The Influence of Corporate Governance Strength on …giftaproject.org/wp-content/uploads/2015/07/Ali-2015-PPT.pdf · The Influence of Corporate Governance Strength on the Symptoms

The Influence of Corporate Governance Strength on the Symptoms of the

Financial Crisis

by:

Bakr Ali Ali Al-Gamrh

(University Utara Malaysia)

Ku Nor Izah Bt Ku Ismail

(University Utara Malaysia)

Contents

Introduction

Why the UAE

The idea of the research

Conceptual framework

Theories

Estimated models

Findings

2

INTRODUCTION

• The issue of corporate governance has received greatattention over the last few decades.

– The Asian crisis (1997 to 1998).

– The early 2000s recession.

– The global financial crisis.

• After the crises, weak corporate governance system is arguedto have potential macroeconomic, distributional and longterm consequences (Claessens & Yurtoglu, 2012).

3

INTRODUCTION

• The 2007-2008 mortgage crisis started in the U.S as a result of the bust of the real estate bubble.

• The crisis has affected almost the whole world and was considered as the worst crisis since the Great Depression of the 1930s.

• For example, world economies faced several problems

– Decline in stock markets

– Failure of big financial corporations

– Decrease in commodities value

– Bailout packages

4

Why the UAE

• Three trillion American dollars losses in the Middle East (Chang, 2011).

• The United Arab Emirates (UAE) is one of the most affected countries by the global financial crisis.

5

The 4th exporter of oil globally First construction growth globally

Decline in oil prices in 2008. Bust of the real estate bubble.

• The UAE is the most hit country globally by the crisis, in terms of its property slump (Alsukker, 2010).

• The UAE has strong links with the US and Western real estate industry. For example, Emmar owned the bankrupted John Laing Homes – over

$1 billion (Fitch, 2009; Woertz, 2008)

• Connections with financial markets of the Western economies For example, the boom in the UAE was heavily financed by affected

banks such as RBS and Standard Chartered.

6

• Companies such as, Dubai World and Nakheel asked investors to reschedule debt repayment.

• Dubai total debt was estimated around USD 150 billion (Bass, 2009)

• Effects to the UAE’s economy:

• Crash in stock markets:

Abu Dhabi: 70% decline in value.

Dubai: 43.2% decline in value.

7

Source: Securities and Commodities Authority (SCA), 2009

Figure 1: Annual Traded Value (2001-2009)

8

• Financial crisis decline in stock values poor firm performance (Huang et al., 2011)

• Decline in stock valuation bad firm performance (Kabir & Roosenboom, 2003) .

9

Studies during the crisis

Good corporate governancefirms were less affected in thetime of crisis (Suvankulov &Ogucu 2012; Watkins et al.2009)

Companies with goodcorporate governanceperformed worse duringcrisis (Beltratti & Stulz,2012; Aebi et al., 2011)

Stronger corporate governance mechanisms had higher profitability.However, negative effects on market valuation during the crisis

(Peni & Vähämaa, 2012).

Poor corporate governance was one of the main causes of the crisis (FCIC, 2011; Kirkpatrick, 2009; Yeoh, 2010)

10

• Several reasons of the crisis were reported and the following are two of them:

• Excessive Risk

• High leverage

Framework

.

12

Leverage

Risk

Governance

PerformanceREVA

Theories

• Pecking order theory

• Agency theory

13

Estimated Models

• REVA it = β0+ β1 SIZE it +β1 LOSS it + β3 GRTH +β3 RISK it+β4 LVRG it + β5CG it +Year dummies+ εit (1)

• REVA it = β0+ β1 SIZE it +β1 LOSS it + β3 GRTH +β3 RISK it+β4 LVRG it + β5CG it + β6 (RISK × CG) it + β7(LVRG×CG)it + Year dummies+ εit (2)

• REVA it = β0+ β1 SIZE it +β1 LOSS it + β3GRTH+β3 RISK it+β4 LVRG it + β5CG it + β6 (RISK × CG) it + β7(LVRG×CG)it+ β8 (RISK it × 2009 i)+ β9 (LVRGit × 2009 i)+ β10 (CG it × 2009 i)+ β11(RISK it ×CG it× 2009 i) +β12 (LVRG it×CG it× 2009 i)+ Year dummies+ εit (3)

Data

• ADX and DFM listed firms (496 observations for 2008-2012)

• Panel Data analysis – Fixed Effects

15

Variables Model 1 Model 2 Model 3

LEVERAGE -0.674***

(-4.272)

RISK 0.135

(0.636)

CG -0.023**

(-2.417)

LEVERAGE*CG 0.035**

(2.006)

RISK*CG 0.016

(0.400)

LEVERAGE*CG*crisis -0.295***

(-21.613)

RISK * CG * crisis -0.203***

(-12.880)

R-square 0.7385 0.7395 0.7998

Fixed effects regression with Driscoll and Kraay’s standard error

• Leverage - Firm performance

• Risk X Firm performance

• CG - Firm performance

• Leverage & CG + Firm performance

• Risk & CG X Firm performance

• Leverage & CG & crisis - performance

• Risk & CG & crisis - performance

Summary of the Measurements of Variables

Variables Acronym Measurement

Refined economic value

added

REVA (NOPAT) – kw × WACC

Firm Size SIZE Log of market capitalization

Loss LOSS Dummy equals one if the firm has

loss

Growth GRTH Market cap. + total liabilities /total

assets

Leverage LVRG Total liabilities/total assets

Risk RISK Beta

Corporate Governance CG Corporate governance index

Thank youQ & A

• Illustration of REVA

• REVA = NOPAT – kw × WACC

• NOPAT = net operating profit after tax

• WACC = Weighted Average Cost of Capital

• Kw = Market value of assets at the end of the period

20

Global Construction (2007-2008)

21

(Davis Langdon, 2008)

Before the crisis During the crisis

Inflation rates 6% in 2006 15% in 2009

Real GDP growth 8.7% in 2006 - 3.3% in 2009

Foreign investment Rated 22nd attracting foreign investment globally

Negative AED 11.5 billion

Property prices 50% decline from 2008-2009

Stimulus packages AED 120 billion

Liquidity problems Projects worth $582 billion were freeze

Bailout $10 billion

22