Study of Corporate Governance on Relation between Self-interest

Transcription

1 Study of Corporate Governance on Relation between Self-interest Incentive and Cost Stickiness 1 1, First Author College of Accounting, Shanxi University of Finance and Economics, China, @139.com Abstract Based on the sample of continued listing companies which managers have self-interest incentive from 2001 to 2012, this paper studies the impact of corporate governance on the relation between the self-interest incentive and cost stickiness. Results show that strong governances can restrict managers self-interest incentive, resulting in a lower level of cost stickiness; and managers self-interest incentive is obvious in weak governance companies with higher level of cost stickiness. These conclusions have practical significance on how to strengthen corporate governance in order to restrict the managers self-interest incentive and reduce the agent problem and how to strengthen cost control to enhance the value of companies. Keywords: Corporate Governance; Managers; The Self-Interest Incentive; Cost Stickiness 1. Introduction Cost behavior is a basis for management accounting theory, and is used to cost-volume-profit analysis, cost budget and earnings forecasts by accountants, corporate mangers, financial analysts and professional investors. But the cost stickiness theory has challenged the traditional cost behavior theory, so it is particularly important to make the formation mechanism and influence factors clear for improving the management accounting theory and integrating the management accounting tools. The self-interest managers decision making based on maximizing their own interest is one of the most important causes of cost stickiness [1]. Therefore, there are important theoretical and practical significance to study the impact of the mangers self-interest incentive on const stickiness and the role of corporate governance in restricting the managers self-interest incentive. The text is organized as follows: the second part proposes specific indicators of the level of corporate governance; and the third part discusses the impact of managers self-interest incentive on cost stickiness and the role of corporate governance restricting managers self-interest incentive; the fourth part is empirical research. Finally, we conclude and outline future research directions. 2. The level of corporate governance Chinese scholars have two different ways in measuring the level of corporate governance: firstly, it is measured with different internal governance mechanisms [2-3]; secondly, it is measured with the overall level of corporate governance [4-5]. Based on above literature and the disclosure information of listed company, the paper selects six aspects indicators to measure the level of corporate governance. (1) Property rights governance. Sound corporate governance should be both formally complete and substantial perfect, and the substantial perfect is the issue of property rights [6]. So we chose the type of actual controller of listed company as the level of property rights governance. (2) Equity governance. Ownership structure including shareholding concentration, check and balance is an important issue of internal governance. If shareholding concentration is too high, it is possible that the largest shareholder hurts listed company; and if shareholding concentration is too scattered, mangers will probably damage the interests of the shareholders [7]. So we chose the proportion of the largest shareholder, CR_5 indicator and CR_10 indicator as the level of shareholding concentration; Z index and S index as the level of shareholding check and balance. (3) Board governance. The board is the core part of internal governance mechanisms. The characteristics include the size and structure [8]. So we choose the member of board, the dual of chairman and CEO and the proportion of independent directors as board governance. International Journal of Digital Content Technology and its Applications(JDCTA) Volume7,Number6,March 2013 doi: /jdcta.vol7.issue

2 (4) Mangers governance. Manager governance is an indispensable part of corporate governance structure. And the governance to mangers can be divided into the constraints and the incentives [9]. So we select indicators including asset-liability ratio, total compensation of all managers, the top 3 managers and the top 3 directors, the proportion of the Shareholding of managers. (5) Shareholders meeting governance. Shareholders meeting make important decisions to determine the direction and strategy of company. So the participation of the shareholders meeting is also an important aspect of corporate governance. The calculated indicators selected are total numbers of annual meetings of shareholders, the attendance rate of the annual general meeting of shareholders. (6) Supervisors governance. The law of company rules that the board of supervisor is responsible to shareholders meeting, this show that the supervisors governance is also an important part of corporate governance. Indicators selected include the size of the Board of Supervisors and total numbers of annual meetings of the Board. 3. Corporate governance, managers self-interest incentive and cost stickiness 3.1. Managers self-interest incentive and cost stickiness The principal-agent theory and the assumption of rational economic people provide a good explanation to the mangers self-interest incentive. In 1976, Jensen and Meckling proposed that the managers self-interest incentive and behavior is a kind of agent problem in essential [10]. ABJ (2003) first pointed out that it is self-interested mangers decision based on maximizing their own benefits that causes cost stickiness [1]. And the self-interest incentive is the starting point of the self-interest behavior. However, there is little literature about the effect of managers self-interest incentive on cost stickiness, because of the invisible of incentives [11-13]. But in summary, most of the existing literatures support that mangers self-interest incentive is the main cause of cost stickiness. Based on this, we assume that the more obvious of mangers self-interest incentive the more higher level of cost stickiness Corporate governance and managers self-interest incentive As mentioned above, the manager s self-interest incentive and behavior is a kind of agent problems in essential. So, corporate governance has a restrict effect on the manager s self-interest incentive. The excessive growth and investment are manager s self-interest behavior, and the consequence of this kind of behavior is that the size of company is expanded but the value of company is decreased [14]. If the manager s self-interest incentive is not restricted by corporate governance, the manager will expand the size of company though excessive growth and investment for two reasons: first, the successful expansion of the size of company usually was regard as the manifestation of manager s ability by shareholders; second, by using the resources in the hands of manager, the manager not only can benefit from it but also can enhance the middle management staff, increase their own prestige and reduce the risk of being dismissed. Shleifer and Vishny (1997) s research also shows that strength corporate governance can reduce agent problems and restrict manager s self-interest incentive [15]. Based on the above analysis, we believe that with the higher level of corporate governance, manager will be prudent to increase expenses facing the rising of volume and will be prompt to make reasonable adjustments facing the declining of volume. This leads us to Hypothesis. H: The higher level of corporate governance, the more unobvious of manager s self-interest incentive, and the lower level of cost stickiness. 4. Empirical researches 4.1. Research design and sample selection Firstly, we use factor analysis to measure the level of corporate governance and got 7 principal components. Then, the self-interest incentive and cost stickiness of two groups sample are tested separately. At last, the value of the two groups is tested by Independent-Samples T Test separately so 707

3 as to investigate the relation among the corporate governance, manager s incentive and the value of company. The implementation of manager s self-interest incentive requires a certain environment, and the M&A event provides a potential opportunity for the implementation of manager s self-interest incentive. Therefore, we chose 7,118 Chinese listed companies which lasted from 2001 to 2012 and happened M&A event as initial sample. On the basis of initial sample, the companies with ST or PT symbol and incomplete information of corporate governance were removed. At last, we obtain the remaining 4,344 listed companies as sample. The data are obtained from CSMAR and CCER. 4.2 Measure of the level of corporate governance In this paper, we first identify 18 typical indicators of corporate governance from the relevant literature, and then we use factor analysis to extract 7 common factors. The correlation among the 18 the indicators data of corporate governance should be test first when using factor analysis. And the result is as follows Table 1 by using SPSS Table 1. KMO and Bartlett Test Kaiser-Meyer-Olkin Measure of Sampling Adequacy(KMO) Bartlett's Test of Sphericity Approx. Chi-Square df 153 Sig.Bartlett Measuring the partial correlation among variables, the value of KMO parameters is greater than 0.5 and indicates that factor analysis is suitable. Measuring the degree of correlation among these indicators, the significant level of the value of Bartlett test is less than 0.01 and indicates a strong linear correlation among these factors. Therefore, the method of factor analysis is suitable and necessary. When using SPSS 18.0 software to analysis, in order to eliminate the effect of subjective factors on the number of extracting common factor, the criterion is the value of eigenvalue is greater than 1; in order to eliminate the influence of the dimensions, the correlation matrix is selected as the object of analysis; and in order to clearly show the relation between the common factors and the original indicators, the method of Varimax is selected. Seven common factors (F1,F2,F3,F4,F5,F6,F7) are extracted from 18original indicators by factor analysis. And the eigenvalue, contribution and the factor loading matrix after rotation are showed as Table 2. As is showed in Table 2, seven principal components are listed according to the contribution to the original indicators, and the cumulative variance contribution of the first four principal components is 54.14%; the cumulative variance contribution of the next three principal components is 19.98%; and the cumulative variance contribution of the seven principal components is 74.12%. Specifically, the first principal component reflects the level of governance of the shareholders, and the contribution is 18.60%; the second principal component reflects the level of governance of manager incentives aspect, and the contribution is 14.93%; third principal component reflects the level of governance of the checks and balances among shareholders, and the contribution is 11.92%; the fourth principal component reflects the level of external oversight governance, and the contribution is 8.68%; the fifth, sixth principal component is composed by the total numbers of annual meetings of the Board of Supervisors, the type of actual controller of listed company and the size of the Board of Supervisors, Asset-liability ratio respectively, and the contribution is 14.32%; the seventh principal component is composed by the proportion of the shareholding of managers and the dual of chairman and CEO, and the contribution is 5.67%. 708

4 Table 2. Eigenvalue, contribution and the factor loading matrix after rotation Original indicators Principal factors F1 F2 F3 F4 F5 F6 F7 CR_5 indicator CR_10 indicator The attendance rate of the annual general meeting of shareholders The proportion of the largest shareholder Total compensation of all managers Total compensation of the top managers Total compensation of the top directors Z index S index The proportion of independent directors Total numbers of annual meetings of shareholders Total numbers of annual meetings of the Board of Supervisors The type of actual controller of listed company The size of the Board of Supervisors Asset-liability ratio The proportion of the Shareholding of managers The dual of chairman and CEO Eigenvalue Variance contribution (%) 18.60% 14.93% 11.92% 8.68% 7.33% 6.99% 5.67% Cumulative variance contribution (%) 18.60% 33.54% 45.45% 54.14% 61.46% 68.45% 74.12% In order to obtain the score of the level of whole corporate governance for each sample, seven principal component factor score times the variance contribution of every principal component. And the sample is divided into two groups by the median of this score: the higher level of corporate governance sample, the lower level of corporate governance sample The impact of the level of corporate governance on manager s self-interest incentive Based on that M&A events are prerequisite for the implementation of manager s self-interest incentive; and plenty of free cash flow and longer manager tenure is necessary; and the increasing of the non-fixed proportion of compensation will stimulate the implementation of manager s self-interest incentive, the manager s self-interest incentive is measured by the number of M&A, the scale of M&A, free cash flow, the manager s tenure and manger s fixed pay [16]. The remaining sample is 2,162 after excluding companies with incomplete information about manager s self-interest incentive. Table 3 presents the descriptive statistics of manager s self-interest incentive variables of each of group examples. From the table we can see that the mean of the number of M&A and manager s tenure is lower and the mangers fixed pay is higher in the higher level of corporate governance sample. Meanwhile, the scale of M&A and free cash flow is higher in the higher level of corporate governance sample than in the lower level of corporate governance sample. All these indicate that the manager s self-interest incentive is low relatively in the higher level of corporate governance companies. 709

5 Table 3. Descriptive statistics of manager s self-interest incentive variables of each of group examples Variables State Number of Mean Standard Minimum Maximum samples error the number of 0 1, M&A 1 1, the scale of M&A 0 1, , ,038 - free cash flow , manager s tenure 0 1, , mangers fixed 0 1, pay 1 1, Note: State=0 shows the lower level of corporate governance, and State=1 shows the higher level of corporate governance; Table 4. Independent samples T-test on the mean of manager s self-interest incentive of two group samples Levene s Test t-test for ity of Means for ity of Variances Items the number of M&A the scale of M&A free cash flow manager s tenure mangers fixed pay F Sig. t df Sig.(2- tailed) Mean Std. Error Difference Difference 95% Confidence Interval of the Difference Lower Upper not not not not not To further test the effect of the corporate governance on the manager s self-interest incentive, we use independent samples T-test to test the two groups variables of manager s self-interest incentive. And the results are shown in table 4. The results show that at 5% significance level, free cash flow in 710

6 higher level of corporate governance companies is higher than in lower level of corporate governance companies, but the manager s tenure is opposite. And at 10% significance level, the number of M&A in lower level of corporate governance companies is higher than in higher level of corporate governance companies. But at 10% significance level, the scale of M&A and manager s fixed pay of two group companies are no statistical difference. We know from the results that the corporate governance restricts the implementation of the manager s self-interest incentive though the controlling of the number of M&A, the manager s tenure and manager s fixed pay. Furthermore, the data also shows that the free cash flow, the scale of M&A is not strictly positive with manager s self-interest incentive The impact of corporate governance on the manager s self-interest incentive and cost stickiness Follow the method of Anderson et al.(2003)[1], the following model is used to test the cost stickiness of two group example and the impact of manager s self-interest incentive on cost stickiness. Model I: S & Ait Salesit Salesit log 0 1*log 2* Stickit *log S & Ait, 1 Salesit, 1 Salesit, 1 Salesit Salesit m* Stickit *log * EBm,, i t n* Stickit *log * Controln,, i t m Salesit, 1 n Salesit, 1 * EB * Control m' m' m', it, n' n', it, + it n' m=3,4,5,6, 7; n=8,9,10, 11; m' =12,13,14,15,16; n' =17,18,19,20 Table 5 presents variables type, name, identifie and definition in model I. variable type dependent variables independent variables control variables Table 5. Variables type, name, identifie and definition variable name variable identifie variable definition cost S&A administrative expenses + selling expense Sales Sales annual sales ratio of cost to sales S&A/Sales (administrative expenses + selling expense) /annual sales number of M&A number of M&A the number of M&A in a company in a year scale of M&A scale of M&A the total amount of M&A/the total assets in the beginning year free cash flow FCF (operating profit + depreciation - taxes cash payment for dividends, profits and interest) /current assets at the end of year manager tenure MT (the tenure of chairman change + the tenure of CEO and vice CEO change) manager fixed pay MFP manager fixed pay/(manager fixed pay + market value of mangers shares) Asset_Intensity Asset_Intensity total assets at the end of the year/operating income Employee_Intensity Employee_Intensity wages payable/operating income Level_Debt Level_Debt total liabilities at the end of the year/operating income D GDP D GDP this year GDP growth rate last year GDP growth rate We use mode I to test the two group samples separately with regression analysis. Table 6 presents the regression results. 711

7 As can be seen from the table, the sign of coefficient of 5 cross-terms with dummy variable is confirmed to expection by a different level significance in the lower level of corporate governance sample; however, the sign of coefficient of 5 cross-terms with dummy variable is confirmed to expection but only two coefficients of the scale of M&A and the mangers fixed pay are significant in statistic in the higher level of corporate governance sample. Specifically, in the lower level of corporate governance sample, the level of cost stickiness is 0.37, and for every 1% increasing in operating income, cost increases 0.836%, for every 1% declining in operating income, cost decreases 0.466%; but in the higher level of corporate governance sample, the level of cost stickiness is 0.349, and for every 1% increasing in operating income, cost increases 0.738%, for every 1% declining in operating income, cost decreases 0.389%. Data show that the level of cost stickiness is high and the impact of mangers self-interest incentive on cost stickiness is obvious in the lower level of corporate governance companies; and the level of cost stickiness is low and the impact of mangers self-interest incentive on cost stickiness is not obvious in the higher level of corporate governance companies. Thus, the hypothesis was confirmed. Table 6. Regression results of mangers self-interest incentive on cost stickiness of two group samples The lower level of corporate governance sample The higher level of corporate governance sample Coefficient Pred. Sign Coefficient t-stat Coefficient t-stat b *** ** Sales Change: b *** *** Stick*Sales Change: b Cross-coefficient (variable*stick*sales Change) number of M&A: b *** scale of M&A: b *** *** 4 FCF: b *** MT: b ** MFP: b *** * 7 Asset_Intensity: b *** ** 8 Employee_Intensity: b Level_Debt: b *** D GDP: b * *** 11 Coefficient (variable) number of M&A: b *** scale of M&A: b * 13 FCF: b *** MT: b MFP: b Asset_Intensity: b ** Employee_Intensity: b * *** 18 Level_Debt: b *** D GDP: b *** *** 20 N 2,172 2,172 Adj-R

8 4.5 Further investigation of the level of corporate governance and company value The value of company include short-term value and long-term value, and the short-term value is measured mainly by accounting indicators such as ROE and RAE etc, the long-term value is measured usually by market indicators such as Tobin s Q and the ratio of M/B. In this paper, ROE (operating profit), ROE (net profit), ROA and Tobin s Q are used to measure the company value for comparative analysis. Table 7 shows the descriptive statistics for the two group samples. As can be seen from the table, the mean of ROE (operating profit), ROE (net profit) and ROA in higher level corporate governance companies is higher than in lower level corporate governance companies, but the value of Tobin s Q is opposite. Table 7. Descriptive statistics of company value for two group samples Variable of company State Samples Mean Standard Minimum Maximum value error ROE (operating profit) ROE (net profit) ROA Tobin s Q Table 8. Independent samples T-test on the mean of company value of two group samples Levene s Test t-test for ity of Means for ity of Variances Items ROE (operating profit) ROE (net profit) ROA Tobin s Q not not not not F Sig. t df Sig.(2- tailed) Mean Difference Std. Error Difference 95% Confidence Interval of the Difference Lower Lower

9 Table 8 shows the result of company value of two group samples using independent samples T-test. The test results show that, at the 5% significant level the value of ROE (operating profit), ROE (net profit) and ROA in higher level corporate governance companies is higher than in lower level corporate governance companies, but at the 5% significant level the value of Tobin s Q in higher level corporate governance companies is lower than in lower level corporate governance companies. Two possible reasons as follows: first, there may be theory problems in measuring company value with Tobin s Q [17], whether there is a completely positive relationship between company value and replacement cost of assets is not sure. Second, in the actual calculation process, due to the low effectiveness of Chinese stock market, the value of the company s market value and replacement cost of assets is difficult to obtain and the alternative indicators may not be accurate. 5. Conclusions Cost control is an eternal theme of enterprises, and mangers self-interest incentive will affect cost behavior. Therefore, there is important practical significance in studying the impact of corporate governance on mangers self-interest incentive and cost stickiness. Based on the sample of continued listing companies which managers have self-interest incentive from 2001 to 2012, this paper founds that strong governances can restrict managers self-interest incentive, resulting in a lower level of cost stickiness; and managers self-interest incentive is obvious in weak governance companies with higher level of cost stickiness. Furthermore, the study founds that the relation between the level of corporate governance and the value of companies with accounting indicators is significantly positive, but the relation between the level of corporate governance and the value of companies with market indicators is significantly negative. From the conclusion, we can see that it is very important to attach importance to design of corporate governance and internal control. The rule is how to strengthen corporate governance in order to restrict the managers self-interest incentive and guide the managers optimize incentive, such as examine and approval system of M&A, the control and use of free cash flow, the changes of mangers, the tenure of managers and mangers compensation standard etc.. Only in this way, the agent problem can be reduced, the level of cost control can be increased and the value of companies can be added. 6. Acknowledgment Humanities and Social Sciences Planning Fund Supported by Chinese Ministry of Education (11YZA630208) 7. References [1] Chuan Pang, Hsing Hung Chen,"Evolution of Dynamic Manufacturing Systems and its Corresponding Operations Priorities and Corporate Performance", AISS, Vol. 4, No. 18, pp. 568 ~ 575, 2012 [2] Yue Qi Hua Xing, "The Relationship between Post-acquisition Organizational Structure and Acquisition Performance Moderated by Acquisition Legitimacy", JCIT, Vol. 7, No. 19, pp. 562 ~ 569, 2012 [3] Lei guangyong et al, "Quality of corporate governance, investors confidence and stock return",accounting research, No.2,pp.79-86,2012 [4] Ma zhong, Chen dengbiao, Zhang hongyan, "Company characteristics difference, internal governance and earnings governance ", Accounting research, No.3, pp.54-61, [5] Liu yingguo and Zhu long, "An empirical study of correlation between corporate governance and corporate value",journal of management review, No.2,pp.45-52,2011 [6] Zhang weiying, "The enterprise entrepreneurs-contract theory", Shanghai: Shanghai people s press, [7] Chen deping and Chen yongsheng, "The research on the relationship between ownership concentration, ownership balancing and corporate performance",accounting research, No.1,pp.38-43,

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