Corporate Governance and the
Stock Market in Trinidad &
Tobago
Varuna L. Ramlal
PhD. Candidate
SALISES, St. Augustine
Objectives
1. Construct a Corporate Governance (CG)
Index for firms listed on the Trinidad &
Tobago Stock Exchange (TTSE)
2. Examine relationship between CG and
performance of TTSE firms
3. Policy implications & Conclusions
CG defined
• Many definitions…
• Sir Adrian Cadbury (1992): “Corporate
Governance is the system by which companies
are directed and controlled.”
• Cornelius (2005): “corporate governance can
be defined as the stewardship responsibility
of corporate directors to provide oversight
for the goals and strategies of a company
and foster their implementation.”
CG defined cont’d
• OECD (2010): corporate governance refers to
“procedures and processes according to
which an organisation is directed and
controlled. The corporate governance
structure specifies the distribution of rights
and responsibilities among the different
participants in the organisation – such as the
board, managers, shareholders and other
stakeholders – and lays down the rules and
procedures for decision-making.”
CG defined cont’d
• Fahy et al (2006): “Put in its simplest form,
corporate governance is the systems and
processes put in place to direct and control an
organisation in order to increase performance
and achieve sustainable shareholder value.”
• Kaen (2003): “Corporate Governance is about
who controls corporations and why”
Assessment of CG
• CG is relevant in the marketplace but one of the major
concerns of researchers - the measurement of CG
• The literature has proposed the use of CG Indices
(Ananchotikul 2008, Black et al 2003, Cornelius 2005,
Garay and Gonzalez 2008, Klapper and Love 2002,
Leal and Carvalhal-da-Silva 2005, Mallin 2006.)
• However, most of these indices have two shortcomings
– (i) they have been produced for developed
countries only and (ii) they rely on questionnaires
issued to the firm being assessed.
Assessment of CG cont’d
• Researchers have found that when firms are asked
to respond to questionnaires they put in what
information they think is the ‘right answer’ or
what they intend to do instead of what actually
happens in their firm: self-report bias.
• Or they may not respond at all: self-selection
bias.
• For this reason there has been some movement
away from reliance on questionnaires
administered to firms to use questionnaires which
use public information only.
Index creation
• Quantitative questionnaire used
• Covers major aspects of CG
– Board Responsibility
– Board Structure
– Shareholder Rights
– Transparency and Disclosure
– Audit Committee
– Types of firms
Index creation cont’d
• Questions based on the CBTT’s CG Guideline
and generally accepted CG procedures.
• Yes – 1, No – 0
• Missing values not counted except for
Transparency section where the absence of a
value is equivalent to a lack of transparency
• Final index value weighted to be between 0
and 1 for ease of firm comparison
Index Creation cont’d
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Total – 143 questions
Board Responsibility – 38
Board Structure – 25
Shareholder Rights – 10
Transparency & Disclosure – 53
Audit Committee – 17
Sub-indices as well as total CG index
calculated
Financial Ratios - Performance
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Many calculated…
Earnings per share
Price/Earnings
Dividend per share
Dividend yield
Dividend cover
ROA
ROE
Stock return
Data
• Firms on first and second tier of the TTSE
used
• CGITT used as the dependent variable
• Ratios – main explanatory variables of interest
• Control variables included – sector dummies,
age, size
Method of analysis
• Dependent variable lies between 0 and 1,
inclusive.
• Fractional logit analysis used due to this
(Wooldridge 2001)
• CGITT = β1AGE + β2SIZE + β3PERF
• Maximum CG value – 0.78
• Minimum CG value – 0.25
Results
• Marginal effects calculated to interpret the
coefficients since fractional logit is nonlinear so no direct quantitative
interpretation
• Likelihood Ratio test and Wald test used to
determine usefulness of performance
variables in predicting CG in T&T
Results cont’d
• Significant performance indicators
Indicator
Marginal effect
P-value
ROE
0.495
0.002
EPS
-0.058
0.004
DPS
0.115
0.029
DCOV
0.003
0.01
ROA
-0.405
0.024
Results cont’d
• Negative marginal effects unexpected
• Further investigation of correlation matrix
shows high correlations between ROE & ROA
and between EPS & DPS.
• ROA & ROE – 0.775
• EPS & DPS – 0.644
Results cont’d
• Sub-indices were also used as dependent variables
• For all the models SIZE and ROE were
significant.
• In all the models ROE had a positive marginal
effect
• In some models ROA was used instead, also
positive effect
• LR and Wald tests show models with performance
indicators are better than without
Results cont’d
• Sector effects
Sector Dummy
Marginal Effect
P-value
Banking
0.143
0.000
Conglomerate
-0.438
0.000
Manufacturing 1
0.164
0.000
Manufacturing 2
0.402
0.000
Trading
0.208
0.000
Results cont’d
• Financial performance positively affects CG
• Sector classifications significant
• Some sectors more prone to higher governance
Policy implications &
Conclusions
• Financial performance has a positive effect on
CG
• Encourage good performance
• Certain sectors have a tendency towards good
governance
• Formal CG regulation needed – may need
sector-specific regulation as well
The End