The Impact of Ownership Structure and Other Corporate Governance Mechanisms on Firm Performance, Accounting Discretions and Investor Perceptions: Evidence from Thailand before and after the Corporate Governance Reforms

Abstract

A weak corporate governance system and high ownership concentration with dominant family shareholders, in particular, were claimed by the World Bank to be the main causes of the 1997 financial crisis in Thailand. Consequently, the Thai government embarked on a high-profile program of corporate governance reforms in order to regain investor confidence in the capital market. This thesis aims to provide systematic, empirical evidence on whether the ownership structure was really the key reason for the crisis and if the reforms have worked as well as they were intended to. Focused on the period from 1994 to 2007, the first study within this thesis examines the impact of ownership structure on accounting and market performance. The second study examines the impact of ownership structure and other corporate governance mechanisms (such as the board of directors, CEO characteristics and external auditors) on managers’ opportunistic accounting discretion, as measured by unsigned discretionary accruals and revenues. The third study examines how investors perceive the impact of these governance structures. All three studies take into account whether the reforms helped to improve corporate governance.

The key findings of the first and second studies support the notion of an alignment effect, suggesting that high levels of ownership help to motivate most types of large shareholders to participate in the monitoring of firms. They suggest that high ownership concentration, especially by families, enhances firm performance and limits the use of managers’ opportunistic accounting discretion. Other types of large shareholders appear to have only played a significant role before the reforms, suggesting that the reforms might have reduced the motivation or ability of blockholders to participate in monitoring. There is evidence that boards of directors failed to enhance firm performance and to limit the use of accounting discretion before and after the reforms. The third study suggests that investors have an extremely negative perception of government and foreign company investors and, in turn, underestimate the performance of firms with high ownership by these shareholders. Investors also have negative perceptions of the size and independence of boards before the reforms. It appears that the reforms helped to mitigate their negative perception of boards, even though board efficiency did not significantly improve following the reforms.

The three sets of results contribute to our understanding of the particularities of corporate governance systems in emerging capital markets such as Thailand, which contradicts the view of the World Bank. Thailand’s corporate governance reforms have been partly successful in remedying investors’ loss of confidence in some key corporate governance structures. However, further understanding of key governance structures by policy makers and more efficient monitoring processes by regulators are needed in order to ensure that these mechanisms are applicable and function as efficiently as they are intended to in practice.