The Effects of Corporate Governance and Financial Leverage on Market Value of Equity of Thai Listed Companies

Abstract

This research was a quantitative study on the effects of corporate governance mechanisms based on board responsibilities on financial leverage and market value of equity of the three industrial groups listed in the Stock Exchange of Thailand (SET), namely agro and food, property and construction, and technology. The objectives of this study were as follows: a) to investigate corporate governance affecting financial leverage, b) to investigate corporate governance affecting the market value of equity, and c) to investigate corporate governance affecting market value of equity through financial leverage. Data were collected over the period of 2010-2014 from Form 56-1 (financial statements) and annual reports of the three industrial groups, totaling 161 companies with 805 data entries. The independent variables representing corporate governance were board size, board composition, chief executive director/chair duality, board committees, institutional shareholding, shareholding of board members and board remuneration. Financial leverage and market value of equity were used as intervening and dependent variables respectively. This study then tested the research hypothesis by using Path Analysis, one of the Structural Equation Modeling (SEM) techniques, conducted by AMOS, the statistical program designed for analyzing the level of goodness of fit measures in SEM and to validate the harmony or consistency of the model with the variables. Based on the hypothesis testing results, corporate governance directly and indirectly affected financial leverage and market value of equity, and that corporate governance did not significantly affect market value of equity through financial leverage. Considering the direct and indirect effects, it could be interpreted that corporate governance mechanisms affected market value of equity both directly and indirectly, although the results of the examination of each parameter path line had a significant or insignificant influence. The results of this study consisted of the direct effects of the corporate governance variables on the financial leverage in the negative direction at the statistical significance level of 0.05 comprising of the proportion of board composition and the proportion of board committee. The remaining five variables, namely, board size, chief executive director/chair duality, institutional shareholding, shareholding of board members and board remuneration had insignificant effects on financial leverage. The direct effects of the corporate governance variables on the market value of equity in a positive direction at the statistical significance level of 0.05 were consisted of board size, board composition, institutional shareholding and board remuneration. The direct effects of the corporate governance variables on the market value of equity in the negative direction at the statistical significance level of 0.05 were comprised only of the shareholding of the board members. The direct effects and indirect effects of the corporate governance variables on the market value of equity were insignificant at the statistical significance level of 0.05. Furthermore, the said effects were comprised only of the proportion of chief executive director/chair duality and board committee members appointed to the board. Overall, the effects of the corporate governance variables passed through financial leverage on the market value of equity were statistically insignificant. As a result of this study, it is important to note that the efficient and effective implementation of good corporate governance policy depends on the board's responsibility to balance profitability of the business with the best practices that take into account the interests of all stakeholders. To widely promote the importance and the adoption of corporate governance, further studies should be done with incorporated companies, and small and medium enterprises, using primary data and other tools for measuring the performance of financial markets and market values, such as value added economics, increased cost of market value, and economic profit, as well.