Purpose of Study

1. CORPORATE GOVERNANCE IN JAMAICA:A RISK MANAGEMENT APPROACHDr. Twila Mae LoganDr. Doreen GoodenFlorida International University

2. Purpose of Study • To examine: • The impact of board composition and ownership structure on the riskiness and value of publicly traded non-financial firms in Jamaica

3. Background • The late 1990’s financial crisis in Jamaica – increased the awareness for appropriate governance mechanism resulting in - Tightening of banking laws and regulations - Company Act Legislation-

4. Background • Capital Market poorly developed • Emergence of junior stock market • Trading is relatively thin • Corporate Bond market is virtually non-existent • Jamaica Stock Exchange (JSE) established in 1968 - only 18 non-financial firms trading on the main index - 13 non-financial firms on the junior market

5. Background (Cont’d) • Thus – need for research to determine best practices in corporate governance: - to enhance investors confidence - further development of capital market. • Few studies done on Jamaica publicly traded firms.

6. LITERATURE REVIEW – Board Composition and Risk DAMODARAN (2008) – Risk taking behavior is related to individual traits and characteristics - women in senior positions less risk averse than male counterparts- more experienced persons are more risk averse than naïve persons.

7. LITERATURE REVIEW – Board Composition and Risk • Rachdi and Ameur (2011) – 11 Tunisian Banks – smaller boards associated with better performance and more risk taking. • Independent directors (outside, non-executive) had lower performance and no significant effect on risk taking.

8. LITERATURE REVIEW – Board Composition and Risk • Kyereboah-Coleman & Biekpe (2007) – firm risk level decreased with outside directors - firm risk increased with increasing board size. Brick and Chidambaran (2008)negative relationship between firm risk and the level of board monitoring

9. LITERATURE REVIEW – Ownershipand Risk • Jensen & Meckling (1976) Jensen & Murphy (1990) - shareholders by corporate insiders result in greater risk taking. • Gadhoum and Ayadi (2003) positive relationship between firm risk taking and insider holdings.firm’s risk is negatively related to ownership structure

10. LITERATURE REVIEW – Ownershipand Risk • Wright et.al. (1996)Increasing insider’s stake may represent a significant portion of person wealth – hence less incentive for reducing risk. • Growth opportunities can influence risk taking.

11. LITERATURE REVIEW – Ownershipand Value • Shliefer & Visny (1986) • McConnell & Searves (1990) both foundOwnership structure affects the value of firms • Turki & Sedrine (2012) found that- increased ownership concentration is associated with lower firm performance- increased managerial ownership is consistent with better firm performance.

12. Methods • Uni-variate descriptive statistics • Multiple regression with small samples • Robust regression • Reduces the influence of outliers

13. Data • Publicly traded non-financial firms • 17 main exchange • 8 junior exchange • Dependent variables : Weekly returns and standard deviation from October 2010 – October 2012 • Independent variables: board and ownership composition

14. Results – Board Composition • Board Size – Average of 8.6 directors (median 8), • On average 17% were female directors (median 17%) • Average of 28% of board members were insiders (median 29%)

15. Ownership Composition • Top ten shareholders held on average 79% (median of 87%) • Institutional investors held on average 12% (median 7%) • Insiders held on average almost 30% of the shareholdings. • The average board shareholding was 36% with a median of 20%. • The average managerial shareholding was 19% while the median was 1.5%,

16. Riskiness/Volatility of Returns • Models R2 : 26% and 30% • In addition to weekly returns, the riskiness of the firm was increasing in insider percentage, and the largest ten shareholders, but decreasing in board shareholdings. • Not significant • Percentage of female directors • listed on the junior market

17. Discussion • Insiders are in a better to position to engage in riskier projects. [Jensen & Meckling (1976) and Jensen & Murphy (1990) Gadhoum and Ayadi (2003)] • Increases in board shareholdings result in lower risk. This is consistent with directors being risk averse - loss of personal diversification [Wright et. al., 1996].

18. Returns/Value • Model R2: 40% and 42% • Increases in managerial share ownership resulted in larger weekly returns (value). • Positive but insignificant coefficients on • Top ten block share holdings • institutional shareholdings was positive but not significant. • Number of insiders

19. Discussion • Increases in managerial share ownership result in larger weekly returns. [see Morck et.al., (1988), Jensen and Meckling, (1976]. • The coefficient on institutional shareholdings was positive but not significant [Ming &Gee, (2008)]

20. Discussion (cont’d) • More insiders did not significantly increase the weekly returns even though more insiders are associated with increased risk.

21. Implications/Conclusions • Managerial Ownership and Value • Investing strategy • Policy to encourage greater equity stakes.

22. Implications and Conclusions • Inside Directors and value and risk • Increased riskiness is only beneficial if this results in greater returns • Policy on proportion of inside directors for publicly traded firms.