Corporate Governance of Financial Distress Firms (PN17) in Bursa Malaysia

This study examines the effect of ownership and board independence towards corporate performance of PN17 companies listed on the Bursa Malaysia. Corporate performance is measured by Tobin's Q as the dependent variable while the independent variables are analysed in terms of Managerial Ownership, Family Ownership, Institutional Ownership and the proportion of Independent Directors on the board of directors. A total sample of 53 companies over a 3-year period from 2010 to 2012, comprised of a sample of 26 PN17 companies and 27 non-PN17 companies are selected from the Bursa Malaysia. Based on two-sample t-tests, PN17 companies show significantly higher percentage of Managerial Ownership but lower Institutional Ownership and less number of Independent directors compared to the non-PN17 companies. The findings from multivariate regressions suggest that the performance of PN17 companies is significantly influenced by the level of Family Ownership and Institutional Ownership in their shareholdings. The number of Independent Directors has a negative significant effect the performance of PN17 companies. Nevertheless, the lower level of Managerial Ownership indicates better corporate performance for non-PN17 companies and the overall sample firms. The implication of this research suggests maintaining lower level of Managerial Ownership and increasing the number of Independent Directors are necessary to enhance corporate performance.

KEYWORDS: Corporate Governance, Ownership, Board Independence, Financial


Poor corporate governance has been established in early research as one of the main roots leading to corporate failure. Since the collapse of Enron, the Asian Financial crisis in 1997, and the Global Crisis in 2008, corporate governance continues to remain as an important issue to prevent bankruptcy and corporate failure. Corporate governance can be broadly defined as "the process and structure used to direct and manage the business and affairs of the company towards enhancing business prosperity and corporate accountability with the ultimate objective of realizing long-term shareholder value whilst taking into account the interest of other stakeholders" (Lee, 2003: p. 41). By creating a corporate governance model in which the concentration is not only on monitoring the managers, the mainstream is on improving the business decision making to help corporations gaining more profit to maximize the shareholder's wealth and reduce the likelihood of corporate failures. At its core, Pound (1995) argues that corporate governance is not about power or control, but it is all about ensuring the decisions are made effectively. The ideas for reforms of the relationship power among three critical constituencies which involved managers, shareholders and the board will create true collaboration in strategic decision to ensure more smoothly run organizations.

Financial distress condition is generally associated with the PN17 firms in the Malaysian stock exchange. Under Bursa Malaysia's listing guidelines of Practice Note 17 (PN17), a listed company is classified as a PN17 company when the following criteria is triggered: (i) The shareholders' equity of the listed company on a consolidated basis is 25% or less of the minimum paid-up capital; (ii) Receivers have been appointed over the asset of the company; (iii) A winding up of a listed company's subsidiary or associated company which accounts for at least 50% of the total assets employed by the listed company; (iv) The auditors have expressed an adverse or a disclaimer opinion in the listed company's latest audited financial statements; (v) The auditors have expressed a modified opinion with emphasis on the listed company's ongoing concern in the listed issuer's latest audited financial statements; and (vi) A default in payment by a listed company, its major subsidiary or associated company. Companies that fall within the PN17 classification will need to submit their proposal plan to the Securities Commission to restructure and to revive their company within 12 months in order to maintain the listing status in Bursa Malaysia. As at 23th December 2013, there were 28 companies on Bursa Malaysia falls under PN17 classification which represent about 3 percent from the total of 934 listed companies. The number of PN17 companies has not seen much improvement over the past five years whereby as at at 2nd July 2007, there were a total of 33 PN17 companies, which represented 3.26% of listed firms on Bursa Malaysia.

This study examines the effect of ownership structure and board independence on corporate performance of PN17 companies listed on Bursa Malaysia. The main emphasis of this research is that, since the number of financially distressed firms on Bursa Malaysia is continued to remain incessant, it is important to see whether the poor corporate performance of PN17 companies is caused by specific corporate governance traits. The objective of this study is to compare and investigate the relationship for each element in ownership structure and board independence towards PN17 companies which are generally classified as financial distress firms.



Agency theory suggests that higher managerial ownership may mitigate the problem of agency conflicts between shareholders and managers thus lead to higher firm value (Jensen & Meckling, 1976). The presence of agency conflict in the corporation is regularly occurring when managers tend to pursue their own personal interest, expropriation of shareholders wealth and excessive perquisites by eluding any decisions that may affect their current and future compensation plans (Shleifer & Vishny, 1997). Large shareholders ownership through family, institutional or state ownership is likely to minimise the conflict of interest between the managers and owners thus enhancing corporate performance (Morck, Schleifer & Vishny, 1988). Nevertheless, empirical evidence provide mixed results to support the theory. Stultz (1988) develops a model which shows that firm value first increases, then further decreases as inside ownership increases. This is further supported by Demsetz & Lehn (1985) and McConnell & Serveas (1990) which suggest a nonlinear relationship between inside equity ownership and firm value. Family's involvement in ownership and management could avoid the problem of possible exploitative behaviour of the agent towards the principal, and minimise the supervision costs (Jensen & Meckling, 1976 and Fama & Jensen, 1983). Allowing higher level of managerial shareholdings, however, creates entrenchment effect when managers gain so much power that they are able to use the firm to further their personal own interests rather than the interests of shareholders (Weisbach, 1988). Managers can reduce the probability of being replaced, extract higher wages and larger perquisities from shareholders (Shleifer & Vishny, 1989).

The role of independent directors on the board of directors is needed to effectively monitor and control firm activities in reducing opportunistic managerial behaviors and expropriation of shareholders wealth (Fama & Jensen, 1983). Independent directors should act as an outsider, free from the influence of inside directors and are viewed as an expert monitor to provide an oversight over management decisions to improve firm performance (Zahra & Pearce, 1989). In addition, Miller (1990) finds that firm's inability to respond to change is one of the major causes of corporate decline. It therefore appears reasonable to propose that corporations having fewer outside directors will be less able to perceive and respond to changes in the external environment and therefore be more likely to fail. As they are elected and acting on behalf of the shareholders, independent may reduce agency conflicts and provide more alignment with shareholders' interest. The Malaysian Securities Commission has set out the requirements that must be complied with by a listed company and its directors with regard to corporate governance. The composition of the board of directors must be at least 2 directors or 1/3 of the board of directors of a listed company, whichever is the higher, should be independent directors. Earlier studies provide evidence that independent directors are valued for their ability to provide professional advise and to signal that the company is performing well rather than for their ability to monitor (Mace, 1986, Herman, 1981). Hence, boards dominated by many outsiders may be superior to other boards in contributing to managerial effectiveness (Wagner et al., 1998) and reducing the probability of corporate failure. However, since inside managers may possess more firm-specific information, boards dominated by outside independent directors may well find themselves subservient to executive directors and thus ineffective as monitoring party (Adams and Ferriera, 2007, and Harris & Raviv, 2008). While some studies find that having more outside independent directors improves the performance of the firm (Schellenger et al. 1989; Daily & Dalton, 1992; Barnhart et al. 1994), other studies document no link between outside independent directors and improved corporate performance (Molz, 1988; Fosberg, 1989; Hermalin & Weisbach, 1991).

The literature relating to corporate governance and financial distress firms document that large shareholder ownership, state ownership, and board independence are negatively associated with the probability of financial distress (Wang & Deng, 2006; Steven, 2005; Iwasaki, 2013). Wang & Deng (2006) investigate the relationship between corporate governance characteristics and the risk of financial distress firms in China. Using a sample of ninety-six financially distressed companies and ninety-six healthy companies, they find that large shareholder ownership, state ownership, and the proportion of independent directors are negatively associated with the probability of distress. However, managerial ownership, board size, and CEO duality do not significantly affect the probability of default. Furthermore, corporate-governance attributes act differently on the status of financial distress between the state-controlled and non-state-controlled companies. Iwasaki (2013) studies the survival status of Russian industrial firms before and after the global financial crisis and the determinants of survival firm. Using a sample of 741 companies in Russia from year 2005 until 2009, the findings indicate that the board of directors and the audit committee, which can be classified as outsider independence directors significantly influence firm value. Meanwhile, the insider auditors and the influence of the general shareholders' meeting dedicated to the managerial ownership, have a negative relationship with firm value. Moreover, a study made by Sanjai and Brian (2008) indicates given a poor performance, the probability of disciplinary management turnover is positively correlated with stock ownership of board members, and board independence. Steven (2005) who studies on five areas within corporate boards of directors in U.S therefore concludes the outside independent directors does appear to strengthen corporate boards. The study also demonstrates that the presence of outside independent directors alone will not solve the deficiencies exposed in corporate boardrooms. This result is consistent with the results of Gloria & Gary (2011) where they found that internal corporate governance mechanisms such as more efficient boards and greater CEO stock based compensation are effective instruments for improving firm productivity.

Zhang & Tian (2009) studies the relationship between managerial ownership, motivation and corporate performance using a sample of firms from Shanghai and Shenzhen stock exchange and finds that the ratio of managerial shareholdings has a significant positive effect on ROE and ROA of core business, but it shows no relation with Tobin's Q. The result contradicts with Dahlia, Michael & Craig (2012) who examine the interaction between board composition, outside director ownership, and bankruptcy outcomes. Employing a sample of 152 bankruptcy filings from 1994 to 2004 in the U.S, they suggest that the relationship is positive when outside director ownership is low and it turn to negative form value if the proportion of outside director ownership is high. This findings is further supported by Lakshan & Wijeksoon (2012) who examine the influence of corporate governance characteristics towards the corporate performance by taking a listed company in Sri Lanka as a sample. Their study utilizes a sample of 70 failed firms and a sample of matched 70 non failed firms listed on Colombo stock market for covering the period from 2002 to 2008 financial years. Using logistic regression analysis, they finds that the proportion of outside directors has negative effects on the probability of corporate failure. Meanwhile, other variables such as board size and outside ownership appear to be unrelated to the failure status, and it also shows that CEO duality will be positively related to the corporate failure. Meanwhile, Shamsul (2006) examines the influence of board independence, CEO duality and ownership structure of the firm financial distressed status using a sample of distressed companies and a matched-pair sample of non-distressed companies listed on the Bursa Malaysia. The results indicate that board independence and CEO duality are not associated with financial distressed status. Also the management and non-executive directors' interests are associated negatively with financial distress. A negative relationship is also documented for outside blockholders. This evidence also supports the contention that ownership by non-executive directors and outside blockholders effectively increases their incentives to monitor management in ensuring their wealth in the firms is intact. This result is further supported by Hafiza and Susela (2008) relating to Malaysian firms.

Several research examine on the corporate performance during the financial crisis period when many firms are suffering from financial distress condition. David, Mingyi, & Pedro (2012) study 296 financial firms from 30 countries that were at the centre of the crisis to investigate the influence of corporate governance on financial firm's performance during the 2007-2008 financial crisis. Their results show that most of the firms are affected by the crisis but the firms with higher institutional ownership and more independent boards had worse stock returns than other firms during the crisis. They also suggest that firms with higher institutional ownership took more risk prior to the crisis, which resulted in larger shareholder losses during the crisis period. Furthermore, firms with more independent boards, raised more equity capital during the crisis, which led to a wealth transfer from existing shareholder to debt holders. The result is supported by Peng & Chongqing (2011) who examine the relationship between managerial ownership and firm's performance for 66 samples of China public State Owned Enterprise (SOEs) over the period from 1997 to 2009. Their results indicate that managerial ownership has a negative effect on firm performance. They also find that firms with high managerial ownership exhibit a worse performance decline while the firms which are under high-low percentage managerial ownership provides a positive effect on operating return on asset (OROA), net return on asset (NROA) and Tobin's Q. Sung (2003) study how ownership structure and conflict of interest among shareholders under poor corporate governance system may affect the firm performance before the crisis during 1993-1997. Using a sample of Korean firms subject to outside auditing, he finds that firms with low ownership concentration show low firm profitability, by controlling for industry characteristics. The study also suggests that controlling shareholders expropriated firm resources even when their ownership concentration was small. Also, firms with a high disparity between control rights and ownership rights indicate low profitability. Yue, Hai-Lin, and Jiang (2008) examines the relationship between ownership structure and firm performance using four indicators to represent the firm performance; ROE, EPS, ROA, and Tobin's Q, they analyses public companies in Chinese stock market which consists of 631 business groups. The results shows ownership concentration is significantly positive with financial performance. On the other hand, managerial ownership shows no effect on firm performance. Furthermore, Fathi and Jean-Pierre (2001) study relationships between corporate governance characteristics and financial distress status by using a sample of Canadian firms. The results indicate that outside directors' ownership and directorship affect the likelihood of financial distress. Steven, Jayaraman, Shankar, and Ally (2011) study the performance of Malaysian companies after suffering from a financial distress condition by using financial data of selected sample from Bursa Malaysia. The result indicates the financial ratio such as ROE, EBIT/TA and EPS are positively significant for stock prices.


In this study, a total sample of 53 companies which consists of 26 financial distressed companies under PN17 status are selected and compared with other 27 healthy firms based on top earnings performance in the year 2012 from Bursa Malaysia to examine how corporate governance in terms of ownership structure and board independence would affect corporate performance. The data are collected for three year period from 2010 to 2012 for each company which contribute to a total of 159 observations. The data are sourced from the annual reports extracted from Bursa Malaysia website and Thompson Reuters database. The ownership structure data are retrieved from the analysis of the shareholdings inside the annual reports for each company. The amount of shares held for each directors that are reported in the analysis of the shareholdings consist of direct interest and indirect interest. Direct interest represents ordinary shares held individually by each directors inside the company while the Indirect interest include the ordinary shares that are held through a third party such as through an affiliate company where the directors are also the shareholders or directors of the affiliate company. Relying only on the direct interest alone may not reflect a true picture of ownership structure when the individual directors have indirect shares held through another company. Thus, for robustness test of the results, this study compares both effect of directors having direct shares and indirect shareholdings.

The multivariate regression test is employed to the research model as follows:

Research Model : TBQ = ??0 + ??1 MO + ??2 IO + ??3 FO + ??4 PID + ??5NID + ??6 ROA + ??

TBQ = Tobin's Q*
MO = Managerial Ownership
IO = Institutional Ownership
FO = Family Ownership
PID = Proportion of Independent Directors
NID = No. of Independent Directors in the Board
ROA = Return on Asset (ROA)
?? = Error term

*Tobin's Q = BV of Total Assets + (MV of Common Equity ' BV of Common Equity)
BV of Total Assets

The following two main hyphoteses are tested in this study:

Hypothesis 1 : There is no significant difference between PN17 and non PN17 in terms of each corporate governance characteristics.

Hypothesis 2 : Corporate Governance characteristics in terms of managerial ownership, institutional ownership, family ownership and board independence significantly affect corporate performance of Tobin's Q.

The first hypothesis is examined using independent two-sample t-test while the second hypothesis is tested using pooled-OLS multivariate regression.


4.1 Descriptive Statistics


Table 1: Descriptive Statistics

Variables Mean Median Maximum Minimum Std. Dev.
TBQ 1.6123 1.03 13.04 0.38 1.9459
MO DIRECT 7.0015 0.75 55.7 0 11.6212
MO TOTAL 26.4480 23.43 84.95 0 25.161
FO DIRECT 3.8919 0 55.7 0 11.8740
FO TOTAL 16.3930 0 89.87 0 26.6641
IO 14.1713 9.73 77.06 1.36 13.9148
NID 3.6478 4 9 1 1.2834
PID 0.4917 0.5 0.8 0.2 0.12608
ROA 2.7838 2.1 221.94 -129.92 25.7320
Note: TBQ is the Firm Value measured by Tobin's Q; MO DIRECT is Managerial Ownership proportion of direct shareholdings by director divided by the total outstanding shares; MO TOTAL is Managerial Ownership proportion of total direct and indirect interest of directors shareholdings; FO DIRECT is Family Ownership proportion of direct interest in directors shareholdings; FO TOTAL is Family Ownership for total direct and indirect shareholdings by directors; IO is the proportion of Institutional Ownership from top 30 shareholders; NID as Number of Independent Directors in the Board of Directors; PID is Proportion of Independent Directors in the Board; and ROA is Return on Asset.

Table 1 shows the descriptive statistics for firm performance and the explanatory variables for total of 159 firm-year observations. Based on the table, it can be observed that the mean for dependent variable, Tobin Q is 1.61 with a maximum value of 13.04 and a minimum value of 0.38. The dispersion is given by the standard deviation of 1.95%. The average percentage owned by the large institutional shareholders (IO) is approximately 14.17% of the total sum of shares owned by the thirty largest shareholders. The lowest value of IO is 1.36% and it is at the highest of 77.06%. In terms of ownership mix, MO and FO total value have means of 26.45% and 16.39% respectively. Each ownership mix for total interest has a minimum level of 0 and to as high as 89.87%. Meanwhile, the mean for MO and FO direct value is 7.0% and 3.89% respectively. Percentage of MO direct shows higher mean compared to FO direct value. Also, the lowest value for both direct ownerships is 0 and to a maximum 55.7%. For board independence, we segregate into two variables which are the numbers of independent director (NOID) and the proportion of POID is the independent director (POID). The mean for POID is 0.49 which equivalent to 3.65 for NOID. Its standard deviation shows less dispersion at 0.12 as compared to NOID 1.28. The maximum for both dependent directors are 0.8 and 9 respectively, and the lowest is 0.2 and 1 respectively. Thus, eventhough on average most firms in the sample comply with the Bursa Malaysia requirements of minimum at least 2 directors or 1/3 of the board of directors to be independent directors, there are still some companies that do not comply to the minimum requirement of Board Independence.

4.2 Tests for Equality of Means

Table 2 : Test for Equality of Means

Variables PN17 Firms
N = 78 obs Non-PN17 Firms
N = 81 obs Mean Differences

Mean Mean
Firm Value (Tobin's Q) 1.0011 2.2008 4.0736***
Managerial Ownership Direct 9.6995 4.4034 -2.9414***
Family Ownership Direct 3.6508 4.1242 -0.2506
Institutional Ownership
11.7870 16.4674 2.1443**
Proportion of Independent Director 0.4829 0.5001 0.8600
No. Of Independent Directors 3.0513 4.2222 6.4470***
***Significant at 0.01 level. (2 tailed)
**Significant at 0.05 level. (2 tailed).

Table 2 presents the result of two sample t-tests for equality of means between the sample of PN17 companies and non-PN17 companies in Malaysia. Our findings indicate significant mean differences of corporate governance characteristics of financially distressed firms and healthy firms. On average, the results shows that PN17 companies has lower average of Firm Value, lower Family Ownership, lower Board Independence, but higher Managerial Ownership as compared to the healthy non-PN17 companies. The means for percentage of managerial direct ownership in PN17 sample is higher than mean for the non-PN17 with 9.70% and 4.40% respectively. The value of t-statistics for means differences is significant at 1 % level, thus the null hypothesis of HI is rejected. Meanwhile, the mean value of Family Ownership in PN17 sample is slightly lower compared to the mean value for the non PN17 sample which is 3.65% and 4.12% respectively. However, the t-statistics for means differences value is not significant, thus the null hypothesis is accepted. Similarly, the proportion of independent directors with means value for PN17 sample is slightly lower compared to non PN17 sample, each represents 0.48% and 0.50% respectively. Finally, the means figure for the Institutional Ownership in PN17 sample is lower than non PN17 sample which is 11.79% and 16.47% respectively. The t-statistics value for means differences shows a significant value at 5% level. Hence, we conclude that PN17 firms have significantly higher Managerial Ownership compared to the healthy firms (non-PN17) but significantly lower Institutional Ownership and less independent directors inside their board of directors. Less Institutional Ownership in the financially distressed firms (PN17) is broadly justified since non-performing firms attract less investment consideration from large financial institutions and mutual funds.


4.3 Regression Analysis

4.3.1 Direct Ownership Structure and Corporate Performance

Table 3 : Regression Results based on Direct Interest of Directors Shareholdings

Variables Sub-Samples
Dependent Variable: Full Sample
N = 159 obs PN17 Firms
N = 78 obs Non-PN17 Firms
N = 81 obs
Tobin Q t-stats t-stats t-stats t-stats t-stats t-stats

Managerial Ownership Direct -0.0256** -0.0214* -0.0056 -0.0036 -0.0558** -0.054**
Family Ownership Direct -0.0037 -0.0065 0.008** 0.0056 0.0134 0.0155
Institutional Ownership Direct -0.0113 -0.0131 0.0104** 0.0107** -0.0081 -0.009

No. of Independent Directors -0.1408 -0.0734** -0.2132
Proportion Of Independent Directors -0.2045 -0.1743 -1.8873
ROA 0.0486*** 0.0462*** -.0052*** -0.006*** 0.0771*** 0.0773***

R-Squared 0.3957 0.389 0.2359 0.194 0.5622 0.5599
F-Statistic 20.0374*** 19.4842*** 4.4452*** 3.4646*** 19.263*** 19.0794***
***Significant at 0.01 level; **Significant at 0.05 level; *Significant at 0.10 level

Table 3 shows the regression results based on direct interest of directors shareholdings. The model does not suffer from any multicollinearity problems since the variables of No. of Independent Directors and Proportion Of Independent Directors which possess high collinearity with each other are run separately in the model. Managerial ownership in direct shareholdings significantly influences the corporate performance for full samples which comprise of both PN17 and non-PN17 samples at the 5 % level of significance. However, for PN17 samples, there is no significant effect between managerial ownership in direct shareholdings with Tobin Q. This negative relationship between the managerial ownership and the firm performance is consistent with findings of Peng & Chongqing (2011) and David, Mingyi, & Pedro (2012) which corroborate that firms with high level of managerial ownership exhibit a worse performance decline. This suggest that though by increasing shares held by the directors may lower the agency problems, it does not however help to improve corporate performance. Family Ownership have no significant impact on the corporate performance except for PN17 firms. The Institutional Ownership in PN17 sample shows a significant positive relationship with Tobin's Q at 5% significant level. Earlier we have observed that PN17 firms have significantly lower Institutional Ownership. The results indicate that with an involvement from institutional ownership in top 30 largest shareholdings, the financial distress firms (PN17) could survive and improve their performance. Moreover, full sample firms show a positive relationship with ROA at 1% significance level except for PN17 sample. The findings is supported by Steven et al. (2011) that company performance, reorganization, and management change affect stock prices positively, whereas, the performance of second distress condition companies affects stock price performance negatively. The level of board independence does not significantly affect the corporate performance. One of the intriguing findings from the above results is that most of the corporate governance variables have negative impact on firm value measured by the Tobin's Q. Thus, this suggest increasing ownership concentration and board independence may result in lower corporate performance.


4.3.2 Total Ownership Structure and Corporate Performance

Table 4 : Regression Results based on Total Direct and Indirect Interest of Directors Shareholdings

Variables Samples
Dependent Variable: Full Sample
N = 159 obs PN17 Only
N = 78 obs NonPN17 Only
N = 81 obs
Tobin Q t-stats t-stats t-stats t-stats t-stats t-stats

Independent Variables:
Managerial Ownership Total -0.0188*** -0.01685*** -0.0012 -0.0008 -0.0333*** -0.0335***
Family Ownership Total -0.0052 -0.0056 0.0043*** 0.0043*** -0.0119 -0.0117
Institutional Ownership Total -0.0169* -0.0188** 0.0111* 0.0117** -0.0237** -0.0255**

No. of Independent Director -0.1868* -0.036 -0.1624
Prop. Of Independent Directors -0.6193 0.0451 -0.2177
ROA 0.0479*** 0.0452*** -0.0056*** -.0061*** 0.0726*** 0.0714***

R-Squared 0.4383 0.4275 0.2839 0.2715 0.6265 0.6213
F-Statistics 23.874*** 22.8501*** 5.7101*** 5.3673*** 25.1577*** 24.6049***
***Significant at 0.01 level; **Significant at 0.05 level; *Significant at 0.10 level

For robustness test of the results, we take into account the indirect ownership held by directors inside the firms. The signs of each coefficients remains negative for most of the corporate governance variables. In contrast with previous results, table 4 above shows a negative relationship between managerial ownership and corporate performance in total shareholdings at 1% significant level for full data sample and non-PN17 sample. Thus, this suggests that for non-PN17 companies, they need to control the present of agency conflict inside the firm since by reducing the managerial ownership possibly will help the firms to cater the problems of agency conflicts from affecting the firm's performance. The result is supported by Yue Qi et al. (2008) where they find that ownership concentration show a significant relationship with a firm financial performance. Meanwhile, the PN17 sample shows a positive relationship with family ownership in total shareholdings at 1% significant level. This could be one of the strongest supports for distress financially company to survive in the market. Most of the sample of PN17 companies, among the director there will be a kindred relationship. The result is consistent with the notion that an active family control is associated with higher firm valuations, but the premium is mainly at the expense of high shareholder protection. The benefits of family control occur in minority held firms, thus family control lowers the agency problem between owners and managers, but gives rise to conflicts between the family and minority shareholders when shareholder protection is low and control is high. Number of independent directors appears to be a significant factor influencing the corporate performance but only for full sample data. This is supported by previous study (Peng, 2004), that outside directors do make a difference in firm performance. The number of independent directors plays an important role in making decisions because it will diminish the conflict of interest with their independence hindsights to help the firm gaining better performance.



This paper examines the effect of ownership structure and board directors independence on corporate performance of financial distress (PN17) companies listed on Bursa Malaysia. Ownership structure in terms of managerial ownership, family ownership and the institutional ownership and board independence are used in this study to investigate how corporate governance affect firm performance especially for financial distress company. A total sample of 27 top earnings per share (EPS) companies together with other 26 PN17 companies listed on Bursa Malaysia for a period of three years from 2010 to 2012 are used in the study. We conclude that PN17 firms have significantly higher Managerial Ownership compared to the healthy firms (non-PN17) but significantly lower Institutional Ownership and less independent directors inside their board of directors. Although all firms were affected by the concentration of the ownership, the empirical results of this study indicate that a financial distress firm will have a significant positive relationship between the institutional ownership and family ownership with Tobin's Q but there is a negative relationship between the numbers of independent directors with Tobin's Q. Boards of financial distress companies have significantly fewer outside members than the outperformed companies. The prevailing belief is that internal directors are lack of objective and less independent from management. This lack of independence may be critical for the board of directors, which is designed as a means to protect shareholders from personal managerial self-interests. This is consistent with the findings of Hambrick and D'Aveni (1992) that failed companies had significantly fewer outside directors than their matched pairs of surviving companies. The study further finds that the managerial ownership for total shareholdings was significantly and negatively correlated with Tobin's Q. Hence, they could alleviate the conflict of interests present on the firm if the managerial ownership proportion in their shareholding is lower. Moreover, the study shows a significant positive relationship between family ownership and Tobin Q since family interest was for the enhancement of company profitabily as compared to increasing the managerial ownership. In contrast with PN17, the company has significantly positive impact of the number of independent directors with the Tobin Q. Finally, there is much effort needed to change the environment in which corporate boards operate in order to better protect shareholder interest and to prevent corporate failure.

This study contributes to bridge the gap in the literature relating to corporate governance of financial distressed firms in the Malaysian context. Future research can be expanded by analysing fixed and random effect using panel data and tackling endogenity issues among the variables. Including other types of ownership mixes such as government ownership and foreign ownership in other neighbouring countries such as Thailand and Singapore should also be considered for future research. In addition, further research could study the performance of the financial distress company and the companies that are based the on technologies such as those companies under ACE market in which these companies are expected to be involved in high innovation activities and by increasing the validity of the findings through larger sample size.



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