6th ICFC, 2014
THE RELATIONSHIP BETWEEN
CORPORATE GOVERNANCE AND THE STOCK PRICE
OF LISTED COMPANIES IN MAI
USING FELTHEM – OHLSON VALUATION MODEL
Supranee Sugaraserani
September 4 , 2014
6th ICFC, 2014
Do the investors use publicized CG Rating in trading
stocks in MAI?
Company Summary
SCG
Symbol
Resources/ Energy & Utilities
CG
SET
Score:
SAHACOGEN (CHONBURI) PUBLIC COMPANY LIMITED
Data as of 31/07/2014
SCG
Price
52 week
P/E
P/BV
Paid-up
Market Cap
EBITDA
(B.)
5.00
High/Low
5.25 / 3.58
(X)
16.63
(X)
1.91
(MB.)
955.00
(MB.)
4,775.00
(MB.)
202.96
6th ICFC, 2014
THE OBJECTIVE OF THE STUDY
To examine the relationship between corporate
governance (CG) and the stock price of listed
companies
in
the
Market
for Alternative
Investment (MAI) by using a valuation model
6th ICFC, 2014
Corporate Governance (CG) Rating
• annual surveys on the state of corporate governance by the Thai
Institute of Directors (IOD)
• since 2001 (2544)
• The sources for scoring are – company annual report, annual
information filling (Form 56-1), notice and minutes of companies'
shareholders
meeting,
company
website,
information
on
SET/SEC database, and other publicly available information.
• After scoring, listed companies are classified into six groups.
6th ICFC, 2014
Figure 1: Classified CG scores, Logo, and description
Score
Range number of Logo (publicized)
Description
90-100
80-89
70-79
Excellent
60-69
50-59
Satisfactory
Lower than 50
Very Good
Good
Pass
No logo given
N/A
Source: Corporate Governance Report of Thai Listed Companies (CGR) 2006.
6th ICFC, 2014
Previous studies - CG
• Black (2001), Gompers, Ishii and Metrick (2003), found positive
correlation between CG and firm performance.
• Drobetz, Schilhofer and Zimmerman (2004), Durnev and Kim
(2007), Klapper et al. (2002), Black, Jang and Kim (2006) found
positive impact of CG to firm‘s value and investors gave their
attention to performance of the good CG firms, especially in
countries with weaker legal systems.
• Morey et al. (2009) studied the correlation between governance
quality and share prices in emerging markets, using samples from
21 countries, they found that improvements in CG were associated
with higher share prices.
6th ICFC, 2014
Basic FO valuation model
Pt
=
𝜷₀+𝜷₁BVAt +𝜷₂BVLt + 𝜷₃AEt + 𝝎𝟏 ѵ𝟏 + 𝝎𝟐 𝝂𝟐 + 𝓔
Where:
•
Pt
=
•
BVAt =
•
•
•
•
BVLt
AEt
𝝂¹, 𝝂²
ℰ
=
=
=
=
stock price at period t
book value of assets at period t
book value of liabilities at period t
abnormal earnings of period t
other non-accounting information
tolerance value
6th ICFC, 2014
Main assumptions of FO model
• The relevance of publicly accounting information and
firm‘s market value.
• The PV of expected future dividends determines the
intrinsic firm value (considering a fair game).
6th ICFC, 2014
• Clean
Surplus Relation - concept derives from
conservative accounting.
• Linear Information Model - the relationship of control
variables must exist in a linear equation (Ota, 2002).
6th ICFC, 2014
Pt
= 𝜷₀+𝜷₁BVAt +𝜷₂BVLt + 𝜷₃AEt + 𝝎𝟏ѵ𝟏 + 𝝎𝟐𝝂𝟐 + 𝓔
Qualitative data
Decoded using 4-level rating scale
YES
Test Clean Surplus Relation
6th ICFC, 2014
Transformed model
Pt = β0 + β1CGt-1BVAt + β2CGt-1BVLt + β3CGt-1AEt + β4 CGt-1 + ℰ
6th ICFC, 2014
Hypotheses
H1:
The relationship of CG rating meets the
assumption of Clean Surplus Relation
H2: The relationship of stock price, CG rating,
firm‘s size, liability, and abnormal earning must
exist in a linear equation.
6th ICFC, 2014
Limitations
• Population
The data were 45 listed companies in MAI which their
securities were first traded before 2008 (2551) and had
reported and disclosed of financial information and
others
non-accounting
information,
through the year 2012 (2555).
continuously,
6th ICFC, 2014
• Variable Measurement
Variable
Pt
BVAt
Definition
Firm’s value at period t
Firm’s size at period t
Calculation and Measurement
Market price per share at the end of period
Common logarithm of moving average of the
book value of assets at the end of period
BVLt
Liability at period t
Common logarithm of moving average of the
book value of liabilities at the end of period
AEt
Operating efficiency or
The percentile ranks of abnormal earnings.
abnormal earning at
Abnormal earning is the difference between
period t
moving average of operating profit after tax
and a return, at risk free rate, to the moving
average of equity at the beginning of period.
CGt-1
Corporate governance
rating at previous period
a) FO valuation model- using 4-level rating
scale instead of the volume of logo.
b) Testing clean surplus relation- a ceiling
score of each group will be used instead
of the volume of logo.
6th ICFC, 2014
RESULT OF THE STUDY
H1:
The relationship of CG rating meets the
assumption of Clean Surplus Relation
Using Simple Regression:
6th ICFC, 2014
Table 2: Simple regression analysis output
Significant level at 0.05 (n=45)
6th ICFC, 2014
• The
Corporate
Governance rating has
met the assumption of
the
Clean
Surplus
Relation .
• The
longer
• As the constants’ coefficient is
decreasing, Curve Fit is tested
and
the
the
predictions
from
IOD
conveys its survey the
equations without constants are
higher the power of the
better, so, the constants are
impact of current period
removed from equations.
CG to following period
CG (R2)
6th ICFC, 2014
The relationship of CG rating meets the
assumption of Clean Surplus Relation
and the null hypothesis is rejected.
CG09
=
0.567CG08
………..……… (2.1)
CG10
=
0.751CG09
……………..… (2.2)
6th ICFC, 2014
H2: The relationship of stock price, CG rating,
firm‘s size, liability, and abnormal earning must
exist in a linear equation.
Using Multiple Regression:
6th ICFC, 2014
Table 3: Multiple regressions analysis output
Significant level at 0.05
Year 2009 (n=45)
Control variables
Unstandardized Coeff.
Collinearity Statistics
B
Stand. Err.
Toler.
VIF
constant
4.010
1.206
Firm Size09
3.751
1.829
.003
287.784
Liability 09
.271
.972
.014
70.819
Ab. earning09
2.154
1.077
.441
2.269
CG08
-24.887
6.885
.009
113.034
R2 = .415
Std. Error of the Estimate = 3.012932
F = 7.091 Sig. = .000
Durbin-Watson = 1.584
Year 2010 (n=45)
Control variables
Unstandardized Coeff.
Collinearity Statistics
B
Stand. Err.
Toler.
VIF
constant
2.752
1.621
Firm Size10
3.228
1.708
.005
214.078
Liability 10
-.578
.957
.015
64.624
Ab. earning10
.867
1.096
.459
2.177
CG09
-15.801
6.274
.014
73.654
R2 = .255
Std. Error of the Estimate = 3.429150
F = 3.430 Sig.=.017
Durbin-Watson = 1.903
Year 2011 (n=43 : delete 2 companies’ data because of the high volatility in stock
price)
Control variables
Unstandardized Coeff.
Collinearity Statistics
B
Stand. Err.
Tolerance
VIF
constant
.709
1.682
Firm Size11
3.822
1.535
.005
206.24
Liability 11
-1.163
.951
.013
76.824
Ab. earning11
-.573
.907
.446
2.240
CG10
-14.694
5.458
.015
67.091
R2 =.283
Std. Error of the Estimate = 3.171487
F = 3.755 Sig.=.011
Durbin-Watson =1.696
6th ICFC, 2014
Test the autocorrelation - Compare DW values to
the critical value
• 2009:
the result cannot conclude whether
there is an autocorrelation or not.
• 2010: the result can conclude that there is
no autocorrelation.
• 2011: the result cannot conclude whether
there is an autocorrelation or not.
6th ICFC, 2014
The findings have proved that all control variables can
explain the change in stock price and the relationship
exists in a linear equation. The null hypothesis is rejected.
P09 = 4.01(+/-3.0129) + 3.75BVA09 + 0.27BVL09 + 2.15AE09 – 24.89CG08
..……. (3.1)
P10 = 2.75(+/-3.429) + 3.23BVA10 – 0.58BVL10 + 0.87AE10 – 15.80CG09
……… (3.2)
P11 = 0.71(+/-3.171487) + 3.82BVA11 – 1.16BVL11 - 0.57AE11 – 14.69CG10
…….... (3.3)
6th ICFC, 2014
SKEPTICISM ISSUES FROM THE FINDING
• FO model is predictive valuation model that
emphasizes on growth. So, all control
variables shall have positive correlation.
2 control variables that have negative correlation –
CG rating and liability.
a) CG rating – the finding implies that investors
do not pay attention to the CG rating and do not use
it for decision making (Bauer et al., 2004, Beiner et
al., 2006).
6th ICFC, 2014
b) Liability - the liability and equity of listed
companies in MAI at the time of the study may not be
relevant to determine the firm‘s value and its operating
results in the future (Modigliani and Miller, 1958).
6th ICFC, 2014
• Explanatory power of the models - show a weak
power of explanation.
During 2008-2011, Thailand had economic downturn
and that would cause abnormalities to the capital
market. The investors‘ decision to weigh the risks with
the benefits received would be different from normal
capital market (Fama, 1965, 1969).
Typically, investors' behavior, securities could not be
evaluated in isolation, but only as a group Markowitz (1952).