Con respecto a futuras líneas de investigación

4.3.4.1Director ownership and risk-taking

According to agency theory, boards of directors have the responsibility to monitor the activities of management. However, La Porta et al. (1999) point out that ownership structure in many countries outside of the U.S. consists of directors owning the majority of stock. It was confirmed that this is largely the case in Hong Kong, where members of founding families are directors and executives of their firms and own the majority of the stock (Ho and Wong, 2001; Chen and Jaggi, 2000).

Theoretically, when managers own most of the firm’s stocks, this can accentuate the free rider issue, in that there is less monitoring of management, and a risk of takeover by management (Shleifer and Vishny, 1997). It is also possible that the interests of management and shareholders would coincide (Jensen and Meckling, 1976). When the interests of management and shareholders are more closely aligned, the need for motivat ing plans in director-controlled firms is greatly decreased.

Several studies offer an explanation for the role of directors and management entrenchme nt (Morck et al., 1988; McConnell and Servaes, 1990; Short et al., 1999). For example, the concept of management entrenchment is evident when management has gained a great deal of power that makes it possible for managers to promote their own interests. Management entrenchment assumes that when directors hold a small percentage of shares in their firm, outside and inside factors serve to align the interests of managers with the best interests of

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shareholders. However, when directors hold a large percentage of shares, they can make decisions to protect their interests against those of their shareholders. In such situatio ns, directors find it in their interest not to maximise the wealth of shareholders. This is because directors can ensure they obtain higher salaries, compensation and bonuses (Morck et al., 1988; McConnell and Servaes, 1990). With director entrenchment it can be shown that director shareholding, or with directors owning a large part of the firm’s shares could be detrimental to corporate value. Also, it was shown that putting the assumptions of the alignment of interests between directors and shareholders and director entrenchme nt together does not lead show a positive relationship between director shareholdings and corporate value (Morck et al., 1988; McConnell and Servaes, 1990). It would follow that low ownership of stock by directors is positively related to good corporate value.

In examining the relationship between director shareholdings and Tobin’s Q for U.S. firms between 1976 and 1986, McConnell and Servaes (1990) discovered that the relations hip was curvilinear. According to these researchers, the relationship between these two groups continued to be positive until the level of director shareholdings reached between 40% and 50%. The relationship became negative after this level of director shareholding was reached (McConnell and Servaes, 1990). Similar evidence was found among U.K. firms to support the curvilinear relationships of direct shareholdings (Hermalin and Weisbach, 1991). Further studies attest to this.

Between 1988 and 1992, Short and Keasey (1999) examined the relationship between director shareholdings and Tobin’s Q in 225 U.K. firms, the fair market value for the stocks. Their findings reveal that it took a much higher level of director ownership for management to become entrenched in the U.K. than in the U.S. Using return on assets as a proxy for corporate governance, Weir and Laing (2000) show a positive relations hip between director ownership and return on assets.

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Hillier, linn and McColgan (2005) also reveal a curvilinear relationship between director ownership and firm value. Their findings reveal that at director ownership of 7%, Tobin’s Q increases, but then decreases when director ownership reaches 26%. In contrast to this finding, looking at mandatory disclosure as an aspect of corporate governance, Owusu- Ansah (1998) shows no curvilinear relationship, as seen in some studies in the U.S. and U.K. Instead, this researcher shows that in Zimbabwean listed firms in 1994, there was a positive relationship between director shareholdings and mandatory disclosure at all levels (Owusu-Ansah, 1998).

Further, Fama and Jensen (1983) show that insider or management ownership can give rise to two behaviours. On the one hand, there could be convergence or alignment of interests of insider ownership with shareholders; on the other hand, there could be an entrenchme nt effect (Fama and Jensen, 1983). Earlier studies assert that when there is an increase in ownership among directors or managers, owners tend to use company resources less, thereby showing a convergence or alignment of their interests with the interests of shareholders. In these situations, owners and managers agree on how the firm is managed, supporting the hypothesis of alignment of interests between these two groups (Fama and Jensen, 1983).

However, these researchers also argue that managers have a natural tendency to use company resources for their own interests, as suggested by agency theory, thereby leading to conflicts of interest with external shareholders (Fama and Jensen, 1983). But according to Fama and Jensen (1983), when insider ownership increases, conflicts decrease, due to the tendency to convergence of their interests.

Fama and Jensen (1983) also argue that when there are major increases in insider ownership, this tends to increase costs. According to this argument, even at low levels of insider ownership, managers are induced by market discipline to seek to maximise value, even when there are few personal incentives to do so (Fama and Jensen, 1983). Conversely,

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Fama and Jensen (1983) also argue that when insiders hold a large part of the capital in a firm, they have the advantage of greater voting rights, which means they can look after their interests and still not maximise value. They can achieve this without compromis ing their jobs or their remuneration (Fama and Jensen, 1983).

Given the director ownership evidence, both the null and alternate hypotheses are tested. The respective null hypothesis to be tested in this study is:

H4a: There is no statistically significant relationship between director ownership and risk-taking.

4.3.4.2Director ownership and credit ratings

The relationship between director owner and credit ratings for as Ho and Wong (2001) point out some director also serve as owners, because they own a large part of the stock of the companies that they direct, as is commonplace in Japan. This is a situation where these companies face severe threats of take over from the directors (Ho & Wong, 2001). The effect of this is to have a negative impact on credit ratings. This shows that agency theory is an appropriate theory to dicuss the relationship between director owner and credit ratings. Researchers have considered the possible impact of agency conflicts on credit ratings. Ashbaugh-Skaife et al. (2006) investigate the relationship between governance mechanisms to address agency conflict and credit ratings. They examine how potential conflicts between shareholders and other stakeholders could be heightened or lessened through governance structures (Ashbaugh-Skaife et al., 2006). It was shown that the interests of shareholders and stakeholders often diverge on issues related to firm performance and the investment policies of management (Fitch Rating, 2004). Ashbaugh- Skaife et al. (2006) show that firms with more shareholder rights usually have lower credit ratings, leading to higher costs of borrowing. Gompers et al. (2003) had different findings : they show that firms with greater shareholder rights had greater share values and lower costs of capital.

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Given the director ownership evidence, both the null and alternate hypotheses are tested. The respective null hypothesis to be tested in this study is:

H4b: There is no statistically significant relationship between director ownership and credit ratings.

4.3.4.3Director ownership and cost of capital

The cost of capital is shown to increase when a company becomes more exposed to market- wide risks. When managers undertake excessive borrowing as a means to promote empire- building expansions, the company’s cost of capital has the potential to increase, as this action increases its risk. This is likely to occur when there is inadequate monitoring of insiders (Pham et al., 2012). Stewardship theory appears to be relevant in showing how director owners could influence cost of capital as they are seen or not seen as looking after the interests of sharehodlers.

Also, the cost of capital is shown to increase for poorly governed companies, because the lack of transparency leads to higher costs. The cost of capital is shown to decrease when insider ownership increases, but this only happens up to a certain level of ownership (Pham et al., 2012). Amihud and Lev (1981) and Belkhir (2006) take the position that, at times, managers that can control board decisions focus on reducing risks more than managers that own shares. This may occur when managers aim to maximise job security (Amihud and Lev, 1981; Belkhir, 2006). Laeven and Levine (2009) explain this by pointing out that as managers accumulate influence and control of the board, they are less likely to undertake risky projects.

Hermalinand Weisbach (1998) suggest that some boards of directors may be less likely to monitor management if management has many bargaining rights. The implication here is that with more insiders on a board, it is less likely that there will be stringent monitor ing of management. This is poor governance, which could lead to managers undertaking riskier

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investment, which may potentially benefit them greatly. Empirical studies have shown that the more insiders there are on a board, the more risk the firm is likely to face (Boone et al., 2007). In other words, having more insiders on a board is likely to lead to an increase in the cost of capital.

Given the director ownership evidence, both the null and alternate hypotheses are tested. The respective null hypothesis to be tested in this study is that:

H4c: There is no statistically significant relationship between director ownership

and cost of capital.

4.4 Board structure variables and risk-taking, credit ratings and cost of capital