Ownership, Control, and Compensation

The articles:

• Ownership structure, investment, and the corporate value: an empirical analysis
• Compensation, Corporate Governance and Owner Shareholding: Theory and Evidence from Family Ownership

The reasons select the article of Compensation, Corporate Governance and Owner Shareholding: Theory and Evidence from Family Ownership:

• To know the link between effective corporate governance and the compensation levels awarded to top managers in Taiwan. Taiwan is an economy which is mainly family-controlled.
  

Components of Comparison	Article from CRP	Article from Student
Title	Ownership structure, investment, and the corporate value: an empirical analysis.	Compensation, Corporate Governance and Owner Shareholding: Theory and Evidence from Family Ownership.
Topic	Ownership, control, and compensation.	Ownership, control, and compensation.
Theory used by article	· Jensen and Meckling (1976) and Stulz (1988) : ownership structure affects corporate value by its effect on investment. · Morck et al. (1988) and McConnell and Servaes (1990) : ownership structure affects corporate value using Tobin’s Q as a proxy for corporate value. · McConnell and Muscarella (1985) : the stock market reacts positively to announcement of increases in planned capital expenditures and negatively to decrease in planned capital expenditures. · Chan et al. (1990) : share – price responses to announcements of increased R&D spending are significantly positive. · Fazzari et al. (1988) : liquidity affects investment, emphasizing the importance of asymmetric information problems and agency problems in investment financing decisions. · Demzets and Lehn (1985) : ownership structure is endogeneously determined in equilibrium. · Kole (1994) : corporate value could be a determinant of the ownership structure rather than being determined by ownership structure. · Murphy (1985) : managerial compensation is strongly positively related to corporate performance, suggesting that ownership structure can represent an endogeneous outcome of the compensation contracting process.	·· Shleifer and Vishny (1997); La Porte et al. (1999); Claessens et al. (2000); Lemmon and Lins (2003) : the separation of ownership and control represents the primary agency problem of conflict between outside investors and the controlling insiders. · Morck et al. (1998); shleifer and Vishny (1997); Claessens et al. (2000, 2002); La Porte et al. (2000); Lemmon and Lins (2003) : the existence of controlling shareholders thus implies agency costs arising from conflicts between controlling shareholders and outside investors. · Claessens et al. (2002) : family-controlled firms were associated with quite severe agency problem. · Yeh et al. (2001); Randoy and Goel (2003); Brunello et al. (2003) ; the family members can accrue additional benefits based upon their high level of insider ownership, as well as the low levels of external stockholders and foreign ownership. · Lim and Kim (2005) : Korean conglomerates with more nonvoting shares and more listed firms tending toward a lower family stake and better corporate governance. · Vilalonga and Amit (2006) : dual share classes, pyramids, and voting agreements reducing family firm value. · Conyon (1997) ; Core et al. (1999) : good corporate governance can prevent top management teams from receiving excessive compensation. · Douglas et al. (2002) : the blame for the excessive compensation packages awarded to top managers has been placed squarely on the shoulders of family firms with poor corporate governance mechanisms. · Brick et al. (2006) : an excessive level of compensation for a CEO or a director provided an indicator of poor corporate governance structure and that this was a precursor to the underperformance of firms. · Lim (2005) ; Cheng and Firth (2005, 2006) : within a family environment, the direct compensation paid to top manager tended to be reduced if the directors had substantial stockholding. · Basu et al. (2007) : relative to ownership and monitoring variables, excessive pay levels had a negative association with subsequent accounting performance. · Murphy (1985) ; Jensen and Murphy (1990) ; Core et al. (1999) ; Conyon and Murphy (2000) : firms are generally characterized by their use of option plans for top executives and stock based compensation for corporate (non-employee) directors. · Core and Guay (2001); Gerety et al. (2001); Ryan and Wiggins (2004); Becher et al (2005); Fich and Shivdasani (2005); Linn and Park (2005) : the effectiveness of the stock option plans used to compensate managers and directors. · Yeh and Lee (2001) : 76% of all listed firms in Taiwan came under the control of family shareholders and 66.45% of the boards of all listed firms totally controlled by family shareholders. · Solomon et al (2003) : families directly or indirectly control most Taiwanese firms through pyramids structure and crossholdings among firms. · Claessens et al. (2000) : the proportion of family controlled firms in Taiwan is similar to that of the average proportion of family-controlled firms in nine Asian economies. · Yeh et al. (2001) : Taiwanese firms were controlled through the extensive use by controlling shareholders of mechanisms which separated their control rights from their cash flows rights. · Claessens et al. (2002) : controlling shareholders in Taiwan used various methods to transfer corporate assets to their family members. · Conyon (1997); Core et al. (1999); Brick et al. (2006) : the award of higher compensation levels to controlling shareholders is associated with weaker corporate governance machanisms. · Cheng and Firth (2006); Basu et al. (2007) : the compensation for controlling shareholders is found to be reduced if the firm is characterized by superior performance and a better corporate governance structure.
Hypothesis of research	Ownership structure, investment, and corporate value might be interdependent. That is, ownership structure affects investment which, in turn, affects corporate value, and corporate value affects ownership structure and so forth.	There is indeed an association between weak corporate governance and poor corporate performance with the higher compensation level enjoyed by controling shareholders. Hypothesis: I. A family firm with better shareholder protection (corporate governance) levels will be associated with a lower level of compensation for the Family Controlling Shareholder (FCS). II. Higher equity ownership by the ultimate controlling shareholder of the family firm will be associated with a lower level of compensation for the FCS. III. The higher the equity owned by the ultimate controlling shareholder of the family firm, the higher the firm performance. IV. The better the shareholder protection of the family firm, the higher the firm performance. V. FCS within a family firm with better shareholder protection has a lower compensation level; the firm will demonstrate higher performance.
Variables used in research	. · OLS regression model : - INV: The investment level for firm - INS1i : Insider ownership firm - INS2i : will be zero if the insider ownership for firm is less than first breakpoint - INS3i : will equal to zero if insider ownership of firm is below the second breakpoint. · Simultaneous equation regression model : - Insider ownership – f ( Market value of firm’s common equity, Corporate value, Investment, Volatility of earnings, Liquidity, Industry) - Corporate value – g ( Insider ownership, Investment, Financial Leverage, Asset size, Industry) - Investment = h ( Insider ownership, Corporate value, Volatility of earnings, Liquidity, Industry)	· Firm characteristics : - Salest-1 - ROAt-1 - Cash Flow Risk - Stock Returnt-1 - R&Dt-1/Assetst-1 - Debtt-1/ Assetst-1 - Advertisingt-1/ Assetst-1 - PPEt-1/ Assetst-1 · Governance characteristics : - Duality (CEO is Chairman) - Ratio of family directors · Compensation variable : - FCS Compensation · Independent variables : - Tobin’s Q - FCS Ownership - Family Ownership - Divergence
Method of analysis	· OLS regression analysis : Estimate a piecewise OLS linear regression of corporate value on ownership structure. Assume that two change in the slope coefficient on insider ownership. Estimate the following model of the investment equations to investigate whether ownership structure affects investment. · Simultaneous equation regression analysis : To address the potential endogencity effect, estimating a simultaneously equation system of ownership structure, investment and corporate value using the two stage least square method.	· Simple model It is fully controlled by a single shareholder, referred to as the family controlling shareholder (FCS). · Empirical methodology
Result of the analysis	· OLS regression results: - Leverage has a strong negative correlation with corporate value, and that the adjusted R-squares are substantially increased, the non linear relation between Q and insider ownership remains significant. It is consistent with Morck et al. (1988). - Ownership variables are weaker, but still statistically significant at the 10% level. It is consistent with Morck et al. (1988). · Simultaneous regression results: - Insider ownership is a function of market value of equity and industry type. - Tobin’s Q is an important determinant of insider ownership. It indicates that managers in firms with higher corporate values or with better investment opportunities hold a larger fraction of their firm’s shares. - Investment is an important determinants of corporate value. - Liquidity and corporate value positively affect investment. It is consistent with Fazzari et al. (1988). Conclusion : Investment affects corporate value which in turn affects ownership structure but not the reverse suggests that ownership may not be an effective incentive mechanism to induce managers to make value-maximizing decisions.	Support for: · Hypothesis I : Divergence is positive and significant in the pooled regression at the 1% level, and the fixed effect regression at the 5% level. It indicates a positive correlation between FCS compensation and ineffective corporate governance in family firms. · Hypothesis II : the coefficients of the family ownership variable are both positive and significant at the 1% and 10% levels for the full sample regressions. It is consistent with the findings of Cheng and Firth (2006), that compensation levels for top managers are reduced in a family firm environment if they have substantial stockholdings. · Hypothesis I & II : the coefficient of duality is positive and significant, indicating that a CEO who also chairs the board is more likely to be entrenched and higher paid. For the details, the family ownership <26.9% (low stockholding) sub-group and family ownership ≥ 26.9% (high-stockholding) sub-group showing that the analyses are quite similar. · Hypothesis IV : the coefficients of FCS ownership are positive and have a positive correlation with Tobin’s Q in all the regressions, all of which are significant at the 1%, 5%, 10% levels. · Hypothesis V : the interaction variable for FCS compensation with divergence has a significantly negative relationship with Tobin’s Q. It indicates that, within a family firm characterized by an ineffective corporate governance structure, if an FCS is compensated at a higher level, this will lead to lower firm performance. Conclusion : Controlling shareholders can amass considerable wealth through the receipt of substantial dividends based upon their higher holdings of the stocks in the firm and less need for cash compensation.

Components of Comparison	Article from CRP	Article from Student
Title	Ownership structure, investment, and the corporate value: an empirical analysis.	Compensation, Corporate Governance and Owner Shareholding: Theory and Evidence from Family Ownership.
Topic	Ownership, control, and compensation.	Ownership, control, and compensation.
Theory used by article	· Jensen and Meckling (1976) and Stulz (1988) : ownership structure affects corporate value by its effect on investment. · Morck et al. (1988) and McConnell and Servaes (1990) : ownership structure affects corporate value using Tobin’s Q as a proxy for corporate value. · McConnell and Muscarella (1985) : the stock market reacts positively to announcement of increases in planned capital expenditures and negatively to decrease in planned capital expenditures. · Chan et al. (1990) : share – price responses to announcements of increased R&D spending are significantly positive. · Fazzari et al. (1988) : liquidity affects investment, emphasizing the importance of asymmetric information problems and agency problems in investment financing decisions. · Demzets and Lehn (1985) : ownership structure is endogeneously determined in equilibrium. · Kole (1994) : corporate value could be a determinant of the ownership structure rather than being determined by ownership structure. · Murphy (1985) : managerial compensation is strongly positively related to corporate performance, suggesting that ownership structure can represent an endogeneous outcome of the compensation contracting process.	· Shleifer and Vishny (1997); La Porte et al. (1999); Claessens et al. (2000); Lemmon and Lins (2003) : the separation of ownership and control represents the primary agency problem of conflict between outside investors and the controlling insiders. · Morck et al. (1998); shleifer and Vishny (1997); Claessens et al. (2000, 2002); La Porte et al. (2000); Lemmon and Lins (2003) : the existence of controlling shareholders thus implies agency costs arising from conflicts between controlling shareholders and outside investors. · Claessens et al. (2002) : family-controlled firms were associated with quite severe agency problem. · Yeh et al. (2001); Randoy and Goel (2003); Brunello et al. (2003) ; the family members can accrue additional benefits based upon their high level of insider ownership, as well as the low levels of external stockholders and foreign ownership. · Lim and Kim (2005) : Korean conglomerates with more nonvoting shares and more listed firms tending toward a lower family stake and better corporate governance. · Vilalonga and Amit (2006) : dual share classes, pyramids, and voting agreements reducing family firm value. · Conyon (1997) ; Core et al. (1999) : good corporate governance can prevent top management teams from receiving excessive compensation. · Douglas et al. (2002) : the blame for the excessive compensation packages awarded to top managers has been placed squarely on the shoulders of family firms with poor corporate governance mechanisms. · Brick et al. (2006) : an excessive level of compensation for a CEO or a director provided an indicator of poor corporate governance structure and that this was a precursor to the underperformance of firms. · Lim (2005) ; Cheng and Firth (2005, 2006) : within a family environment, the direct compensation paid to top manager tended to be reduced if the directors had substantial stockholding. · Basu et al. (2007) : relative to ownership and monitoring variables, excessive pay levels had a negative association with subsequent accounting performance. · Murphy (1985) ; Jensen and Murphy (1990) ; Core et al. (1999) ; Conyon and Murphy (2000) : firms are generally characterized by their use of option plans for top executives and stock based compensation for corporate (non-employee) directors. · Core and Guay (2001); Gerety et al. (2001); Ryan and Wiggins (2004); Becher et al (2005); Fich and Shivdasani (2005); Linn and Park (2005) : the effectiveness of the stock option plans used to compensate managers and directors. · Yeh and Lee (2001) : 76% of all listed firms in Taiwan came under the control of family shareholders and 66.45% of the boards of all listed firms totally controlled by family shareholders. · Solomon et al (2003) : families directly or indirectly control most Taiwanese firms through pyramids structure and crossholdings among firms. · Claessens et al. (2000) : the proportion of family controlled firms in Taiwan is similar to that of the average proportion of family-controlled firms in nine Asian economies. · Yeh et al. (2001) : Taiwanese firms were controlled through the extensive use by controlling shareholders of mechanisms which separated their control rights from their cash flows rights. · Claessens et al. (2002) : controlling shareholders in Taiwan used various methods to transfer corporate assets to their family members. · Conyon (1997); Core et al. (1999); Brick et al. (2006) : the award of higher compensation levels to controlling shareholders is associated with weaker corporate governance machanisms. · Cheng and Firth (2006); Basu et al. (2007) : the compensation for controlling shareholders is found to be reduced if the firm is characterized by superior performance and a better corporate governance structure.
Hypothesis of research	Ownership structure, investment, and corporate value might be interdependent. That is, ownership structure affects investment which, in turn, affects corporate value, and corporate value affects ownership structure and so forth.	Family Controlling Shareholder (FCS) with lower compensation will demonstrate lower self benefit behavior and engage in less expropriation of minority shareholders. Hypothesis: I. A family firm with better shareholder protection (corporate governance) levels will be associated with a lower level of compensation for the FCS. II. Higher equity ownership by the ultimate controlling shareholder of the family firm will be associated with a lower level of compensation for the FCS. III. The higher the equity owned by the ultimate controlling shareholder of the family firm, the higher the firm performance. IV. The better the shareholder protection of the family firm, the higher the firm performance. V. FCS within a family firm with better shareholder protection has a lower compensation level; the firm will demonstrate higher performance.
Variables used in research	. · OLS regression model : - INV: The investment level for firm - INS1i : Insider ownership firm - INS2i : will be zero if the insider ownership for firm is less than first breakpoint - INS3i : will equal to zero if insider ownership of firm is below the secong breakpoint. · Simultaneous equation regression model : - Insider ownership – f ( Market value of firm’s common equity, Corporate value, Investment, Volatility of earnings, Liquidity, Industry) - Corporate value – g ( Insider ownership, Investment, Financial Leverage, Asset size, Industry) - Investment = h ( Insider ownership, Corporate value, Volatility of earnings, Liquidity, Industry)	· Firm characteristics : - Salest-1 - ROAt-1 - Cash Flow Risk - Stock Returnt-1 - R&Dt-1/Assetst-1 - Debtt-1/ Assetst-1 - Advertisingt-1/ Assetst-1 - PPEt-1/ Assetst-1 · Governance characteristics : - Duality (CEO is Chairman) - Ratio of family directors · Compensation variable : - FCS Compensation · Independent variables : - Tobin’s Q - FCS Ownership - Family Ownership - Divergence
Method of analysis	· OLS regression analysis : Estimate a piecewise OLS linear regression of corporate value on ownership structure. Assume that two change in the slope coefficient on insider ownership. Estimate the following model of the investment equations to investigate whether ownership structure affects investment. · Simultaneous equation regression analysis : To address the potential endogencity effect, estimating a simultaneously equation system of ownership structure, investment and corporate value using the two stage least square method.	· Simple model · Empirical methodology
Result of the analysis	· OLS regression results: - Leverage has a strong negative correlation with corporate value, and that the adjusted R-squares are substantially increased, the non linear relation between Q and insider ownership remains significant. It is consistent with Morck et al. (1988). - Ownership variables are weaker, but still statistically significant at the 10% level. It is consistent with Morck et al. (1988). · Simultaneous regression results: - Insider ownership is a function of market value of equity and industry type. - Tobin’s Q is an important determinant of insider ownership. It indicates that managers in firms with higher corporate values or with better investment opportunities hold a larger fraction of their firm’s shares. - Investment is an important determinants of corporate value. - Liquidity and corporate value positively affect investment. It is consistent with Fazzari et al. (1988).	Support for: · Hypothesis I : Divergence is positive and significant in the pooled regression at the 1% level, and the fixed effect regression at the 5% level. It indicates a positive correlation between FCS compensation and ineffective corporate governance in family firms. · Hypothesis II : the coefficients of the family ownership variable are both positive and significant at the 1% and 10% levels for the full sample regressions. It is consistent with the findings of Cheng and Firth (2006), that compensation levels for top managers are reduced in a family firm environment if they have substantial stockholdings. · Hypothesis I & II : the coefficient of duality is positive and significant, indicating that a CEO who also chairs the board is more likely to be entrenched and higher paid. For the details, the family ownership <26.9% (low stockholding) sub-group and family ownership ≥ 26.9% (high-stockholding) sub-group showing that the analyses are quite similar. · Hypothesis IV : the coefficients of FCS ownership are positive and have a positive correlation with Tobin’s Q in all the regressions, all of which are significant at the 1%, 5%, 10% levels. · Hypothesis V : the interaction variable for FCS compensation with divergence has a significantly negative relationship with Tobin’s Q. It indicates that, within a family firm characterized by an ineffective corporate governance structure, if an FCS is compensated at a higher level, this will lead to lower firm performance.