Corporate Governance and Firms Value in Emerging Markets

Abstract

This paper empirically explores the relationship between the identity and concentration of different block holders and firm value for 89 industrial and service firms listed at the Amman Stock Exchange (ASE) over the period 1998–2001. The paper examines the role of block holders (institutional investors who are not on the board of directors, the institutional investors who are on the board of directors, the ownership of the board of directors, and the financial policy of the firm, such as the capital structure) in controlling the managerial actions which leads, on average, to better firm valuation in the emerging market of Jordan. The paper employs a simple regression and the piecewise regression specification methodology. The results of our simple regression shows a significant and positive relationship between the ownership of the board of directors and firm value. Also, the paper found a positive and significant relationship between firm value and ownership by institutional investors whether or not they are on the board of directors. However, there is no significant relationship between ownership by management and firm value. The results of the piecewise regression analysis indicate a positive and significant relationship among the ownership of securities above 25% by the board of directors, institutional investors on the board of directors, the institutional investors not on the board of directors, and firm value. There is no significant relationship between the above-mentioned ownership and firm value for ownership below 25%. The results also indicate a significant and negative relationship between ownership by the CEO below 5% and firm value. Therefore, it seems that low ownership by management does not give them incentives to work for the interest of shareholders. Dividends are still positively and significantly related to firm value. Leverage is significantly and positively related to firm value when we relate ownership to institutional investors not on the board of directors and firm value. This might imply that creditors work as complementary monitors of value along with institutional investors who are not on the board of directors. The paper concludes that block holders are important monitors of firm value especially if they own large amounts of securities to justify the high cost of monitoring.