Corporate Governance and the Stock Market in Trinidad & Tobago

1. Corporate Governance and the Stock Market in Trinidad & Tobago Varuna L. Ramlal PhD. Candidate SALISES, St. Augustine

2. Objectives • Construct a Corporate Governance (CG) Index for firms listed on the Trinidad & Tobago Stock Exchange (TTSE) • Examine relationship between CG and performance of TTSE firms • Policy implications & Conclusions

3. CG defined • Many definitions… • Sir Adrian Cadbury (1992): “Corporate Governance is the system by which companies are directed and controlled.” • Cornelius (2005): “corporate governance can be defined as the stewardship responsibility of corporate directors to provide oversight for the goals and strategies of a company and foster their implementation.”

4. CG defined cont’d • OECD (2010): corporate governance refers to “procedures and processes according to which an organisation is directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among the different participants in the organisation – such as the board, managers, shareholders and other stakeholders – and lays down the rules and procedures for decision-making.”

5. CG defined cont’d • Fahy et al (2006): “Put in its simplest form, corporate governance is the systems and processes put in place to direct and control an organisation in order to increase performance and achieve sustainable shareholder value.” • Kaen (2003): “Corporate Governance is about who controls corporations and why”

6. Assessment of CG • CG is relevant in the marketplace but one of the major concerns of researchers - the measurement of CG • The literature has proposed the use of CG Indices (Ananchotikul 2008, Black et al 2003, Cornelius 2005, Garay and Gonzalez 2008, Klapper and Love 2002, Leal and Carvalhal-da-Silva 2005, Mallin 2006.) • However, most of these indices have two shortcomings – (i) they have been produced for developed countries only and (ii) they rely on questionnaires issued to the firm being assessed.

7. Assessment of CG cont’d • Researchers have found that when firms are asked to respond to questionnaires they put in what information they think is the ‘right answer’ or what they intend to do instead of what actually happens in their firm: self-report bias. • Or they may not respond at all: self-selection bias. • For this reason there has been some movement away from reliance on questionnaires administered to firms to use questionnaires which use public information only.

8. Index creation • Quantitative questionnaire used • Covers major aspects of CG • Board Responsibility • Board Structure • Shareholder Rights • Transparency and Disclosure • Audit Committee • Types of firms

9. Index creation cont’d • Questions based on the CBTT’s CG Guideline and generally accepted CG procedures. • Yes – 1, No – 0 • Missing values not counted except for Transparency section where the absence of a value is equivalent to a lack of transparency • Final index value weighted to be between 0 and 1 for ease of firm comparison

10. Index Creation cont’d • Total – 143 questions • Board Responsibility – 38 • Board Structure – 25 • Shareholder Rights – 10 • Transparency & Disclosure – 53 • Audit Committee – 17 • Sub-indices as well as total CG index calculated

11. Financial Ratios - Performance • Many calculated… • Earnings per share • Price/Earnings • Dividend per share • Dividend yield • Dividend cover • ROA • ROE • Stock return

12. Data • Firms on first and second tier of the TTSE used • CGITT used as the dependent variable • Ratios – main explanatory variables of interest • Control variables included – sector dummies, age, size

13. Method of analysis • Dependent variable lies between 0 and 1, inclusive. • Fractional logit analysis used due to this (Wooldridge 2001) • CGITT = β1AGE + β2SIZE + β3PERF • Maximum CG value – 0.78 • Minimum CG value – 0.25

14. Results • Marginal effects calculated to interpret the coefficients since fractional logit is non-linear so no direct quantitative interpretation • Likelihood Ratio test and Wald test used to determine usefulness of performance variables in predicting CG in T&T

15. Results cont’d • Significant performance indicators

16. Results cont’d • Negative marginal effects unexpected • Further investigation of correlation matrix shows high correlations between ROE & ROA and between EPS & DPS. • ROA & ROE – 0.775 • EPS & DPS – 0.644

17. Results cont’d • Sub-indices were also used as dependent variables • For all the models SIZE and ROE were significant. • In all the models ROE had a positive marginal effect • In some models ROA was used instead, also positive effect • LR and Wald tests show models with performance indicators are better than without

18. Results cont’d • Sector effects

19. Results cont’d • Financial performance positively affects CG • Sector classifications significant • Some sectors more prone to higher governance

20. Policy implications & Conclusions • Financial performance has a positive effect on CG • Encourage good performance • Certain sectors have a tendency towards good governance • Formal CG regulation needed – may need sector-specific regulation as well

21. The End