportion of inside directors for publicly traded firms.