DOES CORPORATE GOVERNANCE AND CORPORATE
PERFORMANCE EFFECT ON FIRM VALUE?
(Case in Mongolia)
Sodnomdargia Bayanjargal- CPA, PH.D student, College of Economics and Business
Administration of Chongqing University, China. E-mail: bakana_sod@yahoo.com
Fu Qiang- Professor, College of Economics and Business Administration of Chongqing University,
China. E-mail: fuqiang@cqu.edu.cn
ХУРААНГУЙ
Энэ илтгэлдээ 2012-2013 онуудын хооронд “Тобин Кю”-ийн түвшин өндөрт тооцогдож байсан
манай хувийн есөн ХК-ын эх сурвалжийг олон хэмжээст регрессийн аргыг ашиглах замаар
компанийн засаглал ба компанийн үйл ажиллагааны үр дүнг тооцов. Хувьцаат компаниудын
мэдээлэл ил тод ба хууль дүрмийг сахин биелүүлж байх шаардлагатай болох нь
харагдсан.Судалгаагаар компанийн засаглал ба компанийн үйл ажиллагааны үр дүн нар нь зах
зээлийн үнэлгээг өсгөхөд чухал үүрэг гүйцэтгэдэг болох нь тогтоогдсон ба бүх хувьцаат
компаниуд хөрөнгийн зах зээлд идэвхтэй үйл ажиллагаа явуулах шаардлагатай байгааг
харуулж байна.
Түлхүүр үгс: Тобин Кю, Ашигт Ажиллагааны Харьцаа, Хувьцаат Компани
ABSTRACT
This paper has analyzed on data of 9 private listed companies which is high Tobin’s q rate of nine
business sectors in Mongolia from 2012 to 2013, and used Multiple Regression Analysis within the
corporate governance and corporate performance. Using eight variables, the study was found that the
framework of corporate governance and corporate performance would play an important role to
increase firm value. The result shows that effect of firm value has significant relationship between
corporate governance and corporate performance. Also if the Tobin’s q ratio is reached high level, the
corporate governance has shows high rate. From the research found that Listed Companies’
information has to be transparency and to shows necessary to comply with the implementation of the
legal obligations in company. From the result of this research can analyze that some of big companies
has influence to stock market in Mongolia, also all listed companies need more activity in the stock
market.
Key words: Tobin’s q, Ratio of Profitability, Listed Company
I.
INTRODUCTION
The improvement of corporate governance is to help increase the firm value, to get attention
of a lot of investment, to decrease ineffective cost, to prevent risk also that is to help more
growth of company size. The good corporate governance to including non stopping process
of transparency and law of implementation and the fairness.
Mongolian Stock Market has established in 1991 years, since that time the stock market has
started own development in society but recent still going on development stage. The
Mongolian Stock Exchange, Financial Regulatory Commission of Mongolia and Corporate
Governance Development Center of Mongolia have working important role in corporate
governance. Data was collected from 2012 to 2013, also this paper based on about 9 private
listed companies which has registered account in Mongolian stock market and chose 9 private
listed companies of 9 business sector’s with high Tobin’s q rate. If the Tobin’s coefficient is
more than 1.0, the corporation value is higher than capital, that means to value high rate in
stock market. From the research can see that, nine sectors already have pointed out by stock
market survey, which means the corporate governance has influence to economic
development. From the geographical reason, about 67 percent of our sample has located in
Capital of Mongolia, that means need to develop to countryside for doing business. In
Mongolia, most of listed companies board of members are 9 people, but few of companies
about 11 people are board members. The more important principle is from the board of
director to choose right person, non breaks personal interest and more independent.
For estimating firm value, this paper was measures Tobin's q is the ratio. Tobin's q is the ratio
between a physical asset's market value and its replacement value. It was introduced in 1968
by James Tobin and William Brainard, although the use of the letter "q" did not appear until
Tobin's 1969 article "A general equilibrium approach to monetary theory". If the market
value reflected solely the recorded assets of a company, Tobin's q would be 1.0. If Tobin's q
is greater than 1.0, then the market value is greater than the value of the company's recorded
assets.
Good corporate governance increases with corporate performance. In this paper, Ratio of
profitability and other required ratio give as variable. Including as: Return on asset ratio
(ROA), Return on equity (ROE), Return on total asset (ROTA), Earnings per share(EPS) and
Asset Liability ratio (LEV).
In this research, to use 9 private listed companies of firm value which presented about 28
percent of the total market value. About 30 listed companies are presented 89 percent of the
total market value.
If those big companies activity has changing bad direction, then it will be directly
influence to stock market. Nevertheless to improve corporate governance is priority work in
our country.
II.
LITERATURE REVIEW
In recent times, the Mongolian Government and several non government organizations in
Mongolia have been focused on developing better corporate governance (CG) in Mongolian
Companies. Mongolian authorities have expressed great interest and have shown
commitment to improve corporate governance.
The recent big research created between The International Finance Corporation in
collaboration with the Financial Regulatory Commission of Mongolia and the Corporate
Governance Development Center of Mongolia. This review was conducted in 2013 based on
available data from 2011 about Mongolian Corporate Governance. This study is concluded
Corporate Governance in Mongolia, as indicated by this review, is in its infancy. This
provides an opportunity to establish quality corporate governance policies and practices – a
sound base for corporate governance in the future.
Yaser Fallatah and Denise Dickins (2012) investigated the relationship between corporate
governance characteristics and firm performance and value of Saudi-listed firms using an
index intended to capture the combined effect of firms’ corporate governance characteristics.
Their research is influenced by the recency of governance initiatives and large percentages of
insider ownership, among other things, we predict and found that corporate governance and
firm performance (measured as return on assets) are unrelated, but corporate governance and
firm value (measured as Tobin’s Q and market value of equity) are positively related.
Moreover, (Robert N. Eberhart and Sprie Fellow) tell us economic efficiency of corporate
governance systems by examining the effects of cross-sectional differences among Japanese
firms selecting one of two legal systems. The paper presents evidence that the adoption by
Japanese firms of a shareholder-oriented, more transparent, system of corporate governance
creates greater corporate value in comparison to the traditional system of statutory auditors.
Data analysis shows a significant increase in firm valuation, as measured by Tobin’s q, for
companies that adopted the committee system, even though comparative financial data show
little difference.
One of Korean research studies exploring the relationship between the effect of firm value
on corporate governance by Bernard.S Black, Hasung Jang and Woochan Kim (2003). They
find a strong positive correlation between the overall corporate governance index and firm
value, which is robust across OLS, 2SLS and 3SLS regressions, in subsamples, in alternate
specifications of the corporate governance index, and with alternate measures of firm value..
III.
RESEARCH METHOD
These datas were collected mainly from MSE and FRC database.
Data was collected from 2012 to 2013, also this paper was based on about 9 private listed
companies of 9 business sector’s which has registered account in Mongolian stock market
and chose 9 private listed companies with high Tobin’s q rate.
Finally, data consist 9 private listed companies which of Mining sector, Construction
industry, Food manufactury, Hotel, Financial company, Manufacturing industry, Wholesale
and retail trade and Real estate industry.
There are eight variables in this paper, Tobin Q, Implementation of Law, Board size, and
Five indicators /ROA, ROE, ROTA, EPS and LEV/.
Dependent variable of this study is the Tobin’s q and other variables are independent
variables. The following multiple regression equation:
TobinQ    1 IL   2 Board   3 ROA   4 ROE   5 ROTA   6 EPS   7 LEV  
Table III.1 Variables and Explanations of Model
Symbol
TobinQ
Name
Tobin’s q
IL
Implementation of Law*
Board
ROA
Board size
ROE
Return on equity
Net
profit/Average
shareholders’ equity
ROTA
Return on total asset
Income before interest and
tax/Total asset
Return on asset ratio
Definition
The total market value of
corporate capital/total assets
1. Share Holders Meeting- 4
points
2. Financial statement -2 points
3. Dividend-1point
4. Fee-2 points
Total 9 points /100 %/
Number of Board
Net profit/Average total asset
EPS
Earnings per share
Net profit/ Outstanding shares
LEV
Asset Liability ratio
Total Liabilities / Total Assets.
Source: *data from the estimation of Mongolian Stock Exchange
data from Mongolian Stock Exchange; http://mse.mn/company/financials/
IV.
ANALYSIS AND RESULTS
Table IV.I Summary Statistics
Variables
TOBINQ
IL
BOARD
ROA
ROE
ROTA
EPS
LEV
Mean
2.952829
0.883889
8.888889
0.193071
0.450888
0.374452
2.048647
0.333329
Maximum
6.483950
1.000000
9.000000
0.691550
1.538150
0.738510
8.278310
1.089590
Minimum
1.613850
0.725000
8.000000
-0.076270
0.030970
0.053310
-0.022180
0.011550
Std. Dev
1.547684
0.088874
0.333333
0.231795
0.499157
0.233243
3.272742
0.381979
Table IV.I provides some summary statistics for the above variables. As revealed, these 9
listed companies have an average Tobin’s q of 2.95, with a minimum of 1.61385 and a
maximum of 6.483950.
The mean of Implementation of Law is 0.8838 (88.38 %). The number of board is from 8 to
9, the average is 8.88. The average of EPS is higher, than other indicators, with a minimum of
-0.022180 and a maximum of 8.278310.
Table IV.2 Results of OLS
Dependent Variable: TOBINQ
.
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
-102.6134
4.153206
-24.70704
0.0258
IL
59.48028
2.211092
26.90086
0.0237
BOARD
6.733071
0.281526
23.91633
0.0266
ROA
13.97862
0.711037
19.65949
0.0324
ROE
-3.801748
0.101984
-37.27790
0.0171
ROTA
-18.65062
0.979108
-19.04858
0.0334
EPS
-0.902108
0.027252
-33.10301
0.0192
LEV
2.969836
0.149718
19.83623
0.0321
R-squared
0.999882
Mean dependent var
2.952829
Adjusted R-squared
0.999056
S.D. dependent var
1.547684
S.E. of regression
0.047549
Akaike info criterion
-3.673554
Sum squared resid
0.002261
Schwarz criterion
-3.498244
Log likelihood
24.53099
Hannan-Quinn criter.
-4.051874
F-statistic
1210.656
Durbin-Watson stat
2.071028
Prob(F-statistic)
0.022126
The estimated results of Ordinary Least Square can be seen in Table IV.II. The estimated
value of adjusted R-squared is 0.99 and both the R-squared and adjusted R-squared look
pretty good. It appears that the model accounts for all of the variation.
All variables are significant. The coefficients of Implementation of Law, Board, ROA, LEV
are positive relationships between Tobin’s q. Especially the coefficients of Implementation of
Law is most high positive significant on firm value. One unit increase in Implementation of
Law leads to 59,48 units increase in Tobin’s q.
The coefficients of ROE, ROTA and EPS are negative relationships with Tobin’s q. This
means if ROE, ROTA and EPS increase then firm value will decrease.
The p-value is 0.02 which is less than 0.05, which shows the significance of our model. The
value of Durbin Watson statistics for dependent variable is 2.07, it means that there is no
autocorrelation exists in the study. In our case it is near to 2.00 which means that there is no
autocorrelation exists in our study and the regression model assumes that error deviations are
uncorrelated.
V. CONCLUSION
The stock market of corporate governance is still going on development stage in our country.
Furthermore the all of listed companies have to be more activity in stock market, that will
help increase market value by corporate governance. From the research found that,
company’s information has to be transparency and to shows necessary to comply with the
implementation of the legal obligations in company. The framework of corporate governance
and corporate performance would play an important role to increase firm value. The result
shows that effect of firm value has significant relationship between corporate governance and
corporate performance. Also if the Tobin’s q ratio is reached high level, the corporate
governance has shows high rate.
Moreover, government policy should be support corporation activity and to give more
acknowledge about stock market to people, to give more attention to countryside of
manufacturing and development.
During the research, a study was found that in our case study of company rate and companies
implementation of law compared with low market value companies demonstrate quite high a
rate.
To increase ratio of market value in Mongolia, that’s to require asset source from value of
public funds. To attract investment, compete with world high rate companies, essentially to
need good corporate governance, accurate, and consistent policy.
REFERENCES:
[1] The International Finance Corporation, Financial Regulatory Commission of Mongolia
and the Corporate Governance Development Center of Mongolia, Corporate governance
scorecard 2011.
[2] Yaser Fallatah and Denise Dickins, Corporate governance and firm performance and value in
Saudi Arabia, African Journal of Business Management, 2012.
[3] N.Khisigzaya , The analysis of Corporate governance and firm value, working paper , 2013.
[4] Bernard.S Black, Hasung Jang and Woochan Kim, Does Corporate Governance Affect Firm
Value? Evidence from Korea, working paper, 2003
[5] Robert N. Eberhart and Sprie Fellow ,Corporate Governance Systems and Firm Value:
Empirical Evidence from Japan’s Natural Experiment, Stanford Program on Regions of Innovation
and Entrepreneurship Stanford University, 2008.
[6] Mongolian Stock Exchange, Listed Company/ Financial Statement, 2012 and 2013.
[7] Mongolian Stock Exchange, Research of Law of implementation, 2012 and 2013.
[8] Financial Regulatory Commission of Mongolia, annual report of 2012.
[9] http://en.wikipedia.org/wiki/Tobin%27s_q.
[10] http://mse.mn/company/financials/