Government ownership and the performance of government-linked companies: The case of Singapore

J. of Multi. Fin. Manag. 16 (2006) 64–88

Government ownership and the performance of government-linked companies: The case of Singapore James S. Ang a,∗ , David K. Ding b,1 a b

College of Business, Florida State University, Tallahassee, FL 32306-1110, USA Nanyang Business School, Nanyang Technological University, Singapore 639798 Received 8 November 2004; accepted 20 April 2005 Available online 1 August 2005

Abstract In an emerging economy, the alternative to government control is often no governance. We investigate the governance structure of government-linked companies (GLCs) in Singapore under the ownership/control structure of Temasek Holdings, the government holding entity, which typically owns substantial cash flow rights but disproportional control rights and exercises no operational control. We compare the financial and market performance of GLCs with non-GLCs, where each has a different set of governance structure, the key difference being government ownership. We show that Singaporean GLCs have higher valuations and better corporate governance than a control group of non-GLCs. The results hold even when we control for firm specific characteristics such as profitability, leverage, firm size, and foreign ownership. © 2005 Published by Elsevier B.V. JEL classification: G32; G34; O53 Keywords: Corporate governance; Government-linked corporations; Government ownership

∗ 1

Corresponding author. Tel.: +1 850 644 8208; fax: +1 850 644 4225. E-mail addresses: [email protected] (J.S. Ang), [email protected] (D.K. Ding). Tel.: +65 6790 4927; fax: +65 6791 3697.

1042-444X/$ – see front matter © 2005 Published by Elsevier B.V. doi:10.1016/j.mulfin.2005.04.010

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1. Introduction This paper studies the effect of an alternative ownership/control structure of corporate governance on firm value. In particular, we investigate the governance structure of government-linked companies (GLCs) in Singapore. These GLCs, unlike many state-owned enterprises (SOEs) in other countries, have been touted in the media as well-governed.2 It is conceivable that other countries, which follow a similar model of governance would reap similar benefits. The GLCs of interest are publicly traded companies in which the government owns a partial but substantial cash flow right, and yet a disproportional control right. The GLCs account for about 24% of the stock market’s total capitalization of US$ 287 billion and control over a tenth of the country’s economic output.3 GLCs are also the largest single group of employers in Singapore after the small and medium enterprises (SME) sector.4,5 An important objective of the paper is to compare the financial and market performance of GLCs with non-GLCs, where each has a different set of governance structure, the key difference being government ownership. In the search for an ownership structure suitable for an economy in transition, from an underdeveloped to a developed one, a starting point is to examine the positive and negative attributes of the two dominant ownership/control structures, and ask if a structure incorporating some of their desirable attributes could evolve. Government owned and run enterprises, in principle, represent the interest of a broad base of individuals, not just the controlling shareholders. If ownership/control rights of the government evolve into a strong monitoring role without operational or managerial responsibilities, then it may fill the role of an external monitor when strong external institutional investors are not yet available in the transition period. During this period, broad based savings and a system of private pension funding have to be in place in order to allow the growth of professional investment companies. Private companies, if their incentive to expropriate minority shareholders could be curbed, have the advantage of being able to hire from the external labor market and offer incentive aligned compensation contracts. Thus, a successful mutation of organizational forms for the transition period requires those that can incorporate the desirable features of existing organizational forms, i.e., make use of available mechanisms during the period. One might argue that government involvement protects GLCs by keeping competition in check through the government’s strong market power. However, such an argument can be rejected if the companies operate in contestable international markets, which is largely the case among many Singaporean GLCs that are structured with elements of the hybrid ownership/control structures described above. In this paper, we evaluate GLCs as a viable ownership/control structure where both the positives and negatives are discussed. On the plus side, GLCs are preferred to purely gov2

Lambe, Patrick, “Innovation—The Public Service Way,” Business Times, February 19, 2002, p. 20. Computed from figures provided by the Singapore Exchange as at March 31, 2003. 4 Among the GLCs are some internationally known names, such as Singapore Airlines (SIA), Neptune Orient Lines, and Singapore Telecommunications (SingTel). 5 The 2000 Singapore Business Times Corporate Transparency Index shows that 7 of the top 10 rated companies are GLCs. (The Business Times, Singapore, November 13, 2000). 3

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ernment owned and run companies. GLCs are under the discipline of the stock market and investors, including the government, have objective measures of performance. They can hire good executives competitively, and compensate them with external labor market pay that is also incentive-compatible with wealth creation for their owners. The government appointee(s) on the board, if they do not interfere with day-to-day operations of the firm, could serve as influential monitors, much as venture capitalists and investment companies do in more developed capital markets. It is possible that GLCs may have better corporate governance than publicly traded companies that are owned by individuals, oligarchs, families, or business groups, as the interest a government represents is much broader. Minority investors may expect better protection, which in turn may lead to a more favorable development of the capital market. GLCs under Temasek, however, are not above criticism. There has been controversy in the way the government appoints the “right people” to the board of directors. For example, a large number of GLCs have their board of directors appointed by the Directorship and Consultancy Appointments Committee, which, by no coincidence, is under the direct control of the Ministry of Finance. Aggressive recruitment of the best minds into the public sector has caused a brain drain in the private sector. Low and Haggard (2000) speculate that this will inhibit private sector initiatives, which may go against government policies. In Singapore, government involvement is sometimes viewed as a contributing factor whenever an acquisition attempt of a GLC fails.6 Such occurrences have led to a call for the government to accelerate its divestment process in order to defuse criticism that such acquisitions allow Singapore to exert its influence over other countries’ internal affairs, and help boost the image of Singapore as a liberalized economy.7 Therefore, the call for a reduction in the government’s control of GLCs is to minimize the bureaucratic behavior in decision-making. The most relevant question in analyzing GLCs is possibly whether it is a suitable ownership/control structure for an emerging economy. The answer is a conditional yes. Conditional on government agencies having the credibility to carry out its commitment to high governance standards, GLCs could be instrumental in the development of capital markets. The government can lead in providing risk capital when the venture capital industry is not yet developed, and may serve as a large monitoring shareholder when institutional investors have not yet reached the critical threshold of share ownership. It may set the standard of corporate governance for other privately controlled companies to emulate. However, it should be recognized that, beyond the transition period of development, when the economy is developed and other institutions and mechanisms for control are in place, GLCs may outlive its usefulness and be phased out. In fact, there are signs that Temasek recognizes this and has started to divest its holdings.8

6

“Singapore Divestment Moves to Deepen Stock Market.” Reuters News Service (July 4, 2000). “Shackles of the Old Script are Loosened—Corporate Restructuring.” Reuters News Service (March 28, 2000). 8 For example, Temasek’s press release on May 4, 2000 mentions the reduction of the government’s share in SingTel from 100% to 78.2%, SIA from 77% to 56.3%, NOL from 62% to 32.6%, and Keppel from 58.5% to 31.7%. On March 15, 2001, the Business Times reported that Temasek will give up its veto powers in SingTel and that it is prepared to further reduce its holdings in DBS and SingTel over the medium term. 7

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The remainder of this paper is organized as follows. Section 2 describes the background and structure of the GLCs in Singapore and their corporate governance. The data selection procedure and research methodology are outlined in Section 3. Section 4 presents our results and analysis. Section 5 summarizes and concludes.

2. GLCs and corporate governance in Singapore This section details the background and organization of Singaporean GLCs. As an alternative ownership/control organizational form to enterprises that are government-owned and run or to private family and group-controlled companies, some of the salient features of GLCs may become relevant in the type and quality of their corporate governance. We discuss how the mandate for the main government holding company, Temasek Holdings, determines its policy and view toward corporate governance for the GLCs. 2.1. Background and role of Temasek Holdings In 1959, the Singapore Government set up the “Minister of Finance Inc.” (MOF Inc.), for the control of properties that were previously held by the British Chief Secretary during the colonial rule of Singapore. The MOF Inc., is empowered to acquire, purchase, hold, transfer, dispose, or otherwise deal with real assets. It wholly owns several operational holding companies: Temasek Holdings (for commercial entities, including GLCs); MND Holdings (for certain remnant, but mainly dormant, company shares); MOH Holdings (for hospitals); the Government of Singapore Investment Corporation (GIC, which invests Singapore’s reserves). The original purpose behind the government’s involvement was to accelerate Singapore’s economic development by initiating industrialization in the early 1960s. As part of the effort for the industrialization drive, the government took an active entrepreneurial role by investing in a wide range of companies in the manufacturing, financial, banking, trading, transportation, shipbuilding, and other service sectors. Today, Temasek and its subsidiaries are registered companies under the Companies Act, subject to the same requirements as private businesses. Temasek and its GLC subsidiaries fall into several categories. These include companies that are wholly owned by the government, those that the government has a majority or minority share, and subsidiaries of its first-tier owned firms. All of the direct first-tier subsidiaries of Temasek have their own subsidiaries or associate companies, some of which may also be publicly listed companies. In turn, these subsidiaries may have third-tier subsidiaries, and so on. There are also cross-holdings among the GLCs. For example, Sembcorp, a conglomerate, is held in part by Singapore Technologies. From the ownership information we obtained and compiled, we construct the ownership structure of Temasek. Fig. 1 indicates both fully owned entities, which are mostly utilities and the like, and partially owned companies. The number within each box indicates the effective percentage ownership by Temasek. Of particular importance is Singapore Technologies, a wholly owned Temasek subsidiary, which owns a substantial percentage of some major corporations, some of which are in the high technology sectors (see Fig. 2).

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Fig. 1. Group structure of Temasek Holdings. This figure shows the effective interest of Temasek Holdings in the various GLCs as of December 31, 2000. Effective interest is defined as the sum of direct and indirect interest held by Temasek. The corporate structure shows a “two-tier” holding relationship. S.S. refers to Singapore subsidiaries and F.S. refers to foreign subsidiaries.

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Fig. 2. Group structure of Singapore Technologies. This figure shows the effective interest of Singapore Technologies in the various GLCs. Singapore Technologies is a 100% owned subsidiary of Temasek Holdings. Effective interest is defined as the sum of indirect interest held by Temasek, through Singapore Technologies. The corporate structure shows a “two tier” holding relationship. TH refers to the percentage of effective ownership by Temasek Holdings. All companies in the chart are listed and traded on the main board of the Singapore Exchange unless otherwise stated. Unlisted companies are shown for the purpose of illustrating the holding relationship of listed companies through them.

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By collecting all government owned companies under a single portfolio, one avoids the type of inter-agency conflicts when government owned enterprises are under different ministries and government bureaus, such as in China. However, there is a risk that the single government holding company may be too powerful to pursue its multiple, some of which may be value-destroying, objectives. 2.2. The mandate for Temasek and research hypothesis To ensure that it is possible for Singaporean GLCs to uphold high governance standards, we need to examine Temasek’s mandate. Temasek was set up to “contribute to Singapore’s economic growth by nurturing world-class companies through effective stewardship and commercially driven strategic investments” (Source: www.temasek.com.sg). If the government has enough credibility to be taken seriously, the statement conveys a commitment to a high level of corporate governance, through active monitoring or stewardship, since the aspiration is to compete with world-class companies. The international emphasis has significance. As Singapore strives to become an international financial center and its companies become increasingly international, globalization, and liberalization of the product and service markets will create external pressure to cause these companies to adopt sound management practices in order to improve efficiency. Temasek’s articulated policy with respect to the GLCs is to play the key monitoring role in a commercially viable and financially independent company. While its objectives are laudable, whether the government has the will and ability to implement them may be another matter. Fortunately, many of these objectives are amenable to empirical testing. The empirical issues raised are: If GLCs operate to maximize shareholder value, investors should do no worse from investing in GLCs than non-GLCs.9 Other questions can also be asked. Are GLCs as transparent as non-GLCs, if not more so? Do GLCs behave, with respect to financial leverage, as though they were without the implicit guarantee of a government safety net? For instance, evidence supporting no financial dependency may include the observation that GLCs keep as much or more cash than non-GLCs, providing that they do not have greater agency costs, as evidenced by higher expenses. We examine some of these issues in this paper. Specifically, we examine the following research hypothesis: Hypothesis. The degree of government ownership in a Singaporean GLC affects its firm value. 2.3. Temasek’s areas of corporate governance Temasek considers corporate governance to cover the following broad areas, which have changed over time (Source: www.temasek.com.sg). 9 Issues such as the willingness of GLCs to hire the best available talent, such as non-local executives, can also be tested. The results (not shown) from a pilot study on the appointment of foreign CEOs reveals a significant positive market reaction to such an announcement.

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1. Board Governance: Temasek sees as its function to help GLCs build effective boards by setting out guidelines on the appropriate composition of board, tenure of the directors, their size, and formation of specialized board committees. 2. Business Charters: While Temasek encourages GLCs to stay focused on their core competencies, it will not deny any GLC the opportunity to diversify if it is done in the best interest of its shareholders. 3. Talent and Remuneration: Temasek encourages GLCs to recruit the best global talent and to reward them competitively. 4. Value Creation: Temasek works closely with their GLCs to adopt appropriate performance benchmarks to maximize returns on shareholder investments. Like any shareholder, Temasek expects its companies to be profitable and generate a high rate of return on investment. These issues capture the major areas of responsibility of a value maximizing large corporate monitor. But how well Temasek executes the objectives and helps the GLCs achieve the desirable standards of governance that lead to better market and financial performance is a matter of empirical question, where the answer has to be found by examining its record. 2.4. Implementation of better corporate governance Starting with the 1992 Cadbury Committee Report in the UK on the financial aspects of corporate governance, and the subsequent 1998 Hampel Report, Temasek has taken steps to incorporate international best practices in implementing its own corporate governance policy. It is interesting to note that, at a recent Corporate Governance Conference, the Singaporean Finance Minister, whose ministry Temasek reports to, remarked that corporate governance standards in Singapore are not yet comparable to those in the US, UK, and Australia.10 This is despite Singapore being ranked first among 25 emerging markets for corporate governance in a recent Credit Lyonnais report and number one in East and Southeast Asia in a survey conducted by Britain’s Association of Chartered Certified Accountants.11 In 2000, the Ministry of Finance set up three private-sector-led committees to review Singapore’s corporate regulatory framework, disclosure and accounting standards, and corporate governance practices.12 Temasek does not follow the recommendations of any one particular report per se in conducting its corporate governance. In December 1999, the government set up a Corporate Governance Committee (CGC) to make recommendations on governance practices that it has since accepted. This means that many of the international best practices, including those recommended in the Cadbury Report, have been or are being implemented in Singapore 10

Third Asian Roundtable on Corporate Governance. Shangri-La Hotel, Singapore, April 4, 2001. “The Tide’s Gone Out: Who’s Swimming Naked?” CLSA Emerging Markets Equities Research on Corporate Governance, October 2000, and “Responsibility in Business” Association of Chartered Certified Accountants, November 2002. 12 Partly stemming from the recent corporate scandals in the US, and in the economic slowdown among Asian economies, the Singapore Government set up a high level Economic Review Committee in 2002 to review and make recommendations on the various sectors of the Singapore economy, including those relating to corporate governance. 11

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and its GLCs. To this end, GLCs in Singapore have taken the lead in implementing the CGC’s recommendations. It should be pointed out that, while the government does not yet require strict compliance with the CGC’s recommendations, listed companies are required to disclose their corporate governance practices and explain any deviations from those recommended, starting from January 1, 2003. A brief discussion of the state of implementation of the four broad areas recommended by the CGC – composition of the board, remuneration matters, audit and accountability, and communication with shareholders – is provided in Appendix A.

3. Data and methodology State-owned enterprises (SOEs) in many developing countries have been shown to be inefficient and ineffective (Megginson et al., 2004; Wei et al., 2003; Kumar, 1993; Haririan, 1989; Ayud and Hegstad, 1986; Ramanadham, 1984). For example, Wei et al. (2003) report that privatized firms experience significant improvements in profitability compared to SOEs. Within the structure of Singaporean GLCs described in the previous sections, so long as GLCs do not underperform non-GLCs and are valued as highly as non-GLCs, the ownership/control structure of Singaporean GLCs is not harmful and may have merit. 3.1. Data and sample design We examine Singaporean GLCs and non-GLCs over an 11-year-period from 1990 to 2000. To be considered a GLC, a company must meet the following criteria. First, Temasek must hold an effective ownership interest of around 20% or more in a listed company, where effective holdings are determined up to the second tier companies in the group structure of Temasek Holdings. We also include second-tier companies in the Singapore Technologies Group, a wholly owned Temasek subsidiary. Second, the identified GLCs must be listed on the main board of the Singapore Exchange starting December 31, 1990 or later, up till 2000.13 We use a combination of approaches in our investigation. Both primary and secondary sources of information are used. From our interviews with executives of Temasek and some GLCs, we discover that Temasek has a team that looks after stewardship matters of its companies and that it considers a company a GLC only when it appoints directors to the company’s board and Temasek is the single largest shareholder with at least a 20% share ownership. Temasek has a philosophy of subjecting its companies to market competition and getting them to list publicly to face market discipline. Its hands-off approach allows the CEO of a GLC free rein of the business.14 It does not seek waivers from disclosures, is open to GLCs being acquired, and limits the tenure of board members to a maximum of 6 years. At Singapore Airlines (SIA), a major GLC, a senior officer likened the running of the airline to that of a private company that is subject to market discipline and competition. 13 It is interesting to note that not a single GLC went bankrupt during the period and that all firms identified as a GLC in 1990 or later remain a GLC in 2000, although there have been some name changes. 14 Temasek generally has an influence on the choice of the CEO.

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It has a board that meets once a month and minority shareholders are given a voice in major corporate decisions when Temasek refrains from voting.15 The secondary sources of information come from the Company Analysis and Extel databases provided by Thomson Financial Services, and the Bloomberg Interactive database. These databases contain the accounting and financial data. Companies listed on the main board of the Singapore Exchange from 1990 to 2000 are identified and extracted from the July 2001 version of the Company Analysis database. We identify the GLCs according to our stated selection criteria. The remaining main board listed companies in the database in each year are classified as non-GLCs. In the later years (1999 and 2000), some missing governance related information, such as non-duality, are supplemented from the Extel, Bloomberg Interactive, Reuters Business Brief, and the Companies Handbook, which is an annual compilation of financial facts and figures prepared by the Singapore Exchange. The Pacific Basin Capital Markets (PACAP) database contains a list of main board companies listed on the Singapore Exchange from 1990 to 1998. However, financial data are limited to companies in the finance and manufacturing sectors. The amount of missing data is greater than those from Company Analysis. In the interest of obtaining the largest possible sample size, Company Analysis is chosen over the PACAP database. The number of GLC classifications in the sample ranges from 9 in 1990 to 25 in 2000; the corresponding number for non-GLCs ranges from 68 in 1990 to 204 in 2000. Non-GLCs form the control sample for comparative purposes. Selected characteristics of the GLCs are provided in Table 1. 3.2. Methodology We investigate the relationship between firm valuation, government ownership, and various governance factors, while controlling for cross-sectional differences between GLCs and non-GLCs. To determine if there are any differences between the performance of GLCs and non-GLCs, various market and financial performance measures are compared. Tobin’s Q is used as a proxy for firm value.16 Accounting-based performance measures such as total liability to total assets, return on equity, return on assets, cash to total assets, sales to total assets, total expense to assets, and total expense to sales, are also computed and analyzed. We shall attempt to explain how financial performance measures are linked to other accounting measures of performance by establishing a logical business relationship among the variables. We employ the Chung and Pruitt (1994) method of approximating Tobin’s Q, which is summarized in Eq. (1) as: Q=

MV(CS) + BV(PS) + BV(LTD) + BV(CL) − BV(CA) BV(TA)

(1)

15 As Temasek owns more than 50% of SIA shares, a vote by Temasek would appear that the decision taken by SIA is the government’s decision. To avoid this perception, it sometimes refrains from voting, especially if what is being considered is a business decision, thus allowing minority voters to have a voice. 16 For robustness, we run similar regression models with price-to-book and price-to-earnings as the dependant variable. Similar qualitative results are found but are not reported for the sake of parsimony.

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Table 1 Selected characteristics of GLCs Company

CapitaLand Ltd. Chartered Semiconductor Manufacturing Ltd. DBS Group Holdings Ltd. Keppel Capital Keppel Corporation Ltd. Keppel Fels Energy & Infrastructure Ltd. Keppel Hitachi Zosen Ltd. Keppel Land Ltd. Keppel T & T Neptune Orient Lines Ltd. Raffles Holdings Ltd. SATS Sembcorp Industries Ltd. Sembcorp Logistics Ltd. Sembcorp Marine Ltd. SIA Engineering Company Ltd. Singapore Airlines Singapore Computer System Ltd. Singapore Telecommunications Ltd. SMRT Corporation Ltd. SNP Corporation Ltd. ST Assembly Test Services Ltd. ST Engineering Ltd. Vickers Ballas Holdings Ltd. Vickers Capital Ltd.

Nature of business

Market capitalization

Total assets

PE ratio

Significant foreign ownership (>5%)

Nonduality

(US$, million)

(%)

(US$, million)

Property Manufacturing

7552050 6539091

1.94 1.68

19602 3217

60.3 20.4

No No

Yes Yes

Finance Finance Multi Industry Manufacturing

23825804 3160616 2585944 744046

6.12 0.81 0.66 0.19

113000 19602 38372 2816

17.3 15.5 10.3 11.9

No No No No

Yes Yes Yes No

Manufacturing Property Services Transport Hotels Services Multi Industry Transport/Storage Manufacturing Services

309875 1948029 635734 929021 946400 1410000 2728714 1939694 976625 1180000

0.08 0.50 0.16 0.24 0.24 0.36 0.70 0.50 0.25 0.30

854 5599 1112 4360 2857 5550 705 1394 594 16418

20.1 16.0 17.6 5.3 11.9 21.3 36.4 12.3 10.2 17.5

Yes No No No No No No Yes No No

Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

Transportation Services

21068325 346092

5.41 0.09

1084 328

12.7 17.2

No No

Yes Yes

Telecommunications

41490309

10.65

13917

20.2

No

Yes

Transport Manufacturing Manufacturing

1140000 76654 2248239

0.29 0.02 0.58

2257 179 712

11.6 12.6 29.5

No No No

Yes Yes No

Multi Industry Finance Finance

7966358 348362 294907

2.05 0.09 0.08

4453 1484 426

27.6 30.1 14.7

No No No

Yes Yes Yes

This table provides the firm characteristics of the 25 GLCs in the sample as at December 31, 2000.

where MV(CS) is market value of common shares, BV(PS) the book value of preferred shares, BV(LTD) the book value of long term debt, BV(CL) the book value of current liabilities, BV(CA) the book value current assets, and BV(TA) is the book value of total assets. This method is more amendable to processing a larger sample size than the more demanding but higher precision methods of calculation such as the Lindenberg and Ross (1981), Hall (1990), and Lewellen and Badrinath (1997) methodologies. The Chung and Pruitt (1994) approximate Tobin’s Q implicitly assumes that the replacement values of a firm’s plant, equipment, and inventories are equal to their book values. Tobin’s Q is an important and widely accepted measure of corporate performance (McConnell and Servaes, 1990; Morck et al., 1988). It is a more stable approach to estimating firm value since the value of a firm’s assets are not subjected to the same degree of volatility as would share price when valuation proxies such as price to book value or price to earnings are used.

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The primary issue of interest here is the performance of Singaporean GLCs in comparison to other local companies. In this vein, we consider three issues. First, being a Singaporean GLC implies a certain governance practice. Second, since agency theory states that managers with concentrated power often disregard shareholder interest for personal financial benefit, we consider non-duality, or the separation of the office of the Chairman and the CEO. Third, we regard foreign ownership of over 5% as the threshold for performance as capable monitors. We determine, by the percentage of government ownership, whether being a GLC generates greater firm value, while controlling for non-duality, firm characteristics such as profitability and risk (firm size and leverage), alternative monitoring mechanisms (foreign ownership), and industry. We utilize a fixed effects cross-sectional time series panel model shown in Eq. (2) that is designed to capture the equivalence of the parameter estimates between GLCs and non-GLCs.17 Value = β1 G Govown + β2 G Non-dual + β3 N Non-dual + β4 G Profit + β5 N Profit + β6 G Size + β7 N Size + β8 G Leverage + β9 N Leverage + β10 G Forown + β11 N Forown +

14
i=12

βi Industryi + ε (2)

where Value is represented by the firm’s Tobin’s Q (multiplied by 100); G and N refer to GLCs and Non-GLCs, respectively; Govown captures the percentage of government ownership in a GLC; Non-dual is a dummy variable that takes on a value of one when the firm’s CEO is separate from the Chairman, and zero otherwise; Profit measures a firm’s profitability by its return on equity; Size is the natural logarithm of the firm’s total assets that controls for differences in firm size; Leverage is total liabilities to total assets; Forown is a dummy that is assigned a value of one when there is at least 5% foreign ownership of the firm’s issued share capital, and a zero value otherwise; Industry controls for the four broad industry groups with three dummy variables;18 and ε is a random error term. Similar approaches have been adopted by Carter et al. (2002), Yermack (1996), Hermalin and Weisbach (1991), and Morck et al. (1988).

4. Results and analysis While various forms of acceptable governance in each country evolve from a country’s history, values, and culture, certain characteristics of superior governance have been documented in the literature (e.g., Shleifer and Vishny, 1997). We have considered the role of corporate governance and government control in the context of Singaporean firms and its capital market and examine the issue of value relevance of corporate governance and governmental control in assessing firm value. We compare the financial performance of GLCs 17

A fixed effects panel regression model is used after examining the results of the Hausman specification test. The four industry groups are: (1) finance and commerce; (2) hotels/restaurants, properties, and construction; (3) manufacturing; (4) services, utilities, multi-industry, and transportation. 18

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with non-GLCs, and determine whether government ownership and various governance measures contribute to market based firm valuation, using panel and pooled regression analyses. 4.1. Financial and market performance We investigate the source of superior GLC performance by comparing various measures of financial and market performance of GLCs and non-GLCs. The results are presented in Table 2. Note that our choice of control firms in the sample passes the most essential test for good control firms—they must be able to track the movement of the firms in question as closely as possible. This condition holds if both firms are affected by the same set of factors. An examination of the stock returns in Table 2, for example, shows that the portfolio of control firms (non-GLCs) tracks the GLCs almost perfectly as both time series move up (down) together in virtually every period. Thus, we have some assurance that such a comparison, albeit not ideal, is suitable for our purpose. We capture firm profitability by the return on equity (ROE) or return on assets (ROA). On both counts, GLCs outperform non-GLCs. The Pearson’s correlation coefficient between GLC status and ROE or ROA is significant (Table 3). This finding is consistent with that of Singh and Siah (1998) that GLCs are able to achieve at least similar levels of profitability and are as efficient as non-GLCs. Since GLCs also finance their capital structure through debt, their profits are distributed over a correspondingly smaller equity base. Both ROE and ROA recover sharply in 1999 from the low of 1998 with GLCs leading non-GLCs in the recovery. Our results concur with those of Sabhlok (2001) that Singaporean GLCs are generally profitable and do not fall behind non-GLCs in terms of profitability and efficiency. A detailed analysis of the source of the higher ROE is made through the DuPont model, in which ROE is further decomposed into three components: profit margin (net income-tosales), asset turnover (sales-to-assets), and leverage (asset-to-equity). We find that the main drivers of GLC profitability are profit margin and leverage. The profit margin of GLCs is higher than that of non-GLCs at the 1% level. The higher leverage among GLCs, revealed by the higher asset-to-equity ratio, is significant at the 5% level. However, asset turnover among GLCs is lower than that of non-GLCs at the 1% level.19 Since asset turnover captures how well a company utilizes its assets, the lower value appears to imply that GLCs do not make as good use of their assets as their non-GLC counterparts. Upon closer examination, however, we find that the lower ratio is due to the higher asset levels among GLCs, which in turn is caused by their propensity to hold larger excess cash. GLCs maintain a significantly higher cash-to-assets ratio than non-GLCs. Concomitant with its higher debt structure, ready cash is possibly needed by GLCs to meet greater interest payments, and unexpected cash 19 The finding of a lower asset turnover among GLCs is not inconsistent with that of Singh and Siah (1998), where GLCs exhibit a higher asset turnover in three industries and lower turnover in four other industries. Since GLCs generate less sales per asset dollar and, in order for them to be more operationally efficient (i.e., ROA), the expense-to-asset ratio must be less for GLCs, so as to maintain a higher margin than non-GLCs. One possible explanation for the seemingly lower capital turnover among GLCs is that some high capitalization GLCs are in capital intensive industries, such as airline, shipping, and telecommunication. This is consistent with the earlier discussions on the expense-to-assets and expense-to-sales ratios.

Table 2 Mean performance measures of GLCs vs. non-GLCs Companies

1990

1991

1992

1993

1994

1995

1996

Tobin’s Q (%)a

GLCs Non-GLCs T-test

87.897 76.564 0.529

89.234 92.023 −0.169

84.513 85.105 −0.042

105.796 131.591 −1.097

163.995 120.587 1.415

130.765 120.043 0.361

125.181 111.914 0.571

98.969 87.456 0.672

89.294 73.587 1.267

113.378 102.860 0.582

97.181 89.484 0.404

108.622 98.923 1.472

Stock returnsa

GLCs Non-GLCs T-test

−0.065 −0.192 0.897

0.308 −0.166 0.085 −0.049 2.455** −1.594

0.786 0.785 0.002

−0.156 0.039 −1.287

0.003 0.053 −0.339

−0.069 0.009 −0.952

−0.282 −0.231 −0.439

0.029 0.868 −0.245 1.054 2.891*** −0.331

−0.124 −0.186 0.485

1.132 1.112 −0.315

Price to earningsa

GLCs

15.371

18.375

22.762

24.851

21.506

31.673

28.904

18.718

214.491

23.678

19.213

34.118

Non-GLCs T-test

53.261 −0.510

55.228 −0.537

46.775 −0.578

72.403 −0.939

67.738 −0.794

47.179 −0.550

35.774 −0.461

27.525 −0.421

27.033 49.944 4.137*** −1.192

22.765 −0.363

42.932 −0.793

GLCs

1.499

1.987

1.735

3.749

3.034

2.821

2.385

1.657

2.195

2.885

3.671

2.636

Non-GLCs T-test

1.252 1.036

1.519 1.391

1.472 0.791

2.893 0.905

2.087 1.183

2.267 0.765

1.889 0.779

1.204 1.015

1.081 2.507**

2.525 0.529

1.783 1.368

1.819 3.004***

GLCs

0.444

0.441

0.488

0.489

0.472

0.501

0.533

0.568

0.633

0.583

0.559

0.531

Non-GLCs T-test

0.425 0.289

0.442 −0.020

0.451 0.521

0.446 0.657

0.431 0.688

0.436 1.068

0.452 1.301

0.481 1.503

0.493 2.889***

0.485 2.044*

0.496 1.227

0.465 3.651***

ROEb

GLCs Non-GLCs T-test

0.124 0.079 2.018

0.105 0.058 2.393**

0.101 0.052 1.933*

0.134 0.086 1.897*

0.122 0.101 0.929

0.103 0.081 1.007

0.101 0.067 1.515

0.038 0.043 −0.115

−0.118 −0.109 −0.085

0.431 0.005 1.317

0.419 0.072 1.453

0.142 0.041 2.310**

ROAa

GLCs Non-GLCs T-test

0.068 0.046 1.358

0.058 0.037 1.487

0.049 0.039 0.660

0.064 0.048 1.098

0.061 0.055 0.411

0.045 0.043 0.216

0.043 0.038 0.247

0.033 0.024 0.469

−0.015 −0.002 −0.486

0.041 0.013 1.028

0.068 0.022 1.848*

0.046 0.029 2.421**

Price to Book Valueb

Total liabilities to total assetsb

1997

1998

1999

2000

All years

J.S. Ang, D.K. Ding / J. of Multi. Fin. Manag. 16 (2006) 64–88

Year

77

GLCs Non-GLCs T-test

Total expense to salesa

GLCs

0.435

0.505

0.539

0.633 0.610 −2.031* −0.888

0.649 −0.875

0.464

0.485

0.482

0.691 −1.902*

0.715 −1.766*

0.738 −1.990*

0.495

0.459

0.593

0.540

0.692 −1.657

0.693 −2.169

0.722 −1.137

0.668 −1.184

0.477

0.501

0.782 0.699 −3.643*** −5.992***

0.872

0.879

0.869

0.811

0.832

0.866

0.875

0.903

1.123

0.896

0.861

0.907 −0.495

0.899 −0.302

0.919 −0.559

1.021 −0.514

0.917 −0.760

0.934 −1.223

0.905 −0.330

0.961 −0.852

1.078 0.289

0.991 −0.897

1.021 −1.494

GLCs

0.212

0.209

0.214

0.213

0.181

0.157

0.126

0.141

0.118

0.149

0.151

0.164

Non-GLCs T-test

0.109 1.445

0.117 1.540

0.139 1.753*

0.147 1.414

0.164 0.367

0.149 0.239

0.127 −0.042

0.131 0.286

0.131 −0.485

0.135 0.493

0.149 0.041

0.137 2.393**

Sales to assetsb

GLCs Non-GLCs T-test

0.499 0.685 −1.734

0.563 0.651 −0.714

0.609 0.696 −0.647

0.548 0.747 −1.624

0.562 0.771 −1.579

0.534 0.784 −1.934*

0.544 0.731 −1.607

0.501 0.722 −2.031*

0.574 0.723 −1.311

0.583 0.682 −0.895

Total assets to equityb

GLCs

1.824

1.810

2.061

2.094

2.000

2.289

2.349

1.152

7.867

10.512

Non-GLCs T-test

1.717 0.27

1.568 1.24

1.333 0.12

1.792 0.57

1.836 0.59

1.884 1.02

1.763 1.270

1.792 −1.500

5.450 1.49

GLCs

0.136

0.103

0.080

0.117

0.109

0.084

0.079

0.066

Non-GLCs T-test

0.067 1.22

0.057 0.68

0.056 0.18

0.064 0.42

0.071 0.33

0.055 1.11

0.052 0.260

0.033 0.830

Non-GLCs T-test

Net income to salesb

Sample size

GLCs Non-GLCs

9 68

10 96

12 103

14 115

14 126

14 138

14 164

15 186

0.894 0.971 −1.712*

0.547 0.553 0.803 0.732 −2.922*** −5.280*** 6.162

3.087

0.385 3.630***

3.273 3.960***

1.414 1.96**

−0.026

0.070

0.124

0.083

−0.003 −0.230

0.019 1.320

0.027 3.88***

0.040 2.72***

17 192

19 191

25 204

15 144

This table compares the means of the various performance measures of GLCs to non-GLCs. The t-statistic is shown for each year of study. The pooled mean is obtained by taking the sum of the variable for all firms over the period of study and averaging them over the total sample size. The various t-statistics are shown under the ‘all years’ column. To determine equality of variances between GLCs and non-GLCs, Leverne’s test for equality of variance was used on the pooled sample denoted in the “all years” column. The result of this test for “all years” was applied in each individual year of study. A confidence level of 95% was used to determine equality of variance. Chung and Pruitt (1994) model of Tobin’s Q is used and is expressed in percentage terms. Asterisks (*** , ** , and * ) denote statistical significance at the 1%, 5%, and 10% levels, respectively. a Equal variance is assumed. b Unequal variance assumed.

J.S. Ang, D.K. Ding / J. of Multi. Fin. Manag. 16 (2006) 64–88

Cash to total assetsb

78

Total expense to assetsb

Rate of return Tobin’s Q (%) Price to earnings Price to book TL/TA ROE ROA Expense to assets Expense to sales Cash to assets Sales to assets Ln(TA) Non-duality GLC Foreign ownership Year

Rate of return

Tobin’s Q (%)

Price to earnings

Price to book

TL/TA

ROE

ROA

Expense to assets

Expense to sales

Cash to assets

Sales to assets

Ln(TA)

Nonduality

GLC

Foreign ownership

Year

1.000 – –

0.245*** 1.000 –

0.064* 0.022 1.000

0.207*** 0.391*** 0.055**

0.026 −0.109*** 0.003

0.033 0.101*** −0.092***

0.066*** 0.237*** −0.112***

0.026 0.044 −0.052**

−0.005 −0.054** 0.121***

0.041 0.103*** −0.023

0.034 0.085*** −0.069***

−0.002 −0.96*** −0.031

0.022 0.057** 0.032

−0.008 0.036 −0.020

0.019 0.072*** −0.023

0.029 −0.048*** −0.067***

– – – – –

– – – – –

– – – – –

1.000 – – – –

0.085*** 1.000 – – –

−0.004 −0.083*** 1.000 – –

0.023 −0.247*** 0.479*** 1.000 –

0.077*** 0.173*** −0.011 −0.048 1.000

0.063** 0.098*** −0.261*** −0.468*** 0.053**

0.078*** −0.282*** 0.101*** 0.199*** 0.056**

0.083*** 0.131*** 0.065** 0.112*** 0.985***

−0.082*** 0.358*** 0.071*** 0.010 −0.303***

0.028 −0.000 −0.016 0.020 0.069***

0.071*** 0.090*** 0.085*** 0.058** −0.100***

−0.039 −0.027 −0.010 −0.068*** 0.058**

0.009 0.114*** −0.036 −0.138*** 0.051**

–

–

–

–

–

–

–

–

1.000

−0.027

−0.031

−0.098***

0.001

−0.043

−0.007

0.073***

– – – – – –

– – – – – –

– – – – – –

– – – – – –

– – – – – –

– – – – – –

– – – – – –

– – – – – –

– – – – – –

1.000 – – – – –

0.082*** 1.000 – – – –

−0.095*** −0.291*** 1.000 – – –

−0.072*** 0.073*** −0.010 1.000 – –

0.059** −0.089*** 0.330*** 0.086*** 1.000 –

0.047 0.070*** −0.090*** 0.074*** −0.081*** 1.000

−0.003 0.026 0.036 0.015 −0.018 −0.004

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

1.000

This table shows the Pearson’s correlation coefficient among the variables for the pooled sample from 1990 to 2000. The pooled sample is obtained by testing all firms over the 11-year period of study. Asterisks (*** and ** ) denote statistical significance at the 1% and 5% levels, respectively.

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Table 3 Pearson’s correlation matrix

79

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shortfalls. In Table 2, it is observed that, although GLCs maintain a much higher cash to total asset ratio in the earlier years, the value differential between that of GLCs and nonGLCs begin to narrow from 1995 onwards. In 1998, when the Asian Economic Crisis forced corporations to rationalize and optimize the use of their resources, the cash ratio of GLCs dipped below that of non-GLCs. The evidence of a higher cash level among GLCs supports the notion that GLCs have to provide their own cash reserves against distress and are not expected to be financially dependent on the government. The alternative explanation that higher cash balances represent free cash flow lacks support since, as we report below, GLCs are leaner with its lower operating expense ratios.20 Consistent with the higher asset-to-equity ratio, Singaporean GLCs also tend to manifest a higher debt-to-asset (leverage) ratio, at the 1% level, relative to non-GLCs. GLC status and leverage are positively correlated at the 1% level of significance (Table 3), suggesting that GLCs may be willing to carry higher cash reserves to support their higher leverage than non-GLCs. A higher cash balance among GLCs is consistent with the presence of higher growth opportunities and a greater uncertainty of obtaining the desired size of financing internationally at a reasonable rate (Morris, 1983). We observe that the liability-to-assets ratio peaked in 1998 during the Asian Financial Crisis, reflecting a reduction of the asset base relative to the debt level in that year, as well as a successful pare down of debt in subsequent years. In addition to the above analysis, we relate financial statement profitability of GLCs to market values based performance measures. This is done through examining the Tobin’s Q, price-to-earnings (P/E), and price-to-book (P/B) ratios. The P/B ratio is significantly higher among GLCs than non-GLCs at the 1% level. This shows that the market places higher value on GLCs relative to their book value. In addition, we find that GLCs in general enjoy a higher but statistically insignificant Tobin’s Q compared to non-GLCs (see Table 2 and Fig. 3). However, the difference in the P/E ratio between GLCs and non-GLCs is not significant. One general conclusion that can be drawn from the evidence is that GLCs either outperform, or do not under-perform, non-GLCs in terms of their valuation and supports our contention that government ownership in Singapore increases (or does not hurt) firm value. Moreover, due to the relatively small GLC sample size, we consider the higher valuation ratios for GLCs to be meaningful, albeit not all are statistically significant. In examining the expense to assets and expense to sales ratios, which are a rough measure of agency costs (Ang et al., 2000), we find that GLCs in fact incur lower expenses, at the 1% level, than non-GLCs.21 The Pearson’s correlation in Table 3 shows that GLC status and the expense-to-assets ratio are negatively correlated at the 1% level. The lower expense-to-sales ratio among GLCs supports the assertion that GLCs are more profitable with higher profit margins because they run leaner operations. The findings demonstrate that GLCs in Singapore are different from the generally inefficient nationalized firm run by the government and that they are more apt at managing expenses than non-GLCs. 20 These observations pose several interesting possibilities. Is the excess cash largely free cash flow, which would imply GLCs have higher agency costs? Or, if not, does it mean that GLCs hold more cash as a slack for emergencies and other unexpected needs, contrary to the expectation that the government always rescues those companies that they have part ownership? The answer to this question, however, is best left to future research. 21 Total expense includes cost of goods sold, interest expense, and depreciation.

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81

Fig. 3. Tobin’s Q (%) of GLCs vs. non-GLCs. This figure shows the Tobin’s Q for 25 listed GLCs and compares it with the non-GLCs listed on the Singapore Exchange from 1990 to 2000, where there is an annual average of 144 listed non-GLCs. The Tobin’s Q is expressed as a percentage. Tobin’s Q is defined as the ratio of the market value of a company’s financial claims to the replacement value of its assets and is often used as a proxy for firm value. The Chung and Pruitt model (1994) for Tobin’s Q is used: Q = MV(CS)+BV(PS)+BV(LTD)+BV(CL)−BV(CA) , BV(TA) where MV(CS) is market value of common shares, BV(PS) the book value of preferred shares, BV(LTD) the book value of long term debt, BV(CL) the book value of current liabilities, BV(CA) the book value current assets, and BV(TA) is the book value of total assets.

In summary, we see that GLCs tend to exhibit higher valuations than non-GLCs due to their ability to earn higher returns on their investments, including running more efficient and lower expense operations than non-GLCs. The results support our hypothesis that GLCs outperform non-GLCs not only in market based valuation measures, but also in accounting based measures of internal process efficiency. 4.2. Panel and pooled regression analysis22 Prior evidence shows that investors value good corporate governance (Felton et al., 1996). If certain governance measures are positively related to firm value, we can determine if government involvement in GLCs helps to increase firm value by emphasizing those areas of corporate governance. In Table 3, we find that Tobin’s Q, a proxy for firm value, is positively correlated to non-duality, GLC status, and foreign ownership. The relationship is significant at the 5% level for non-duality and 1% level for foreign ownership. GLC status is positively correlated with non-duality at the 1% level, indicating that most GLCs have separate chairman and CEO positions. This is in line with Temasek’s policy of fostering governance by delegating to the Chairman of the Board the role of monitoring the CEO, and 22

For robustness, we also performed a two-stage least squares analysis assuming that Govown is endogenously determined before running the valuation model. We find that there is no change in the contribution of profitability, firm size, and foreign ownership from those of the panel and pooled regressions. This provides further support for the contribution of Singaporean GLCs (and the percentage of government ownership) to firm valuations.

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Table 4 Fixed effects panel regression of firm valuation and government ownership Variable

Coefficient

G Govown N Non-dual G Profit N Profit G Size N Size G Leverage N Leverage N Forown Industry 1 Industry 2 Industry 3

0.931** 4.454 50.954 8.883*** −17.802*** −14.507*** −12.283 14.533 23.398 1.634 −3.182 −0.140

Adj R2 F

Wald test (p-value)

0.359 0.316 0.545

0.460 6.269***

This table shows the relationship between firm valuation and the percentage of government ownership, while controlling for non-duality, firm characteristics such as profitability and risk (firm size and leverage), alternative monitoring mechanisms (foreign ownership), and industry. A fixed effects cross-sectional time series panel model is applied as: Value = β1 G Govown + β2 G Non-dual + β3 N Non-dual + β4 G Profit + β5 N Profit + β6 G Size + β7 N Size + β8 G Leverage + β9 N Leverage + β10 G Forown + β11 N Forown +  14 β Industryi + ε where Value is measured by the Chung and Pruitt (1994) approximation of Tobin’s Q, i=12 i expressed as a percentage; G and N refer to GLCs and Non-GLCs, respectively; Govown captures the percentage of government ownership in a GLC; Non-dual is a dummy variable that takes on a value of one when the firm’s CEO is separated from the Chairman, and zero otherwise; Profit measures a firm’s profitability by its return on equity; Size is the natural logarithm of the firm’s total assets that controls for differences in firm size; Leverage is total liabilities to total assets; Forown is a dummy that is assigned a value of one when there is at least 5% foreign ownership of the firm’s issued share capital, and a zero value otherwise; Industry controls for the four broad industry groups with three dummy variables; ε is a random error term. The reported coefficients have been adjusted for multicollinearity and are White heteroskedasticity consistent. The Wald test is used to measure the equivalence of the estimates between the GLC and non-GLC groups. The adjusted R2 , F-statistic, and significance of the coefficients are also provided. Asterisks (*** , ** , and * ) denote statistical significance at the 1%, 5%, and 10% levels, respectively.

not to allow too much concentration of power in one person. Indeed, as reported in Table 1, 23 out of 25 GLCs have separated the positions of CEO and Chairman. Finally, consistent with a prediction of lower agency costs, GLCs have a lower expense-to-assets ratio. Of particular interest is whether the degree of government ownership in a GLC contributes to firm value. We report the results of a panel regression with fixed effects [Eq. (2)] in Table 4. These results, which have been adjusted for multicollinearity and are also White heteroskedasticity-consistent, support our main research hypothesis.23 Firm value is positively and significantly related to government ownership, even after controlling for common governance measures such as non-duality and foreign ownership, firm specific 23 The tolerance factors among the various independent variables are first computed. Since multicollinearity exists between total assets and ROA and ROE, and between leverage with ROA, we find that taking the natural logarithm of total assets and using ROE instead of ROA best adjusts for this problem.

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83

Table 5 Pooled OLS regressions for firm valuation and government ownership in GLCs Variable

Coefficient

t-Statistic

Constant Govown Profit Size Leverage Forown Industry 1 Industry 2 Industry 3 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year8 Year9 Year10 Adj R2 F

−245.989 3.411 21.651 10.418 −92.659 109.602 24.789 39.458 4.730 20.209 6.387 9.790 37.032 115.139 69.991 64.805 15.027 15.496 35.610

−1.595 2.642*** 2.778*** 2.063** −2.359** 3.060*** 1.230 1.000 0.222 0.599 0.211 0.295 0.746 1.447 1.627 1.469 0.552 0.643 1.525 0.246 3.263***

This table presents the pooled OLS results across all years from 1990 through 2000 of the relationship between firm valuation and the percentage of government ownership, together with the various control variables: Value = β0 + 8 18 β Industryi + β Yeari + ε where β1 Govown + β2 Profit + β3 Size + β4 Leverage + β5 Forown + i=6 i i=9 i Value is measured by the Chung and Pruitt (1994) approximation of Tobin’s Q, expressed as a percentage; Govown captures the percentage of government ownership in a GLC; Profit measures a firm’s profitability by its return on equity; Size is the natural logarithm of the firm’s total assets that controls for differences in firm size; Leverage is total liabilities to total assets; Forown is a dummy that is assigned a value of one when there is at least 5% foreign ownership of the firm’s issued share capital, and a zero value otherwise; Industry controls for the four broad industry groups with three dummy variables; Year is a series of 10 (0, 1) dummies that serves to control for the possibility of time varying differences during the 11-year study period from 1990 to 2000; ε is a random error term. Asterisks (*** , ** , and * ) denote statistical significance at the 1%, 5%, and 10% levels, respectively.

differences such as profitability and risk, industry, and time varying differences. In Table 4, the coefficient of Govown, which measures the percentage of government ownership, is significant at the 5% level. This means that the positive relation of firm value to the percentage of government ownership in a GLC occurs over time. The adjusted R-square of the regression is 45.96%. In Table 5, the results for the pooled regression, which has an adjusted R-square of 24.6%, show that the coefficient of government ownership in a GLC is significant at the 1% level, suggesting that Temasek’s stewardship through the GLCs has created value for its shareholders. This finding is consistent with that of Claessens (1997) who reports that the level of state ownership of privatized firms is positively related to the firm’s equity value. The positive results emerge after controlling for differences in other governance mechanisms, profitability, leverage, firm size, and industry.

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Firm profitability, as measured by the ROE, is positively related to firm value.24 In the panel regression of Table 4, the coefficient of Profit is significant, at the 1% level, for the non-GLCs. It is also significant, in the pooled regression, for GLCs (Table 5). However, the difference in the contribution of profitability between GLCs and non-GLCs, judging by the results of the Wald test in Table 4, is insignificant. In the panel regression of Table 4, the Wald test for the equivalence of the estimates shows that the difference in the impact of firm size between GLCs and non-GLCs is not significant. The difference in the contribution of leverage between GLCs and non-GLCs is also not significant. As an alternative monitor, foreign ownership in a GLC has a significant effect on its value, judging by the significantly positive coefficient of Forown in Table 5.25 Among non-GLCs, foreign ownership is positively, though not significantly, related to firm value (Table 4). From the evidence shown, it can be argued that Singaporean GLCs, compared to non-GLCs, implement better governance mechanisms and stronger monitoring of their operations, in addition to being leaner organizations. As such, government ownership has a direct effect on firm valuations, as evidenced by the significant contribution of Govown. Being GLCs also have a spillover effect on other governance variables beyond those discussed in the paper. Our conclusions are not inconsistent with the assertion by Fama and Jensen (1983) that a higher degree of corporate governance increases firm value, only in this case being a Singaporean GLC represents the alternative governance mechanism. In our analysis, we have controlled for a firm’s profitability and risk (leverage and firm size). The findings are consistent with Chan and Chen (1988) who assert that firm size does not necessarily explain firm value. The evidence reveals that, contrary to the performance of state-owned enterprises in many countries, being a GLC in Singapore does not hurt but adds to firm value. The presence of alternative monitoring mechanisms, such as foreign ownership, provides a positive perception about a GLC’s corporate governance and bolsters its valuation. 4.3. Comparison with matched sample of non-GLCs In addition to the above analysis, a matched sample of non-GLCs is included for further analysis in which each GLC is paired with a non-GLC closest to its firm size. The results of the pooled regression analysis shown in Table 6 are largely consistent with those in Table 5. We highlight some of them here. First, similar to GLCs, larger non-GLCs are associated with higher valuations. Second, non-duality is an important contributor to firm value among nonGLCs. The evidence suggests that government ownership in Singaporean companies is a good substitute for duality even though almost all GLCs already practice non-duality. Third, investors appear to place more value in the presence of foreign ownership in GLCs than in non-GLCs. The results demonstrate that investors in Singapore appear to take comfort in the knowledge that a firm is a GLC.

24

When firm profitability is measured by ROA, the results (not shown) are not qualitatively different. No results were reported for foreign ownership in the GLCs in the panel regression as there were very few GLCs in each year with foreign ownership of more than 5% across the 11 years of the study. 25

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Table 6 Pooled OLS regression for matched sample of non-GLCs Variable

Coefficient

t-Statistic

Constant Non-dual Profit Size Leverage Forown Industry 1 Industry 2 Industry 3 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Adj R2 F

−25.584 12.910 116.837 4.373 −30.364 5.113 4.071 2.235 34.090 11.851 8.479 33.977 15.236 5.312 4.442 −10.467 −10.083 7.317 −7.652

−0.528 1.779* 4.454*** 1.834* −1.873* 0.770 0.489 0.287 4.915*** 0.927 0.669 2.691*** 1.200 0.413 0.349 −0.816 −0.776 0.560 −0.593 0.269 6.338***

This table presents the pooled OLS results across all years from 1990 through 2000 of the relationship between firm valuation and various variables from a size-matched control sample of non-GLCs: 8 β Industryi + Value = β0 + β1 Non-dual + β2 Profit + β3 Size + β4 Leverage + β5 Forown + i=6 i

18

β Yeari + ε i=9 i where Value is measured by the Chung and Pruitt (1994) approximation of Tobin’s Q, expressed as a percentage; Non-dual is a dummy variable that takes on a value of one when the firm’s CEO is separated from the Chairman, and zero otherwise; Profit measures a firm’s profitability by its return on equity; Size is the natural logarithm of the firm’s total assets that controls for differences in firm size; Leverage is total liabilities to total assets; Forown is a dummy that is assigned a value of one when there is at least 5% foreign ownership of the firm’s issued share capital, and a zero value otherwise; Industry controls for the four broad industry groups with three dummy variables; Year is a series of 10 (0, 1) dummies that serves to control for the possibility of time varying differences during the 11-year study period from 1990 to 2000; ε is a random error term. Asterisks (*** , ** , and * ) denote statistical significance at the 1%, 5%, and 10% levels, respectively.

5. Summary and conclusions In this paper, we have studied the ownership/control structure of Singaporean GLCs (government-linked companies) in which the government, through a holding company, Temasek Holdings, owns large cash flow rights but disproportional control rights. Instead of exercising operational control, Temasek uses its control rights to monitor and participate as board members of the firm, i.e., stewardship. We investigate the level of corporate governance displayed by the GLCs and compare it to a control sample of listed non-GLCs on the Singapore Exchange. We then compute the Tobin’s Q to determine the degree to which government involvement and corporate governance affects firm value. We find that GLCs

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on average exhibit higher valuations than those of the non-GLCs, even after controlling for firm specific factors such as profitability, leverage, firm size, industry effect, and foreign ownership. An important objective of the paper is to compare the financial and market performance of GLCs with non-GLCs, where each has a different set of governance structure, the key difference being government ownership. On average, GLCs provide superior returns (on both assets and equity), and are valued more highly, through their better management of expenses than non-GLCs. GLCs do better than non-GLCs in many performance measures and do not appear to be worse off in other measures. Correspondingly, they are more highly valued. Since GLCs are generally correlated with better governance practices, the results support the view that investors in the Singaporean market do value the higher standards of corporate governance found in the GLCs.

Acknowledgements The authors gratefully acknowledge the helpful comments on earlier versions of the paper by Gunter Dufey, T.J. Wong, Charlie Charoenwong, seminar participants at the Nanyang Business School’s Faculty Workshop, and the 2002 APFA/PACAP/FMA Finance Conference in Tokyo, Japan.

Appendix A. State of implementation of Corporate Governance Committee’s recommendations A.1. Board of directors An independent director is defined as one who is capable of performing his duties independently from the management, controlling shareholders, and the corporation (Gregory, 1999). In line with the recommendations of the Cadbury Report, the CGC has recommended that at least one-third of the board should be independent to provide a certain degree of independence from the management. In addition, a nominating committee should be established to provide a formal and transparent process for the appointment and re-election of directors. It also recommends that the chairman and chief executive should be two separate persons (Perry, 1995). Temasek is in the process of replacing any executive chairman of a GLC upon the expiration of the current term. Some GLCs have already set up a nominating committee while Temasek considers its implementation across all its companies. Temasek limits the tenure of chairmen to two terms of 3 years each. It has also placed limits on the terms of other directors, board size (less than 12), and the number of board appointments per director. A.2. Remuneration for directors The CGC recommends the set up of a remuneration committee to provide objectivity in setting remuneration. It requires greater clarity on the principles of compensating executive and non-executive directors, so that the remuneration of directors and senior executives

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better reflect their performance and contributions to the company. While the CGC does not require the disclosure of individual director’s remuneration, companies are strongly encouraged to do so. Boards, however, are asked to disclose the total remuneration of their directors, including those of the top five earning executives, in bands of USS$ 250,000, showing the breakdown of salaries, bonuses, stock options, and other incentives. Disclosure should also be made of any staff that is an immediate family member of a director or the CEO. A.3. Audits and financial reporting The CGC recommends that the audit committee be made up entirely of non-executive directors, to ensure independence and objectivity. Some GLCs, such as SingTel have already begun to do so. This recommendation represents a departure from the current practice whereby an executive director can be a member of the Audit Committee. In addition, it is recommended that at least two members of the Audit Committee should have accounting or financial management expertise or experience, so that it can effectively discharge its responsibilities. It also recommends the quarterly reporting of financial results, which some GLCs have already begun to do so on their website. A.4. Communication with shareholders Companies are encouraged to engage in effective communication with their shareholders. The CGC emphasizes the need for companies to provide timely disclosure of information to all shareholders in a fair and equitable manner such that all investors should have the same level of information and that there should be no disclosure of price-sensitive information at analyst briefings or private meetings. It recommends that electronic voting methods be allowed to encourage shareholder participation and that the chairmen of the audit, nominating, and remuneration committees, as well as the external auditor, should be present at the company’s general meeting to answer any questions that may arise.

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