“Political Connection and Ownership Concentration: Evidence from Thailand”

1. “Political Connection and Ownership Concentration: Evidence from Thailand”

2. Introduction Why Politics? • Political turmoil in Thailand during 2005 • Early arguments about the problem • Conflict of interest • Freedom of media and press • Nominee and stock price manipulation Lead to … • The study about stocks that have strong linked with political figures • Also how concentration of ownership determines the firm performance

3. Introduction Historical event for TRT • Won the election with the majority seats during the beginning of 2001 • Regard as the most stable political situation after the financial crisis • Positive sentiment drove the index to over 700 in just one year

4. Introduction • The topic on the political connection has been around many years. • Empirical studies are conducted around the world. Fisman (2001) focuses in Indonesia, Johnson and Mitton (2003) focus in Malaysia. Faccio (2006) studies 47 countries including Thailand. • Imai (2006) concentrates in Thailand, investigating firm performance between connected and non-connected firms. Wiwattanakantang et al. (2006) conduct event study for connected firms.

5. Introduction • Another interesting topic concerning level of firm performance is how firms in developing countries structure their shareholding. • Some evidence from empirical studies suggest strong link between ownership concentration and countries in East Asia, Claessens et al. (2000). • Mitton (2002) also focuses in East Asian countries, where higher performance relates to the presence of concentrated shareholder.

6. Introduction • Thailand provides an interesting setting for the study. • The period of Thai Rak Thai party attracts many business leaders to take the opportunity to become involved in politics. • This paper is similar and different from previous literatures in a way describes in the next slide.

7. Introduction Similarities 1. Measuring firm performance for connected firms by using return on assets, return on equity and market share. 2. Comparing the leverage level between connected and non-connected. Differences 1. Including market measure for firm performance, Tobin’s Q. 2. Introducing risk measures for connected firms. 3. Expanding the scope to include ownership concentration effect.

8. Research Question & Objectives Research Question • Whether the political connection and concentration of ownership have any impacts on firm performance, leverage, market power and firm risk Objectives To study the impact of political connection and concentration of ownership on 1. Performance 2. Leverage 3. Market power 4. Risk

9. Scope of Study Definition of connections • Key government officers • Prime Minister and Cabinet Ministers Examples, Thaksin Shinawatra, Pracha Maleenont, Adisai Potharamik 2 Criteria for firm to be connected • At least 10% shareholder votes (regard as a major shareholder) OR • At least one of the Board of Directors serves as ministers Examples, CEO, President, Director, Vice-President

10. Some Examples • Tracing for connection – only family name of husband and wife of Cabinet Ministers are included, further change down the family line will be excluded. For example, Shinawatra family Yaowapa Somchai Phayap Phoruthai Yinglak Anusorn Podjaman Thaksin “Damaphong” “Wongsawat” “Jantharaphan” “Amonchat” Further intermarried of these families will not be included.

11. Some Examples Connection through same family name

12. Some Examples Connection through in-laws family name

13. Scope of Study • Firms listed in Stock Exchange of Thailand • Period of study between year 2001 to 2004 • Firm performance measures by return on assets, return on equity, Tobin’s Q and market power (market share) • Firm leverage • Firm risk measures by beta, standard deviation and firm’s specific risk (unsystematic risk) • Ownership concentration uses the number of accumulation of at least 5% shareholding for every shareholder in the firm

14. Limitations • Any indirect measure of connection will be excluded. For example, connection through friendship. • Foreign nominee firms • By including only the connection between Cabinet Ministers, the result can potentially underestimate the value of connection with other government officials or Members of Parliament. • Firm must have a complete information both accounting and stock price during the study period.

15. Literature Review Evolution of the topic • Pioneering paper by Anna Krueger • Dated back to 1974 “The Political Economy of the Rent Seeking Society” More recent papers on politically connected firms • Roberts, 1990 • Agrawal and Knoeber, 2001 • Fisman, 2001 • Johnson and Mitton, 2003 • Dinc, 2005 • Donald, Zhang and Derashid, 2006 • Faccio, 2006 • Cheung, Jing, Raghavendra Rau and Stouraitis, 2005 • Imai 2006 • Bunkanwanicha and Wiwattanakantang 2006

16. Literature Review The global view on ownership structure and concentration • Claessens, Djankov and Lang, 2000 • Morck, et al., 2000 • Mitton, 2002 • Gursoy and Aydogan, 1999 The ownership structure and corporate control in Thailand • Wiwattanakatang, 2001 • Wiwattanakatang, Kali and Charumilind, 2002 • Dhnadirek and Tang, 2003

17. Literature Review Political connection, benefit or expropriation to firm • Y. Wiwattanakantang, P. Bunkanwanicha (2006) • The difference in firm’s market share before and after when tycoon took position in the government increases substantially. • M. Imai (2006) • Higher in return on assets (ROA) for connected firms, the result is greater if firm is connected with Cabinet Ministers. • Cabinet Ministers exert stronger value of connection than among political officials.

18. Literature Review Ownership concentration and firm performance and risk Mitton (2002)found higher ownership concentrated can lower the agency cost • Positive relationship between shareholding and performance • Gursoy and Aydogan (1999) illustrate how ownership concentration affects level of firm risk differently. • Higher concentrated ownership results in higher total risk or standard deviation. • Moreover the presence of different type of shareholders show different level of risk. Government owned firm exhibits higher level of market risk and standard deviation due to low level of corporate governance and management skills.

19. Methodology Data Sources • For public companies sources Example, www.set.or.th, www.setsmart.com, University subscriptions to financial sources, Datastream, various newspaper issues • For private companies sources Example, BOL website, various newspaper issues • For background and political information sources Example, Thai Business Groups published by Brooker group, www.mof.go.th, www.thaigov.go.th, www.parliament.go.th or wikipedia website

20. Methodology Sample description • The sample in this study uses firms listed in Stock Exchange of Thailand. • The study period is from year 2001 to 2004 • Each firm needs to have a complete information in order to arrange data into a balanced panel structure.

21. Methodology Hypothesis Hypothesis 1: Connected firms have higher ROA than non-connected firms Hypothesis 2: Connected firms have higher ROE than non-connected firms Hypothesis 3: Connected firms have higher Tobin’s Q than non-connected firms Hypothesis 4: Connected firms have higher leverage than non-connected firm

22. Methodology Hypothesis Hypothesis 5: Connected firms have higher market share than non-connected firm Hypothesis 6-8: Connected firms have lower risk than non-connected firm

23. Methodology Performance measures Return on Asset (ROA) Earning before interest and tax (EBIT)/Total assets Return on Equity (ROE) Net profit/Total equity Tobin’s Q (Q) (Market value of equity + book value of liabilities)/book value of assets Leverage measures Leverage (LEV) Long-term debts/(book value of liabilities + market value of equity) Market power measures Market Power (MKTP) Firm sales/Total market sales

24. Methodology Risk measures Beta (BETA) The ratio of covariance between weekly stock return and market premium divide by the variance of market premium Standard deviation (STDEV) The standard deviation of weekly stock return Unsystematic risk (UNSYS) The residual variance

25. Methodology Explanatory Variables Political connection (PCON) Connection through a major shareholder (accumulation of at least 10 percent shareholding) or through firm’s Board of Directors Concentration of ownership (CONC) Accumulation of each shareholder who owns more than 5 percent in the firm Interaction term (POLCON) Multiply dummy variable PCON with CONC

26. Methodology Control Variables Log of firm’s total assets is a proxy for firm size.Firm size is widely used to control for the firm’s market power and efficiency. This control variable should reflect a positive relationship with firm performance. Size (SIZE) Number of years since incorporation. Well established firms may have superior performance as a result of experience and reputation. This control variable should reflect a positive relationship with firm performance Age (AGE) Sales to asset (STA) The ratio of firm’s sales to total assets. This variable is a proxy for firm’s efficiency. It should be positively related with firm performance.

27. Methodology Control Variables As a dummy variable for firm with government owned more than 10 percent. It should be negatively related to firm profitability Government (GOV) State owned enterprise (SOE) This is a dummy variable for firm with state enterprise owned more than 10 percent. This should be negatively related with firm performance. Foreign (FOREIGN) This is a dummy variable for firm with foreign owned more than 10 percent. This should be positively related with performance.

28. Methodology Control Variables A dummy variable to remove variation from industry effects Industry (IND) Regression method • The regression in this study uses panel least square procedure with fixed period effect.

29. Classification of connection by type This table presents the sample firms across industries and classified firms with connection between shareholders and management

30. Explanation • The sample consists of 278 firms. • The politically connected firms are present in 12 industries. • Most concentrated in communication sector. • The sample covers approximately 80 percent of total market capitalization. • The connected firms represent over 30 percent of total sample capitalization. • 14 firms connected through management, 2 firms connected through shareholders and 7 firms are connected through both management and shareholders.

31. Descriptive Statistics

32. Explanation • On average connected firms show higher level of total assets, total liabilities and market cap. • Non-connected firms are more concentrated in ownership with 51.68 percent when compare with sample average of 51.44 percent. • Connected firms operating years are longer than sample average and bigger in size. • Connected firms show lowest ROA. But ROE, Tobin’s Q and market power are highest. On average connected firms carry higher leverage than non-connected firms. • On average, beta is higher for connected firms when compare with sample average. While SD and specific risk show no difference between the groups.

33. Regression results with statistically significant level

34. Regression results with statistically significant level

35. Regression results with statistically significant level

36. Explanation • ROE • The coefficient on political connection is statistically significant at 95 percent confident level with positive relationship. This is in line with the hypothesis where connection provides a rewarding benefit to the shareholders and clearly this is an incentive to become connected. • The ownership concentration is not statistically significant but has a positive relationship with ROE. • The interaction term is positively related but not statistically significant, meaning firm with concentrated ownership and politically connected has shown no prove on improving ROE.

37. Explanation • Tobin’s Q • The result shows positive relationship between connection and Tobin’s Q at 95 percent level. • The ownership concentration is also positive and statistically significant at 99 percent level. This is in line with Wiwattanakantang (2001) where she illustrates firm with large shareholding can become more competitive and resulting in low agency problem. • The interaction term is positively related and statistically significant. This result further proves firm with high concentration and politically connected increases firm performance. • Foreign controlled firm shows a positive relationship with Tobin’s Q at 90 percent level. This indicates how foreign partnership equips firm with advanced technology and highly skilled management.

38. Explanation • Market Power • The coefficient on political connection shows a positive relationship with statistically significant level. This is in line with the hypothesis where connected firms enjoy higher market share through government policies or state licensing. • Faccio (2006) shows a similar result where connected firms maintain higher market share by receiving privileges from the government. • The positive coefficient on ownership concentration with significant level determines how this variable becomes one of the success factor in order to increase level of market share. Level of agency problem seems to be diminished as ownership becomes more concentrated.

39. Explanation • Leverage • The result shows the coefficient is negatively related for ownership concentration at 95 percent level, indicating lower level of leverage as firm becomes more concentrated. • Beta • The result shows political connection to be statistically insignificant. • The ownership concentration indicates a negative relationship with market risk at a statistically significant level. This is in line with Gursoy et al. (1999).

40. Regression results with no statistically significant level

41. Regression results with no statistically significant level

42. Explanation • ROA • From the table, the result shows relationship to be statistically insignificant for political connection. • Ownership concentration is also showing sign of positive relationship but insignificant. • The connection itself is providing value, but due to the amount of firm resources are being devoted to get connection which offsetting the benefit firm receives. • The interaction term, POLCON, shows positive relationship but statistically insignificant.

43. Explanation • Standard Deviation • Both political connection and ownership concentration variables show insignificant level with standard deviation (SD). This is contradicting to the hypothesis, where I expect connected firms to show lower SD compare with non-connected firms. The result proves level of total risk has no impact on connection and ownership concentration. • Unsystematic risk • Political connection has shown an insignificant level with unsystematic risk or firm’s specific risk. This is different from what I expect connected firm to show lower unsystematic risk than non-connected firm. The result proves political connection has no impact on level of unsystematic risk.

44. Conclusion • The consequences of being politically connected through either management or shareholders has been explored and these eventually result in higher market shares, better performance in term of return on equity and Tobin’s Q. Firms with connection and high ownership concentration result in higher market share and Tobin’s Q. • Lower agency problem can be seen in highly concentrated firm. • Hence, political connection is a favorable factor for firm to increase its competitive level and stay dominant in the industry. • However, political connection proves to have no impact on level of firm risk. Only ownership concentration that associates with beta.

45. Thank You