Description
The purpose of this paper is to examine the impact of ownership structure and corporate
governance on corporate liquidity policy from a developing country perspective, Ghana Stock
Exchange (GSE).
Journal of Financial Economic Policy
Ownership structure, corporate governance and corporate liquidity policy: Evidence
from the Ghana Stock Exchange
Godfred A. Bokpin Zangina Isshaq Francis Aboagye-Otchere
Article information:
To cite this document:
Godfred A. Bokpin Zangina Isshaq Francis Aboagye-Otchere, (2011),"Ownership structure, corporate
governance and corporate liquidity policy", J ournal of Financial Economic Policy, Vol. 3 Iss 3 pp. 262 - 279
Permanent link to this document:http://dx.doi.org/10.1108/17576381111152236
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Zangina Isshaq, Godfred A. Bokpin, J oseph Mensah Onumah, (2009),"Corporate governance, ownership
structure, cash holdings, and firm value on the Ghana Stock Exchange", The J ournal of Risk Finance, Vol.
10 Iss 5 pp. 488-499http://dx.doi.org/10.1108/15265940911001394
Godfred A. Bokpin, (2011),"Ownership structure, corporate governance and dividend performance on
the Ghana Stock Exchange", J ournal of Applied Accounting Research, Vol. 12 Iss 1 pp. 61-73 http://
dx.doi.org/10.1108/09675421111130612
Godfred A. Bokpin, Anastacia C. Arko, (2009),"Ownership structure, corporate governance and capital
structure decisions of firms: Empirical evidence from Ghana", Studies in Economics and Finance, Vol. 26
Iss 4 pp. 246-256http://dx.doi.org/10.1108/10867370910995708
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Ownership structure, corporate
governance and corporate
liquidity policy
Evidence from the Ghana Stock Exchange
Godfred A. Bokpin
Department of Finance, University of Ghana Business School, Legon, Ghana
Zangina Isshaq
Department of Accounting and Finance, School of Business,
University of Cape Coast, Cape Coast, Ghana, and
Francis Aboagye-Otchere
Department of Accounting, University of Ghana Business School, Legon, Ghana
Abstract
Purpose – The purpose of this paper is to examine the impact of ownership structure and corporate
governance on corporate liquidity policy from a developing country perspective, Ghana Stock
Exchange (GSE).
Design/methodology/approach – The authors adopt multiple regression analysis in estimating
the relationship between ownership structure, corporate governance and corporate liquidity policy as
well as the impact of corporate governance on insider ownership.
Findings – The authors ?nd that foreign share ownership signi?cantly predicts corporate cash
holding on the GSE. The empirical result also portrays positive and statistically signi?cant
relationship between board size, ?nancial leverage, ?rm size, pro?tability and corporate liquidity
holding, and a negative and statistically signi?cant relationship between board composition and
corporate liquidity holding. The authors also document positive and statistically signi?cant
relationship between the various industry classi?cations namely manufacturing, distribution and the
pharmaceutical industry and corporate cash holdings on the GSE but did not however ?nd signi?cant
relationship between corporate governance and insider ownership on the GSE. The authors found
positive relationship between Tobin’s Q and inside ownership.
Originality/value – The main value of this paper is to analyze the relationship between ownership
structure, corporate governance and corporate liquid policy from a developing country perspective.
Keywords Ownership structure, Corporate governance, Cash holdings, Ghana
Paper type Research paper
1. Introduction
Researchers have looked for a unifying theory of the ?rm from various angles.
Our paper would certainly be a drop in that ocean. However, we intend to extend our
knowledge of what that “black box” (a ?rm) is ( Jensen and Meckling, 1976 revised),
by providing evidence of the relationship between ownership structure, corporate
governance and corporate liquidity policy from a developing country context. In the
ideal situation, investors provide capital to a ?rm and managers manage the ?rm in
the interest of the investors for a fee (Mensah et al., 2003). In this case, there is a
separation between the ?nancing and the management, implying a separation between
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1757-6385.htm
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Journal of Financial Economic Policy
Vol. 3 No. 3, 2011
pp. 262-279
qEmerald Group Publishing Limited
1757-6385
DOI 10.1108/17576381111152236
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ownership and control (Berle and Means, 1932). This therefore presents concerns for
shareholders. Managerial behavioral models suggests that there is an inherent
contradiction between the interest of managers and shareholders.
Also given that both principals (owners) and agents (managers) are utility
maximizers, the principal has to do a lot to keep the amount of divergence in interest at a
minimum ( Jensen and Meckling, 1976). This entails the incurrence of monitoring costs
widely referred to as agency costs. Corporate governance institutions thus, are geared
toward ensuring that this divergence is at the barest minimum. And even though
corporate governance structures are put in place by managers – from agitations of
shareholders anyway – the tab is picked byshareholders. Thus, corporate governance is
essentially an act of agency-relationship monitoring. According to Crutchley and
Hansen (1989), managers’ choice of stock ownership in the ?rm, the ?rm’s mixture of
outside debt and equity ?nancing, and dividends are meant to reduce the costs of these
agency con?icts excess liquidity may be viewed as managerial perk and therefore may
be associated with managers’ stake in their ?rm (Papaioannou et al., 1992).
Jensen (1986) argues that when a ?rm’s managers have more cash than is needed to
fund the entire ?rm’s pro?table investment projects (i.e. free cash ?ow), there is an
incentive for the managers to invest the excess cash in unpro?table projects. Myers and
Rajan (1998) postulate that greater asset liquidity gives owners control over managers
but greater liquidity as well gives managers the power to transforms assets in their
owners’ favour. The reasons for this paradox are that managers have implicit rights in
the liquidity of assets and altering asset liquidity would affect these implicit rights.
Thus, agency problems are an important determinant of corporate cash holding
(Dittmar et al., 2003) and to Yun (2008), the choice of corporate liquidity is also a channel
through which corporate governance works. But, Ginglinger and Saddour (2007) ?nd
that ?rms with strong shareholder rights hold more cash, contrary to the predictions of
agency theory with differences partly due to the positive correlation that exists between
governance quality measures and the degree of ?nancial constraint faced by the ?rms.
But cash holdings may serve commendable purposes, allowing the ?rm to seize
pro?table investment opportunities as they arise (Keynes, 1936); or they may, on the
contrary, indicate agency problems ( Jensen, 1986). We learn from agency theory that
liquidity (cash availability) has implications for managerial behaviour coupled with
other factors related to management incentives. However, management incentives that
include stock options introduces issues for the alignment of managerial and shareholder
interests. The question is which way does managerial ownership affect the managerial
disposition towards the utilization of cash resources? What does the nature of corporate
governance structures do to better align the interests of inside equity, outside equity and
debt capital in a ?rm, and shape corporate liquidity policy? The empirical evidence
observed in the literature is inconclusive and pertains to developed capital markets. But,
corporate governance has been gaining ground in emerging markets especially after the
Asian ?nancial crisis. IMF/World Bank-led economic reforms, coupled with recent
?nancial scandals in the west, are now driving the surging interest in corporate
governance practices in several developing countries (Rabelo and Vasconcelos, 2002).
The calls for governance reforms in emerging markets is right because to Gibson (2003)
there are good reasons to think that the effectiveness of corporate governance might be
quite different in developed and emerging markets. But, empirically much has not been
done to ascertain the impact these governance reforms are having on corporate liquidity
CG and corporate
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policy given that cash is the most important assets to be wasted by corporate managers.
Corporate governance in emerging markets has not been studied as intensively as in
developed markets (Shleifer and Vishny, 1997; Gibson, 2003) and particularly as it
relates to corporate liquidity policy and the fact that there is almost no empirical
evidence directly comparing the quality of corporate governance in emerging markets
and developed markets (Chung and Kim, 1999).
Empirical evidence further suggests that foreign investors avoid investing in
developing countries because of weak corporate governance practices (Gibson, 2003).
But theories proofed and empirical evidence have also concentrated on developed
markets such as the USA. Extant literature investigating ownership in emerging
markets have looked at its impact in relation to ?rm value (Lins, 2003) or expropriation
of minority shareholders by controlling shareholders (Claessens et al., 1999) or ?rm
valuation (Sarkar and Sarkar, 1998; Khanna and Palepu, 1999). The paper ?lls this void
in literature and also given that the participation of foreign investors has actively been
encouraged on the Ghana Stock Exchange (GSE) over the couple of years, the direct
empirical evidence of the impact of such policy would invariably enrich the existing
literature. Empirical evidence indicates that, foreign share ownership on the GSE on
the average is 31.9183 percent (Bokpin and Isshaq, 2009). But how much information
do foreign investors have about Ghana’s governance arrangement and to what extent
does these governance reforms affect managerial predisposition towards the utilization
of cash? For this reason, we ?nd it imperative to look at these thematic issues
particularly from the context of a developing country – Ghana. We provide evidence
on these questions from our study of listed ?rms on the GSE.
The next few sections provide a literature on the thematic areas of the study:
corporate governance arrangement in Ghana, ownership structure and liquidity policy,
corporate governance and liquidity policy, and ownership structure and corporate
governance. The method of analysis of the study is then presented followed by an
analysis of the empirical results of the study. Adiscussion of the results and conclusions
are presented in the last section of the study.
1.1 Corporate governance arrangement in Ghana
We have reviewed the governance framework with respect to matters pertaining to the
board and its compositions. Governance framework is not as strong as the USA and
UK in that more formal corporate governance structures and institutions are relatively
not widespread though a number of laws provide for governance structures for
companies in Ghana. These include the Companies Code 1963 (Act 179), which
provides for governance of all companies incorporated in Ghana, and the Securities
Industry Law, 1993 (PNDCL 333) as amended by the Securities Industry (Amendment)
Act 2000 (Act 590), which provides among other things for governance of all stock
exchanges, investment advisors, securities dealers, and collective investment schemes
licensed under the Securities and Exchange Commission (SEC).
The Companies’ Code stipulates a minimum of two directors for each company with
no ceiling on their number. It however, allows companies themselves to ?x the
maximum number of directors in their regulations whilst the GSE listing regulations is
silent on board size. In terms of board composition, there is no requirement under the
Companies Code for the appointment of independent directors neither is there a provision
for the balance of executive and non-executive directors. However, there is allowance for
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the interests of different stakeholders to be represented on the board. Inclusion of
independent directors on the board of directors is a requirement under the SEC’s Code of
best practices on corporate governance (SEC Code) for the GSE. The Companies Code
makes provision for the appointment of executive directors by allowing directors to hold
concurrently with the of?ce of director, any other of?ce or place of pro?t in the company,
except the of?ce of auditor. In terms of board structure, duality or otherwise of CEOrole
as chairman on the board and in the company itself, the Companies Code does not
prevent the appointment of the same person to the two of?ces.
The SEC Code on the other hand advocates for but does insist on the two-tier board
structure where the CEO is different from the board chairman. The responsibility for
good corporate governance at the ?rm level is placed on the board of directors.
Under the Companies Code, 1963 (Act 179), the business of a company is managed by
the BOD except as otherwise provided in the company’s regulations. No doubt,
the effectiveness with which the board plays its oversight role depends to a large
extent on its membership, its independence, and its expertise. Under the Companies
Code, the appointment and replacement of directors of companies is regulated by the
company’s regulations and is the preserve of shareholders.
2. Literature review
The literature review considers the three thematic areas of the study. We review
empirical evidence on the relationship between ownership structure and corporate
liquidity policy followed by the relationship between corporate governance and
corporate liquidity policy and ?nally the relationship between corporate governance
and ownership structure.
2.1 Ownership structure and liquidity policy
Papaioannou et al. (1992) recognized the fact that the relationship between corporate
ownership structure and corporate liquidity policy was an empirical question. Jensen
and Meckling(1976) de?ned ownership structure in terms of capital contributions. Thus,
the authors saw ownership structure to comprise of inside equity (managers), outside
equity and debt. However, in their revision of the original paper, the authors,
in postulating a uni?cation of the various theories pertaining to ?rmbehaviour – theory
of agency, theory of proprietary rights, and theory of ?nance – opined that the ?rmwas
a market. The market the ?rmis, as the authors observed, is because the ?rmis a process
of con?icting objectives of individuals brought into equilibrium within a framework of
contractual obligations ( Jensen and Meckling, 1976).
The distribution of contingent claims on the ?rm’s assets to the market participants
as the above position observes suggests an extension of the form of ownership
structure beyond the debt-holder and equity-holder view. Zheka (2005) constructs
ownership structure using variables including proportion of foreign share ownership,
managerial ownership percentage, largest institutional shareholder ownership, largest
individual ownership, and government share ownership. Jensen and Meckling (1976)
postulated that the distribution of outside ownership has implications for managers’
consideration about changes in their fractional ownership below a certain level.
Managers’ investment in the company is ?rst their professional capital, and second,
when stock options are given as incentives or if they are part owners, their ownership
interest in the company. Galai and Masulis (1976) opine that when managerial stock
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ownership increases, it reduces the value of the component of management wealth held
in stock because higher liquid balances reduces variance of return hence value of stocks.
Based on this view, Papaioannou et al. (1992) predicted a negative relationship between
managerial share ownership and excess liquidity, even though the authors did not ?nd
evidence of a signi?cant relationship between management ownership and liquidity
ratio. The authors attributed the results to the presence of other factors that are so
restrictive of managerial sel?sh interests to present overinvestment problems. These
constraining variables that limit managers ability to exploit corporate resources for their
own utility-maximizing objectives included the product and factor market conditions.
Indeed, Jensen and Meckling (1976) note that ownership structure is in?uenced by a
company’s industry. With respect to liquidity holdings, Papaioannou et al. (1992) found
a negative relationship with inside equity, which was found not be signi?cant. Luo and
Hachiya (2005), however, found that insider ownership plays a signi?cant role in
determining cash holdings. The relationship between managerial ownership and cash
holdings is quali?ed, in a synthesis of the evidence of Papaioannou et al. (1992) and Luo
and Hachiya (2005), by the observation of Ozkan and Ozkan (2002) of non-monotonic
relationship between managerial ownerships and cash holdings. The indication is
therefore that the relationship between managerial ownership and corporate cash
holding is not linear. It is not farfetched to argue that the relationship between corporate
cash holdings and inside ownership could be nonlinear. The intuition is that at a point of
lower managerial ownership interests, the wealth of management invested in the
company would be lower, and an opportunity and temptation would exist to waste cash
through accumulation of cash which would be value destroying. However, as
managerial interest grows, managers’ wealth invested in the company would be higher
and managers would have more at stake and would be motivated to preserve the value of
the ?rm through prudent application of cash reserves rather than stockpiling for easy
expenditure of cash.
2.2 Corporate governance and corporate liquidity policy
Studies have shown that shareholders would markdown the value of a ?rm if they
have reason to expect managers to waste resources (Fresard and Salva, 2008 citing
La Porta et al., 1998; Durnev and Kim, 2005). The extent of the value reduction depends
on the existence and ef?ciency of restraining mechanisms on management tendency to
waste corporate wealth, and availability of assets that are easy to waste (Fresard and
Salva, 2008). The authors’ argument calls into view the asset structure of a ?rm as part
of the challenges to restraining management behaviour. The work of Jensen (1986)
shows that cash is the most likely asset to be wasted and as pointed out by Myers and
Rajan (1998), it is easier to make cash disappear than to make a plant disappear.
The above brings out the importance of governance mechanisms to corporate
liquidity policy. The nature of the relationship between cash holdings, ?rm
and corporate governance systems have been of interest in recent investigations
(Luo and Hachiya, 2005; Pinkowitz et al., 2006; Dittmar and Marth-Smith, 2007; Kalcheva
and Lins, 2007; Fresard and Salva, 2008). The conclusions of these studies show
investors value liquid balances less in countries with weak shareholder protections
rights and weak corporate governance systems, conclusions that are broadly in line with
the agency theory hypothesis stated above. According to Harford et al. (2006), cash
holdings increase with shareholder protection levels, as measured by a governance
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index and that ?rms with weaker corporate governance have smaller cash reserves. In
the same vein, Dittmar and Marth-Smith (2007) document that shareholders assign a
lower value to an additional dollar of cash reserves when agency problems are likely to
be greater. They further show that poorly governed ?rms dissipate cash more quickly
and in such a way that they experience lower operating performance.
Fresard and Salva (2008) document that governance environment that requires
stricter disclosure requirements save to limit managers ability to squander liquid
balances. The environmental context of corporate governance is thus also a variable of
interest in considering the effectiveness of corporate governance. But the evidence the
authors provide show that stronger corporate governance can have positive in?uences
on the corporate liquidity policy of the corporation. To further buttress the importance
of corporate governance mechanism, the authors provide evidence that excess cash
premium is higher in countries where investors perceive weaker investor protection.
But Schauten et al. (2008) ?nd that governance mechanisms – except the market for
corporate control – are not strong enough to prevent managers from wasting excess
cash. The ?ndings of the above research must be understood in the context that
holding cash necessarily is bad. Firms hold cash for a number of reasons including
precautionary, speculative and transactional purposes (Keynes, 1936) and thus how
much liquid balance is held by a corporation is in?uenced by factors such as
transaction costs, opportunity costs and informational asymmetries (Bruinshoofd and
Kool, 2004). Though, the assumptions held for these reasons pertain to developed
markets, we expect similar reasons for emerging markets. We do not expect that
controlling shareholders or managers transform a ?rm’s liquid assets into private
bene?ts in such a way that the ?rm is always starved for cash consistent with
Pinkowitz et al. (2006). Research on the corporate liquidity policy of emerging markets
is very scanty though cross-country study exists (Dittmar et al., 2003; Kalcheva and
Lins, 2004). Also countries in which the appropriation of private bene?ts is easier are
also typically riskier (Acemoglu et al., 2003) and therefore ?rms in these countries may
hold more cash simply because they require a larger buffer to protect themselves
against adverse shocks (Pinkowitz et al., 2006 citing Acemoglu et al., 2003).
2.3 Corporate governance and ownership structure
Corporate governance is a system of mechanisms that serve to ensure that shareholder
wealth is maximized and it does so through several ways geared toward enforcing the
stewardship responsibilities of managers. Governance systems also serve to at least,
restrain the managers’ tendency to maximize their utility at the expense of shareholders,
if not to align managers’ and shareholders’ interest. The board of directors is an
essential ingredient in governance systems in most Anglo-Saxon corporate systems.
Among the benchmark practices is the inclusion of outside directors on the board.
These outside directors are expected to owe more allegiance to shareholders because
they are not of?cers in the company and would be independent of the management
team. As such outside directors presence on the board of directors would be an effective
monitoring mechanism of the actions of managers.
In the foregoing framework, what should be the nature of the relationship between
inside ownership and the presence of outside directors on the board? The empirical
evidence is mixed. Ryan and Wiggins (2004) and Davila and Penalva (2004) ?nd
a positive relationship between inside ownership and the proportion of outsiders on
CG and corporate
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the board. On the other hand, Denis and Sarin (1999) found a negative association
between inside ownership and the proportion of outside directors on the board. The
contradictory nature of the evidences provided by the aforementioned papers, shows
that all is not known about the relationship between the proportion of outsiders on the
board and inside ownership. Coles et al. (2005) offer an explanation. The authors explain
that these differences are attributable to issues such as differences in samples over time
and sizes, the industry from which a sample is selected, ?rm sizes, and data sources.
Others mentioned include choice of control variables and the functional forms of models
used to established relationships. Using a structural model, Coles et al. (2005) conclude
that managerial ownership and proportion of outside directors on the board are
complements in production. The reasoning is that managerial ownership comes as part
of a package of incentives for managers, and such incentives are expected to motivate
performance. The monitoring role of outside directors complements the motivating
factors for managers to perform according the managerial contract provisions.
Coles et al. (2005) conclusion corroborates, in part, the empirical evidence of
Hermalin (2005) of a negative relationship between board composition and managerial
ownership because productivity parameters are correlated. However, this does not
resolve the question of the conclusions of a positive relationship by some researchers
and a negative relationship by others about the same relationship. Coles et al. (2005) in
their analysis of empirical data in the framework of the principal-agent theory ?nd that
CEO ownership and board independence are determined by exogenous productivity
parameters and variation over time and ?rms, and could lead to a positive or negative
CEO ownership and board independence relationships. Thus, suggesting that the
relationship between managerial ownership and board independence is not linear.
3. Empirical methodology
Our approach to modeling the system of interest in this paper incorporates the
arguments of Demsetz (1983)[1], evidence from Demsetz and Lehn (1985) and Demsetz
and Villalonga (2001). The argument is that the ownership structure of a ?rm is an
outcome of the decisions of shareholders and trading in the ?rm’s shares on the market.
Decisions should be viewed from the point that existing shareholders make the
decision to go public and to issue more shares subsequently. Management might play
advisory role, but in essence any changes in ownership structure re?ect the in?uence of
shareholders. Thus, ownership structure should be modeled as an endogenous
variable. However, the system within which Demsetz and Villalonga (2001) reexamine
the evidence on ownership structure involves performance and ownership structure
(insider ownership and ownership concentration). Their model captures the view that
?rm performance in?uences ownership structure and ownership structure might also
be in?uenced by ?rm performance. Highly performing ?rms would attract investors in
the market, and owners of highly performing ?rms can go public, is intuitive.
In the current study, we are interested in liquidity management and its relationship
with ownership structure and corporate governance. Cash accumulation could attract
outsider investors on the market, which would change the ownership structure. This
means a likely causal relation running from liquidity to ownership structure. As argued
earlier, insider ownership, via agency con?icts, may in?uence cash accumulation.
Therefore, we estimated a system of equations using seemingly unrelated regression
techniques as oppose tothe two-stage least squares usedbyDemsetz andVillalonga (2001):
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LIQD
it
¼ b
0
GOV
it
þ d
0
OWNS
it
þ f
0
CONTRL
it
þ1
it
ð1Þ
INSOWN
it
¼ aLIQD
it
þb
0
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it
þ l
0
CONTRL
it
þ h
it
ð2Þ
Where subscript i and t represent the ?rmand time, respectively. In this case, i represents
the cross-section dimension and t represents the time-series component.
LIQD is the dependent variable and measures corporate cash holding (natural
logarithm of cash and cash equivalents). We are interested in liquidity accumulation,
for this reason we do not scale the cash variable over assets.
GOVis a vector of governance variables namely board size and board independence.
OWNS is a vector of ownership variables including inside ownership (the proportion
of shares held by managers and employees), and proportion of shares owned by foreign
investors. Luo and Hachiya (2005) provide evidence in their study of Japanese ?rms, that
foreign ?rms select ?rms that are not only pro?table but also have higher levels of cash.
There is a seemingly causation running from liquidity to foreign share ownership.
To address the effects of this in?uence on the system we estimate a corollary equation
(not stated here), the results are presented in Appendix.
CONTRL in both equations is a vector of control variables including volatility of
income, leverage, industry dummy, sales growth, dividend payout and ?rm size.
VOLATILITY of income is measured as the three-year standard deviation of ROA
as Opler et al. (1999) ?nd empirical evidence of operating uncertainty being positively
related to cash holdings. Volatility is included as measure of precautionary motives for
cash. In the ownership structure equation, we intend it to serve as a proxy for
?rm-speci?c risk.
SIZE is measured as the natural logarithm of total assets. Luo and Hachiya (2005)
include size as a control variable and found that size is negatively related to cash
holdings.
DEBT is a measure of leverage as total debt to total assets (Faulkender and Wang,
2006) who ?nd amongst other things that the marginal value of cash holdings declines
withthe amount of cashholdings andwithleverage consistent withOpler et al. (1999). And
leverage is introduced also as a measure of liquidity demand required to service debts.
DUMINDUST is a dummy for a ?rm’s industry. The industry dummy is included
because Papaioannou and Travlos (1992) show that factor and product market
conditions are restricting mechanisms on the relationship between managerial
ownership and liquidity policy. We followed the GSE of?cial industry classi?cation.
See Appendix 3 for details of industry classi?cation as well as the sensitivity of the
industries to cash holdings.
Following Papaioannou and Travlos (1992) sales growth is included as a measure of
transactions demand for liquidity. Pinkowitz and Williamson (2005) also ?nd that
?rms with good growth options have their cash valued at a premium relative to ?rms
with poor growth prospects.
INSOWN represents inside ownership, measured as the proportion of shares held by
managers and employees.
Data for the study was obtained from the GSE market reports and the GSE Fact
book for the years 2001-2007. We excluded ?nancial ?rms from the sample because of
their peculiar liquidity management requirements. Further, three years of ?nancial
information was required for a company to be included in the sample of listed ?rms
used for this study.
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4. Empirical results
4.1 Descriptive statistics
Table I provides the descriptive statistics of the dependent and the explanatory
variables. Liquid assets (cash holdings) records overall mean of 5.8140 and there are
variations in this variable across the sample size over the period. Tobin’s Q registers
average mean of 0.1863, board composition also registers overall mean of 0.6222,
volatility in earnings on the average records 0.1063 and leverage registers a mean of
0.6532. Overall, dividend payout registers an average value of 0.0656, growth in sales
records 4.4172, inside ownership registers 0.1292, average foreign shareholdings
records 0.2300, average board size over the period was 8.4532. There are more local
?rms in our sample than foreign ?rms throughout the sample period (Appendix 4).
Whilst at the beginning of the sample period, there were seven foreign ?rms as against
eight local ?rms, the number of local ?rms increased to 12 through additional listings
on the GSE whilst the number of foreign ?rms increased marginally to ?ve in 2002.
On the average foreign ?rms appetite to accumulate more cash is more than twice local
?rms (average cash balance for foreign ?rms is 963.87 as against 413.19 for local ?rms;
amounts are in thousands of Ghana cedis) as presented in Table II, there is greater
variation in this variable for foreign ?rms as compared to local ?rms. Industry
dynamics and cash holdings reveals ?rms in the printing and paper hold more cash
followed by ?rms in the food and beverage industry (see Appendix 3 and E for the
industry classi?cation, cash holdings and number of ?rms in each industry over the
sample period).
Variable Mean SD Min. Max. Obs.
Cash holdings 5.8140 1.0880 1.2006 8.2986 139
Tobin’s Q 0.1863 0.2039 0.0008 0.9502 139
Board composition 0.6222 0.1237 0.091 0.8023 139
Volatility 0.1063 0.1507 0.0013 0.9468 139
Leverage 0.6532 1.5792 20.4551 10.5067 139
Dividend 0.0656 0.1348 0 1.0000 137
Sales growth 4.4172 0.7812 3.041 6.3610 139
Inside own 0.1292 0.1820 0.0034 0.9095 139
Foreign own 0.2300 0.3249 0 0.8891 139
Firm size 5.7068 1.4217 3.0168 8.8196 139
Board size 8.4532 2.5544 5 17.0000 139
Table I.
Descriptive summary
statistics
Foreign Local
Stat. CASH INSOWN (%) CASH INSOWN (%)
Min. 65.49 0.34 3.32 0.34
Max. 4,018.21 62.53 1,326.89 90.95
Mean 963.87 8.80 413.19 14.42
SD 1,100.50 13.15 313.87 19.56
Notes: A ?rm is foreign if non-resident holding is greater than 50 percent and local otherwise; data is
for the period 2001-2007; cash is in thousand of Ghana cedi
Table II.
Cash holding and inside
ownership for foreign
and local ?rms
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4.2 Analysis of regression results
We present in this section a part of a system of four equations estimated in an attempt
to mitigate problems of endogeneity in some of the control variables. The system of
equations also provides us an opportunity to address the issues of interest to this study
in a more comprehensive system than can be obtained in single equations models on
the subject matter. We present here the equations for liquidity and inside ownership
equations. The Appendix, however, provides the complete results of the system which
includes corollary equations for foreign share ownership and Tobin’s Q. Our Tobin’s Q
equation borrows from Demsetz and Villalonga (2001) with some exceptions.
We left market risk to the error term and proxied ?rm-speci?c risk with income
volatility, and advertising and research and development expenditure with sales
growth (Table III).
Equation Obs. Parms RMSE R
2
x
2
p
LIQLOG 137 16 0.8937 0.3271 6218.61 0.000
INSOWN 137 16 0.1466 0.3538 190.27 0.000
Coef. SE Z p . jZj
LIQLOG
TOBINQ 20.3423 0.4953 20.69 0.4890
BCOMP 22.4577 0.7327 23.35 0.0010
BDSIZE 0.1265 0.0506 2.5 0.0120
SIZE 20.0392 0.0595 20.66 0.5110
INSOWN 20.2175 0.4909 20.44 0.6580
FRSHR 1.7506 0.2742 6.39 0.0000
LEVRG 0.1494 0.0540 2.76 0.0060
VOI 20.6183 0.5786 21.07 0.2850
FBEV 5.5767 0.6021 9.26 0.0000
MINE 3.0571 0.9919 3.08 0.0020
MANU 5.6123 0.5932 9.46 0.0000
AGPR 5.2361 0.8092 6.47 0.0000
DIST 5.4410 0.6155 8.84 0.0000
PRPB 5.5843 0.6474 8.63 0.0000
PHAM 4.6432 0.5094 9.11 0.0000
ICT 4.8775 0.6076 8.03 0.0000
INSOWN
LIQLOG 20.0065 0.0143 20.46 0.6470
TOBINQ 0.2020 0.0835 2.42 0.0160
BCOMP 0.0272 0.1269 0.21 0.8300
BDSIZE 0.0021 0.0089 0.24 0.8100
SIZE 0.0125 0.0100 1.25 0.2120
FRSHR 20.0762 0.0494 21.54 0.1230
LEVRG 0.0267 0.0090 2.96 0.0030
VOI 20.0981 0.0977 21 0.3150
FBEV 20.0557 0.1283 20.43 0.6640
MINE 0.3241 0.1718 1.89 0.0590
MANU 0.0491 0.1274 0.39 0.7000
AGPR 20.1562 0.1557 21 0.3160
DIST 0.0485 0.1287 0.38 0.7060
PRPB 0.1139 0.1341 0.85 0.3960
PHAM 0.1026 0.1061 0.97 0.3330
ICT 0.0566 0.1226 0.46 0.6440
Table III.
Regression results
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4.2.1 Corporate liquidity management. Our results show that Tobin’s Q has a negative
coef?cient but is not signi?cant in the determination of cash build-up. The two
governance variables showopposite signs whilst bothare signi?cant. Boardcomposition
has a negative coef?cient and is signi?cant to the cash equation. Board size on the other
bears a positive and statistically signi?cant relationship to cash accumulation. Further,
?rmsize shows a negative coef?cient but is insigni?cant in the model. Inside ownership
shows a negative coef?cient but is not statistically signi?cant in the liquidity equation.
Foreign share ownership shows a positive coef?cient andis statisticallysigni?cant inthe
liquidityequation. Our leverage variable also bears a positive andstatisticallysigni?cant
coef?cient in the liquidity equation. Income volatility does not have a signi?cant
coef?cient in the equation even though it shows a negative coef?cient, contrary
to expectation. The dummy variables are all statistically signi?cant and show positive
coef?cients in the liquidity equation. These suggest that the various industries in which a
?rm operates has a likely contribution to cash accumulation.
4.2.2 Ownership structure. Tobin’s Q is found to have a positive and statistically
signi?cant coef?cient in the insider ownership equation. Also noteworthy in the
ownership equation is that the corporate governance variables – board size and board
composition – are both insigni?cant even though they show positive coef?cients. Firm
size also bears a positive coef?cient in the ownership structure equation even though it
is not statistically signi?cant. Foreign share ownership shows a negative coef?cient in
the inside ownership equation even though the coef?cient is not statistically
signi?cant. Leverage is statistically signi?cant in the liquidity equation with a positive
coef?cient. Income volatility is however, insigni?cant in the inside ownership equation
even though it shows a negative coef?cient. Of the industry dummies, only the mining
sector is statistically signi?cant at 10 percent and positive.
5. Discussion and conclusions
There are a number of studies to compare our results withto understand the implications
of our ?ndings for the subject matter at hand, and the signi?cance of the study. Demsetz
and Villalonga (2001) provide evidence of an insigni?cant relationship between insider
ownership and Tobin’s Q. Our result is the contrary. Their position is that altering
the ownership structure is something shareholders do through their decisions. We
interpret our results differently. We believe that after the initial public offer, any decision
to invite other shareholders and thereby alter a ?rm’s ownership structure on the part of
existing shareholders would be enabled by signs of good performance. With this view,
we can see performance has a signi?cant and positive relationship with ownership
structure. Further, if managers and employee ownership re?ects an investment of their
wealth in the future of the ?rm, then our results re?ect utility maximization decisions by
insiders. Indeed, all the ownership variables bear a positive relationship with Tobin’s Q
in the corollary equations estimated in the system of equations.
The results on the governance variables are mixed. But let us take the variables
separately. Board composition shows a negative relationship with liquidity.
That shows a board’s composition can militate against cash accumulation drives if
such accumulation is not going to create any value for shareholders. We infer that the
quality of the board (board composition) is a more important restraining factor on
liquidity accumulation than the number of persons sitting on the board. The negative
relationship is also suggestive of a tendency for such a board not to come to decisions
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far easily, which could weaken any control the board would have over the affairs of the
company. The positivity of the board size variable shows that increasing board size
would lead to increased corporate liquidity accumulation. The indication is that
Ghanaian ?rms are probably lavish on boards of directors such that accumulating cash
balances helps meeting liquidity demand to for pay board remunerations.
There are strands of contradictory evidence in the literature on the in?uence of
corporate governance on inside ownership. Those that ?nd a positive relationship Ryan
and Wiggins (2004) and Davila and Penalva (2004) and those who ?nd a negative
association Denis and Sarin (1999), have both not been supported from our results. Our
results can be seen as a con?rmation of the observations of Coles et al. (2005) that the
relationship between inside ownership and board independence might be nonlinear,
as a linear modeling approach has been used in the study. In the Ghanaian context,
the evidence indicates that corporate governance does not in?uence inside ownership.
One interpretation of this result is that owning part of the stock of the company in Ghana
is not related to corporate governance initiatives to align managerial interest with
shareholders. This interpretation re?ects the positive result on Tobin’s Q in the insider
ownership equation. Firms listed on the GSE are among the country’s best performing
and managed where the company is not a subsidiary of a foreign company. Perhaps, this
fact overshadows what effect boards can have on managers to take up part of the
company’s stock.
Our results on the relationship between managerial ownership and increase in cash
holdings mirror that of Papaioannou et al. (1992). We con?rm their predicted negative
relationship, but like their ?ndings, the relationship is not signi?cant. Luo and Hachiya
(2005) results is, thus, uncon?rmed in the Ghanaian context. Our ?ndings could also be
explained by the observation of Jensen and Meckling that ownership structure is
in?uenced by a company’s industry. The industry dummies were present in the liquidity
equation and even though industry in?uence on ownership structure is only found true
in the case of mining in the inside ownership equation, the point can be made that such
in?uences could curtail managerial misuse of liquidity to the point of insigni?cance.
We would like to qualify this conclusion bearing in mind the non-monotonic relationship
between inside ownership and cash holdings observed by Ozkan and Ozkan (2002).
Another interpretation of the results is that the ?nancial environment restraints
liquidity misuse as part of the actions of managers in the Ghanaian context because
?rms can only raise funds frombanks, which has been very expensive over the past two
decades. Because all the industry dummies are signi?cant and positive in the liquidity
equation, the foregoing interpretation is plausible. Also, there have been fewer than ?ve
seasoned equity offerings on the stock market counting rights issues, which con?rms
environmental constraints onmanagement cashmisuse of liquid balances interpretation
of the results. The theoretical implications is that managerial abuse of slack resources –
perhaps through pet projects, empire-building ambitions – could be curtailed in an
environment where raising funds is expensive. This is symptomatic of pecking-order
theory of capital structure choice. We believe the evidence does not explain pecking
order conjectures but rather indicates that where there are fewer opportunities to invest
excess liquidity, managers just accumulate them, perhaps, to earn interest at the bank
and to spend on board remuneration as alluded to earlier.
The signi?cance of the foreign share ownership variable in the liquidity equation
con?rms the ?ndings of Mangena and Tauringana (2007) who found positive
CG and corporate
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relationship between liquidity and foreign share ownership. The negative relationship
insider ownership and foreign share ownership is also note worthy. It shows that
foreign investors would avoid ?rms with higher levels of insider ownership. Obviously,
a foreign investor would be wary of a ?rm far away from home where the managers
own a greater number of the shares and voting rights because without strong investor
rights protection in the domestic country, the foreign investment’s risk level would be a
few notches up.
Two implications for corporate governance in Ghana are worthy of note. First,
corporate governance mechanisms in Ghana have no effect on alignment of
shareholders’ and managers interest. Second, corporate governance systems mighty be
costly for the listed ?rms. The fact that Ghanaian environment is yet to be faced with
debate over management and directors’ remuneration is a persuasive anecdote, a point
for further consideration. Atheoretical implication for the literature is that the ?nancial
and economic systems are likely constraining factors in managerial misuse or
otherwise of slack cash balances.
Note
1. We are thankful to an anonymous referee who point this out to us.
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Appendix 1
Equation Obs. Parms RMSE R
2
x
2
p
LIQLOG 137 16 0.8937 0.3271 6218.61 0.000
INSOWN 137 16 0.1466 0.3538 190.27 0.000
FRSHR 137 8 0.2836 0.2434 79.24 0.000
TOBINQ 137 11 0.1554 0.4235 107.36 0.000
Coef. SE Z p . jZj
LIQLOG
TOBINQ 20.3423 0.4953 20.69 0.4890
BCOMP 22.4577 0.7327 23.35 0.0010
BDSIZE 0.1265 0.0506 2.5 0.0120
SIZE 20.0392 0.0595 20.66 0.5110
INSOWN 20.2175 0.4909 20.44 0.6580
FRSHR 1.7506 0.2742 6.39 0.0000
LEVRG 0.1494 0.0540 2.76 0.0060
VOI 20.6183 0.5786 21.07 0.2850
FBEV 5.5767 0.6021 9.26 0.0000
MINE 3.0571 0.9919 3.08 0.0020
MANU 5.6123 0.5932 9.46 0.0000
AGPR 5.2361 0.8092 6.47 0.0000
DIST 5.4410 0.6155 8.84 0.0000
PRPB 5.5843 0.6474 8.63 0.0000
PHAM 4.6432 0.5094 9.11 0.0000
ICT 4.8775 0.6076 8.03 0.0000
_CONS (dropped)
INSOWN
LIQLOG 20.0065 0.0143 20.46 0.6470
TOBINQ 0.2020 0.0835 2.42 0.0160
BCOMP 0.0272 0.1269 0.21 0.8300
BDSIZE 0.0021 0.0089 0.24 0.8100
SIZE 0.0125 0.0100 1.25 0.2120
FRSHR 20.0762 0.0494 21.54 0.1230
LEVRG 0.0267 0.0090 2.96 0.0030
VOI 20.0981 0.0977 21 0.3150
FBEV 20.0557 0.1283 20.43 0.6640
MINE 0.3241 0.1718 1.89 0.0590
MANU 0.0491 0.1274 0.39 0.7000
AGPR 20.1562 0.1557 21 0.3160
DIST 0.0485 0.1287 0.38 0.7060
PRPB 0.1139 0.1341 0.85 0.3960
PHAM 0.1026 0.1061 0.97 0.3330
ICT 0.0566 0.1226 0.46 0.6440
_CONS (dropped)
FRSHR
LIQLOG 0.1421 0.0221 6.44 0.0000
TOBINQ 0.4402 0.1233 3.57 0.0000
BCOMP 0.7812 0.1983 3.94 0.0000
VOI 0.1032 0.1634 0.63 0.5280
LEVRG 20.0399 0.0155 22.58 0.0100
DIVP 0.3372 0.1791 1.88 0.0600
(continued)
Table AI.
Full results of systems
of equations estimated
CG and corporate
liquidity
277
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Appendix 2
Appendix 3
Min. Max. Mean SD
Panel A: cash holdings by industry
Agriculture 176.48 540.67 313.83 135.91
Distributive 197.89 981.71 444.00 193.40
Food and beverage 3.32 4,018.21 962.06 1,098.21
ICT 78.38 328.91 198.73 97.49
Manufacturing 50.10 1,326.89 579.17 365.01
Mining 75.20 159.03 108.45 26.20
Pharmaceuticals 50.97 534.62 194.56 173.47
Printing and paper 10.21 2,867.28 1,018.53 1,042.04
Table AII.
Industry cash and inside
ownership
(%) (%) (%) (%)
Agriculture 0.34 0.72 0.53 0.21
Distributive 0.78 33.35 12.78 12.72
Food and beverage 0.61 4.14 1.77 1.16
Manufacturing 7.50 33.35 19.16 13.47
Manufacturing 0.91 90.95 12.20 16.87
Mining 1.39 62.53 45.07 29.81
Pharmaceuticals 0.72 64.00 17.20 25.19
Printing and paper 1.08 64.00 18.92 17.06
Table AIII.
Inside ownership
by industry
BDSIZE 0.0015 0.0096 0.16 0.8740
SIZE 0.0192 0.0173 1.11 0.2680
_CONS 21.0117 0.1890 25.35 0.0000
TOBINQ
INSOWN 0.1738 0.0898 1.94 0.0530
LSALES 0.0357 0.0208 1.72 0.0860
LEVRG 20.0078 0.0095 20.82 0.4150
FBEV 20.5071 0.0707 27.17 0.0000
MINE 20.4177 0.0953 24.38 0.0000
MANU 20.6212 0.0701 28.86 0.0000
DIST 20.5550 0.0736 27.54 0.0000
PRPB 20.4595 0.0817 25.62 0.0000
PHAM 20.6363 0.0784 28.12 0.0000
ICT 20.6219 0.0867 27.17 0.0000
SIZE 20.0028 0.0106 20.27 0.7890
_CONS 0.5628 0.1413 3.98 0.0000 Table AI.
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Appendix 4
Appendix 5
Corresponding author
Godfred A. Bokpin can be contacted at: [email protected]
Foreign Local Total
2001 7 8 15
2002 5 12 17
2003 4 17 21
2004 4 18 22
2005 5 17 22
2006 6 17 23
2007 6 15 21
Table AIV.
Sample of foreign
and locals
Year
Industry 2001 2002 2003 2004 2005 2006 2007
Agric 0 1 1 1 1 1 1
Distributive 4 4 4 4 4 4 4
Food and beverage 4 4 4 4 4 4 4
ICT 0 0 1 2 2 2 2
Manufacturing 4 5 5 5 5 5 5
Mining 1 1 1 1 1 1 1
Pharma 1 1 2 3 3 4 2
Printing 1 1 1 2 2 2 2
Total 15 17 19 22 22 23 21
Table AV.
Industry classi?cation
and number of ?rms
CG and corporate
liquidity
279
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This article has been cited by:
1. F. Beck, F. Kreuzberg, M.M. Rodrigues Junior, N.T. Krespi, P.R. Cunha. 2012. Efeitos da Migração do
Nível de Governança Corporativa sobre o Valor e Estruturas de Capital e Propriedade da Empresa. Revista
Catarinense da Ciência Contábil 11:10.16930/2237-7662/rccc.v11n33, 51-65. [CrossRef]
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doc_928567289.pdf
The purpose of this paper is to examine the impact of ownership structure and corporate
governance on corporate liquidity policy from a developing country perspective, Ghana Stock
Exchange (GSE).
Journal of Financial Economic Policy
Ownership structure, corporate governance and corporate liquidity policy: Evidence
from the Ghana Stock Exchange
Godfred A. Bokpin Zangina Isshaq Francis Aboagye-Otchere
Article information:
To cite this document:
Godfred A. Bokpin Zangina Isshaq Francis Aboagye-Otchere, (2011),"Ownership structure, corporate
governance and corporate liquidity policy", J ournal of Financial Economic Policy, Vol. 3 Iss 3 pp. 262 - 279
Permanent link to this document:http://dx.doi.org/10.1108/17576381111152236
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Users who downloaded this article also downloaded:
Zangina Isshaq, Godfred A. Bokpin, J oseph Mensah Onumah, (2009),"Corporate governance, ownership
structure, cash holdings, and firm value on the Ghana Stock Exchange", The J ournal of Risk Finance, Vol.
10 Iss 5 pp. 488-499http://dx.doi.org/10.1108/15265940911001394
Godfred A. Bokpin, (2011),"Ownership structure, corporate governance and dividend performance on
the Ghana Stock Exchange", J ournal of Applied Accounting Research, Vol. 12 Iss 1 pp. 61-73 http://
dx.doi.org/10.1108/09675421111130612
Godfred A. Bokpin, Anastacia C. Arko, (2009),"Ownership structure, corporate governance and capital
structure decisions of firms: Empirical evidence from Ghana", Studies in Economics and Finance, Vol. 26
Iss 4 pp. 246-256http://dx.doi.org/10.1108/10867370910995708
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Ownership structure, corporate
governance and corporate
liquidity policy
Evidence from the Ghana Stock Exchange
Godfred A. Bokpin
Department of Finance, University of Ghana Business School, Legon, Ghana
Zangina Isshaq
Department of Accounting and Finance, School of Business,
University of Cape Coast, Cape Coast, Ghana, and
Francis Aboagye-Otchere
Department of Accounting, University of Ghana Business School, Legon, Ghana
Abstract
Purpose – The purpose of this paper is to examine the impact of ownership structure and corporate
governance on corporate liquidity policy from a developing country perspective, Ghana Stock
Exchange (GSE).
Design/methodology/approach – The authors adopt multiple regression analysis in estimating
the relationship between ownership structure, corporate governance and corporate liquidity policy as
well as the impact of corporate governance on insider ownership.
Findings – The authors ?nd that foreign share ownership signi?cantly predicts corporate cash
holding on the GSE. The empirical result also portrays positive and statistically signi?cant
relationship between board size, ?nancial leverage, ?rm size, pro?tability and corporate liquidity
holding, and a negative and statistically signi?cant relationship between board composition and
corporate liquidity holding. The authors also document positive and statistically signi?cant
relationship between the various industry classi?cations namely manufacturing, distribution and the
pharmaceutical industry and corporate cash holdings on the GSE but did not however ?nd signi?cant
relationship between corporate governance and insider ownership on the GSE. The authors found
positive relationship between Tobin’s Q and inside ownership.
Originality/value – The main value of this paper is to analyze the relationship between ownership
structure, corporate governance and corporate liquid policy from a developing country perspective.
Keywords Ownership structure, Corporate governance, Cash holdings, Ghana
Paper type Research paper
1. Introduction
Researchers have looked for a unifying theory of the ?rm from various angles.
Our paper would certainly be a drop in that ocean. However, we intend to extend our
knowledge of what that “black box” (a ?rm) is ( Jensen and Meckling, 1976 revised),
by providing evidence of the relationship between ownership structure, corporate
governance and corporate liquidity policy from a developing country context. In the
ideal situation, investors provide capital to a ?rm and managers manage the ?rm in
the interest of the investors for a fee (Mensah et al., 2003). In this case, there is a
separation between the ?nancing and the management, implying a separation between
The current issue and full text archive of this journal is available at
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Journal of Financial Economic Policy
Vol. 3 No. 3, 2011
pp. 262-279
qEmerald Group Publishing Limited
1757-6385
DOI 10.1108/17576381111152236
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ownership and control (Berle and Means, 1932). This therefore presents concerns for
shareholders. Managerial behavioral models suggests that there is an inherent
contradiction between the interest of managers and shareholders.
Also given that both principals (owners) and agents (managers) are utility
maximizers, the principal has to do a lot to keep the amount of divergence in interest at a
minimum ( Jensen and Meckling, 1976). This entails the incurrence of monitoring costs
widely referred to as agency costs. Corporate governance institutions thus, are geared
toward ensuring that this divergence is at the barest minimum. And even though
corporate governance structures are put in place by managers – from agitations of
shareholders anyway – the tab is picked byshareholders. Thus, corporate governance is
essentially an act of agency-relationship monitoring. According to Crutchley and
Hansen (1989), managers’ choice of stock ownership in the ?rm, the ?rm’s mixture of
outside debt and equity ?nancing, and dividends are meant to reduce the costs of these
agency con?icts excess liquidity may be viewed as managerial perk and therefore may
be associated with managers’ stake in their ?rm (Papaioannou et al., 1992).
Jensen (1986) argues that when a ?rm’s managers have more cash than is needed to
fund the entire ?rm’s pro?table investment projects (i.e. free cash ?ow), there is an
incentive for the managers to invest the excess cash in unpro?table projects. Myers and
Rajan (1998) postulate that greater asset liquidity gives owners control over managers
but greater liquidity as well gives managers the power to transforms assets in their
owners’ favour. The reasons for this paradox are that managers have implicit rights in
the liquidity of assets and altering asset liquidity would affect these implicit rights.
Thus, agency problems are an important determinant of corporate cash holding
(Dittmar et al., 2003) and to Yun (2008), the choice of corporate liquidity is also a channel
through which corporate governance works. But, Ginglinger and Saddour (2007) ?nd
that ?rms with strong shareholder rights hold more cash, contrary to the predictions of
agency theory with differences partly due to the positive correlation that exists between
governance quality measures and the degree of ?nancial constraint faced by the ?rms.
But cash holdings may serve commendable purposes, allowing the ?rm to seize
pro?table investment opportunities as they arise (Keynes, 1936); or they may, on the
contrary, indicate agency problems ( Jensen, 1986). We learn from agency theory that
liquidity (cash availability) has implications for managerial behaviour coupled with
other factors related to management incentives. However, management incentives that
include stock options introduces issues for the alignment of managerial and shareholder
interests. The question is which way does managerial ownership affect the managerial
disposition towards the utilization of cash resources? What does the nature of corporate
governance structures do to better align the interests of inside equity, outside equity and
debt capital in a ?rm, and shape corporate liquidity policy? The empirical evidence
observed in the literature is inconclusive and pertains to developed capital markets. But,
corporate governance has been gaining ground in emerging markets especially after the
Asian ?nancial crisis. IMF/World Bank-led economic reforms, coupled with recent
?nancial scandals in the west, are now driving the surging interest in corporate
governance practices in several developing countries (Rabelo and Vasconcelos, 2002).
The calls for governance reforms in emerging markets is right because to Gibson (2003)
there are good reasons to think that the effectiveness of corporate governance might be
quite different in developed and emerging markets. But, empirically much has not been
done to ascertain the impact these governance reforms are having on corporate liquidity
CG and corporate
liquidity
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policy given that cash is the most important assets to be wasted by corporate managers.
Corporate governance in emerging markets has not been studied as intensively as in
developed markets (Shleifer and Vishny, 1997; Gibson, 2003) and particularly as it
relates to corporate liquidity policy and the fact that there is almost no empirical
evidence directly comparing the quality of corporate governance in emerging markets
and developed markets (Chung and Kim, 1999).
Empirical evidence further suggests that foreign investors avoid investing in
developing countries because of weak corporate governance practices (Gibson, 2003).
But theories proofed and empirical evidence have also concentrated on developed
markets such as the USA. Extant literature investigating ownership in emerging
markets have looked at its impact in relation to ?rm value (Lins, 2003) or expropriation
of minority shareholders by controlling shareholders (Claessens et al., 1999) or ?rm
valuation (Sarkar and Sarkar, 1998; Khanna and Palepu, 1999). The paper ?lls this void
in literature and also given that the participation of foreign investors has actively been
encouraged on the Ghana Stock Exchange (GSE) over the couple of years, the direct
empirical evidence of the impact of such policy would invariably enrich the existing
literature. Empirical evidence indicates that, foreign share ownership on the GSE on
the average is 31.9183 percent (Bokpin and Isshaq, 2009). But how much information
do foreign investors have about Ghana’s governance arrangement and to what extent
does these governance reforms affect managerial predisposition towards the utilization
of cash? For this reason, we ?nd it imperative to look at these thematic issues
particularly from the context of a developing country – Ghana. We provide evidence
on these questions from our study of listed ?rms on the GSE.
The next few sections provide a literature on the thematic areas of the study:
corporate governance arrangement in Ghana, ownership structure and liquidity policy,
corporate governance and liquidity policy, and ownership structure and corporate
governance. The method of analysis of the study is then presented followed by an
analysis of the empirical results of the study. Adiscussion of the results and conclusions
are presented in the last section of the study.
1.1 Corporate governance arrangement in Ghana
We have reviewed the governance framework with respect to matters pertaining to the
board and its compositions. Governance framework is not as strong as the USA and
UK in that more formal corporate governance structures and institutions are relatively
not widespread though a number of laws provide for governance structures for
companies in Ghana. These include the Companies Code 1963 (Act 179), which
provides for governance of all companies incorporated in Ghana, and the Securities
Industry Law, 1993 (PNDCL 333) as amended by the Securities Industry (Amendment)
Act 2000 (Act 590), which provides among other things for governance of all stock
exchanges, investment advisors, securities dealers, and collective investment schemes
licensed under the Securities and Exchange Commission (SEC).
The Companies’ Code stipulates a minimum of two directors for each company with
no ceiling on their number. It however, allows companies themselves to ?x the
maximum number of directors in their regulations whilst the GSE listing regulations is
silent on board size. In terms of board composition, there is no requirement under the
Companies Code for the appointment of independent directors neither is there a provision
for the balance of executive and non-executive directors. However, there is allowance for
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the interests of different stakeholders to be represented on the board. Inclusion of
independent directors on the board of directors is a requirement under the SEC’s Code of
best practices on corporate governance (SEC Code) for the GSE. The Companies Code
makes provision for the appointment of executive directors by allowing directors to hold
concurrently with the of?ce of director, any other of?ce or place of pro?t in the company,
except the of?ce of auditor. In terms of board structure, duality or otherwise of CEOrole
as chairman on the board and in the company itself, the Companies Code does not
prevent the appointment of the same person to the two of?ces.
The SEC Code on the other hand advocates for but does insist on the two-tier board
structure where the CEO is different from the board chairman. The responsibility for
good corporate governance at the ?rm level is placed on the board of directors.
Under the Companies Code, 1963 (Act 179), the business of a company is managed by
the BOD except as otherwise provided in the company’s regulations. No doubt,
the effectiveness with which the board plays its oversight role depends to a large
extent on its membership, its independence, and its expertise. Under the Companies
Code, the appointment and replacement of directors of companies is regulated by the
company’s regulations and is the preserve of shareholders.
2. Literature review
The literature review considers the three thematic areas of the study. We review
empirical evidence on the relationship between ownership structure and corporate
liquidity policy followed by the relationship between corporate governance and
corporate liquidity policy and ?nally the relationship between corporate governance
and ownership structure.
2.1 Ownership structure and liquidity policy
Papaioannou et al. (1992) recognized the fact that the relationship between corporate
ownership structure and corporate liquidity policy was an empirical question. Jensen
and Meckling(1976) de?ned ownership structure in terms of capital contributions. Thus,
the authors saw ownership structure to comprise of inside equity (managers), outside
equity and debt. However, in their revision of the original paper, the authors,
in postulating a uni?cation of the various theories pertaining to ?rmbehaviour – theory
of agency, theory of proprietary rights, and theory of ?nance – opined that the ?rmwas
a market. The market the ?rmis, as the authors observed, is because the ?rmis a process
of con?icting objectives of individuals brought into equilibrium within a framework of
contractual obligations ( Jensen and Meckling, 1976).
The distribution of contingent claims on the ?rm’s assets to the market participants
as the above position observes suggests an extension of the form of ownership
structure beyond the debt-holder and equity-holder view. Zheka (2005) constructs
ownership structure using variables including proportion of foreign share ownership,
managerial ownership percentage, largest institutional shareholder ownership, largest
individual ownership, and government share ownership. Jensen and Meckling (1976)
postulated that the distribution of outside ownership has implications for managers’
consideration about changes in their fractional ownership below a certain level.
Managers’ investment in the company is ?rst their professional capital, and second,
when stock options are given as incentives or if they are part owners, their ownership
interest in the company. Galai and Masulis (1976) opine that when managerial stock
CG and corporate
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ownership increases, it reduces the value of the component of management wealth held
in stock because higher liquid balances reduces variance of return hence value of stocks.
Based on this view, Papaioannou et al. (1992) predicted a negative relationship between
managerial share ownership and excess liquidity, even though the authors did not ?nd
evidence of a signi?cant relationship between management ownership and liquidity
ratio. The authors attributed the results to the presence of other factors that are so
restrictive of managerial sel?sh interests to present overinvestment problems. These
constraining variables that limit managers ability to exploit corporate resources for their
own utility-maximizing objectives included the product and factor market conditions.
Indeed, Jensen and Meckling (1976) note that ownership structure is in?uenced by a
company’s industry. With respect to liquidity holdings, Papaioannou et al. (1992) found
a negative relationship with inside equity, which was found not be signi?cant. Luo and
Hachiya (2005), however, found that insider ownership plays a signi?cant role in
determining cash holdings. The relationship between managerial ownership and cash
holdings is quali?ed, in a synthesis of the evidence of Papaioannou et al. (1992) and Luo
and Hachiya (2005), by the observation of Ozkan and Ozkan (2002) of non-monotonic
relationship between managerial ownerships and cash holdings. The indication is
therefore that the relationship between managerial ownership and corporate cash
holding is not linear. It is not farfetched to argue that the relationship between corporate
cash holdings and inside ownership could be nonlinear. The intuition is that at a point of
lower managerial ownership interests, the wealth of management invested in the
company would be lower, and an opportunity and temptation would exist to waste cash
through accumulation of cash which would be value destroying. However, as
managerial interest grows, managers’ wealth invested in the company would be higher
and managers would have more at stake and would be motivated to preserve the value of
the ?rm through prudent application of cash reserves rather than stockpiling for easy
expenditure of cash.
2.2 Corporate governance and corporate liquidity policy
Studies have shown that shareholders would markdown the value of a ?rm if they
have reason to expect managers to waste resources (Fresard and Salva, 2008 citing
La Porta et al., 1998; Durnev and Kim, 2005). The extent of the value reduction depends
on the existence and ef?ciency of restraining mechanisms on management tendency to
waste corporate wealth, and availability of assets that are easy to waste (Fresard and
Salva, 2008). The authors’ argument calls into view the asset structure of a ?rm as part
of the challenges to restraining management behaviour. The work of Jensen (1986)
shows that cash is the most likely asset to be wasted and as pointed out by Myers and
Rajan (1998), it is easier to make cash disappear than to make a plant disappear.
The above brings out the importance of governance mechanisms to corporate
liquidity policy. The nature of the relationship between cash holdings, ?rm
and corporate governance systems have been of interest in recent investigations
(Luo and Hachiya, 2005; Pinkowitz et al., 2006; Dittmar and Marth-Smith, 2007; Kalcheva
and Lins, 2007; Fresard and Salva, 2008). The conclusions of these studies show
investors value liquid balances less in countries with weak shareholder protections
rights and weak corporate governance systems, conclusions that are broadly in line with
the agency theory hypothesis stated above. According to Harford et al. (2006), cash
holdings increase with shareholder protection levels, as measured by a governance
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index and that ?rms with weaker corporate governance have smaller cash reserves. In
the same vein, Dittmar and Marth-Smith (2007) document that shareholders assign a
lower value to an additional dollar of cash reserves when agency problems are likely to
be greater. They further show that poorly governed ?rms dissipate cash more quickly
and in such a way that they experience lower operating performance.
Fresard and Salva (2008) document that governance environment that requires
stricter disclosure requirements save to limit managers ability to squander liquid
balances. The environmental context of corporate governance is thus also a variable of
interest in considering the effectiveness of corporate governance. But the evidence the
authors provide show that stronger corporate governance can have positive in?uences
on the corporate liquidity policy of the corporation. To further buttress the importance
of corporate governance mechanism, the authors provide evidence that excess cash
premium is higher in countries where investors perceive weaker investor protection.
But Schauten et al. (2008) ?nd that governance mechanisms – except the market for
corporate control – are not strong enough to prevent managers from wasting excess
cash. The ?ndings of the above research must be understood in the context that
holding cash necessarily is bad. Firms hold cash for a number of reasons including
precautionary, speculative and transactional purposes (Keynes, 1936) and thus how
much liquid balance is held by a corporation is in?uenced by factors such as
transaction costs, opportunity costs and informational asymmetries (Bruinshoofd and
Kool, 2004). Though, the assumptions held for these reasons pertain to developed
markets, we expect similar reasons for emerging markets. We do not expect that
controlling shareholders or managers transform a ?rm’s liquid assets into private
bene?ts in such a way that the ?rm is always starved for cash consistent with
Pinkowitz et al. (2006). Research on the corporate liquidity policy of emerging markets
is very scanty though cross-country study exists (Dittmar et al., 2003; Kalcheva and
Lins, 2004). Also countries in which the appropriation of private bene?ts is easier are
also typically riskier (Acemoglu et al., 2003) and therefore ?rms in these countries may
hold more cash simply because they require a larger buffer to protect themselves
against adverse shocks (Pinkowitz et al., 2006 citing Acemoglu et al., 2003).
2.3 Corporate governance and ownership structure
Corporate governance is a system of mechanisms that serve to ensure that shareholder
wealth is maximized and it does so through several ways geared toward enforcing the
stewardship responsibilities of managers. Governance systems also serve to at least,
restrain the managers’ tendency to maximize their utility at the expense of shareholders,
if not to align managers’ and shareholders’ interest. The board of directors is an
essential ingredient in governance systems in most Anglo-Saxon corporate systems.
Among the benchmark practices is the inclusion of outside directors on the board.
These outside directors are expected to owe more allegiance to shareholders because
they are not of?cers in the company and would be independent of the management
team. As such outside directors presence on the board of directors would be an effective
monitoring mechanism of the actions of managers.
In the foregoing framework, what should be the nature of the relationship between
inside ownership and the presence of outside directors on the board? The empirical
evidence is mixed. Ryan and Wiggins (2004) and Davila and Penalva (2004) ?nd
a positive relationship between inside ownership and the proportion of outsiders on
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the board. On the other hand, Denis and Sarin (1999) found a negative association
between inside ownership and the proportion of outside directors on the board. The
contradictory nature of the evidences provided by the aforementioned papers, shows
that all is not known about the relationship between the proportion of outsiders on the
board and inside ownership. Coles et al. (2005) offer an explanation. The authors explain
that these differences are attributable to issues such as differences in samples over time
and sizes, the industry from which a sample is selected, ?rm sizes, and data sources.
Others mentioned include choice of control variables and the functional forms of models
used to established relationships. Using a structural model, Coles et al. (2005) conclude
that managerial ownership and proportion of outside directors on the board are
complements in production. The reasoning is that managerial ownership comes as part
of a package of incentives for managers, and such incentives are expected to motivate
performance. The monitoring role of outside directors complements the motivating
factors for managers to perform according the managerial contract provisions.
Coles et al. (2005) conclusion corroborates, in part, the empirical evidence of
Hermalin (2005) of a negative relationship between board composition and managerial
ownership because productivity parameters are correlated. However, this does not
resolve the question of the conclusions of a positive relationship by some researchers
and a negative relationship by others about the same relationship. Coles et al. (2005) in
their analysis of empirical data in the framework of the principal-agent theory ?nd that
CEO ownership and board independence are determined by exogenous productivity
parameters and variation over time and ?rms, and could lead to a positive or negative
CEO ownership and board independence relationships. Thus, suggesting that the
relationship between managerial ownership and board independence is not linear.
3. Empirical methodology
Our approach to modeling the system of interest in this paper incorporates the
arguments of Demsetz (1983)[1], evidence from Demsetz and Lehn (1985) and Demsetz
and Villalonga (2001). The argument is that the ownership structure of a ?rm is an
outcome of the decisions of shareholders and trading in the ?rm’s shares on the market.
Decisions should be viewed from the point that existing shareholders make the
decision to go public and to issue more shares subsequently. Management might play
advisory role, but in essence any changes in ownership structure re?ect the in?uence of
shareholders. Thus, ownership structure should be modeled as an endogenous
variable. However, the system within which Demsetz and Villalonga (2001) reexamine
the evidence on ownership structure involves performance and ownership structure
(insider ownership and ownership concentration). Their model captures the view that
?rm performance in?uences ownership structure and ownership structure might also
be in?uenced by ?rm performance. Highly performing ?rms would attract investors in
the market, and owners of highly performing ?rms can go public, is intuitive.
In the current study, we are interested in liquidity management and its relationship
with ownership structure and corporate governance. Cash accumulation could attract
outsider investors on the market, which would change the ownership structure. This
means a likely causal relation running from liquidity to ownership structure. As argued
earlier, insider ownership, via agency con?icts, may in?uence cash accumulation.
Therefore, we estimated a system of equations using seemingly unrelated regression
techniques as oppose tothe two-stage least squares usedbyDemsetz andVillalonga (2001):
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LIQD
it
¼ b
0
GOV
it
þ d
0
OWNS
it
þ f
0
CONTRL
it
þ1
it
ð1Þ
INSOWN
it
¼ aLIQD
it
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it
þ l
0
CONTRL
it
þ h
it
ð2Þ
Where subscript i and t represent the ?rmand time, respectively. In this case, i represents
the cross-section dimension and t represents the time-series component.
LIQD is the dependent variable and measures corporate cash holding (natural
logarithm of cash and cash equivalents). We are interested in liquidity accumulation,
for this reason we do not scale the cash variable over assets.
GOVis a vector of governance variables namely board size and board independence.
OWNS is a vector of ownership variables including inside ownership (the proportion
of shares held by managers and employees), and proportion of shares owned by foreign
investors. Luo and Hachiya (2005) provide evidence in their study of Japanese ?rms, that
foreign ?rms select ?rms that are not only pro?table but also have higher levels of cash.
There is a seemingly causation running from liquidity to foreign share ownership.
To address the effects of this in?uence on the system we estimate a corollary equation
(not stated here), the results are presented in Appendix.
CONTRL in both equations is a vector of control variables including volatility of
income, leverage, industry dummy, sales growth, dividend payout and ?rm size.
VOLATILITY of income is measured as the three-year standard deviation of ROA
as Opler et al. (1999) ?nd empirical evidence of operating uncertainty being positively
related to cash holdings. Volatility is included as measure of precautionary motives for
cash. In the ownership structure equation, we intend it to serve as a proxy for
?rm-speci?c risk.
SIZE is measured as the natural logarithm of total assets. Luo and Hachiya (2005)
include size as a control variable and found that size is negatively related to cash
holdings.
DEBT is a measure of leverage as total debt to total assets (Faulkender and Wang,
2006) who ?nd amongst other things that the marginal value of cash holdings declines
withthe amount of cashholdings andwithleverage consistent withOpler et al. (1999). And
leverage is introduced also as a measure of liquidity demand required to service debts.
DUMINDUST is a dummy for a ?rm’s industry. The industry dummy is included
because Papaioannou and Travlos (1992) show that factor and product market
conditions are restricting mechanisms on the relationship between managerial
ownership and liquidity policy. We followed the GSE of?cial industry classi?cation.
See Appendix 3 for details of industry classi?cation as well as the sensitivity of the
industries to cash holdings.
Following Papaioannou and Travlos (1992) sales growth is included as a measure of
transactions demand for liquidity. Pinkowitz and Williamson (2005) also ?nd that
?rms with good growth options have their cash valued at a premium relative to ?rms
with poor growth prospects.
INSOWN represents inside ownership, measured as the proportion of shares held by
managers and employees.
Data for the study was obtained from the GSE market reports and the GSE Fact
book for the years 2001-2007. We excluded ?nancial ?rms from the sample because of
their peculiar liquidity management requirements. Further, three years of ?nancial
information was required for a company to be included in the sample of listed ?rms
used for this study.
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4. Empirical results
4.1 Descriptive statistics
Table I provides the descriptive statistics of the dependent and the explanatory
variables. Liquid assets (cash holdings) records overall mean of 5.8140 and there are
variations in this variable across the sample size over the period. Tobin’s Q registers
average mean of 0.1863, board composition also registers overall mean of 0.6222,
volatility in earnings on the average records 0.1063 and leverage registers a mean of
0.6532. Overall, dividend payout registers an average value of 0.0656, growth in sales
records 4.4172, inside ownership registers 0.1292, average foreign shareholdings
records 0.2300, average board size over the period was 8.4532. There are more local
?rms in our sample than foreign ?rms throughout the sample period (Appendix 4).
Whilst at the beginning of the sample period, there were seven foreign ?rms as against
eight local ?rms, the number of local ?rms increased to 12 through additional listings
on the GSE whilst the number of foreign ?rms increased marginally to ?ve in 2002.
On the average foreign ?rms appetite to accumulate more cash is more than twice local
?rms (average cash balance for foreign ?rms is 963.87 as against 413.19 for local ?rms;
amounts are in thousands of Ghana cedis) as presented in Table II, there is greater
variation in this variable for foreign ?rms as compared to local ?rms. Industry
dynamics and cash holdings reveals ?rms in the printing and paper hold more cash
followed by ?rms in the food and beverage industry (see Appendix 3 and E for the
industry classi?cation, cash holdings and number of ?rms in each industry over the
sample period).
Variable Mean SD Min. Max. Obs.
Cash holdings 5.8140 1.0880 1.2006 8.2986 139
Tobin’s Q 0.1863 0.2039 0.0008 0.9502 139
Board composition 0.6222 0.1237 0.091 0.8023 139
Volatility 0.1063 0.1507 0.0013 0.9468 139
Leverage 0.6532 1.5792 20.4551 10.5067 139
Dividend 0.0656 0.1348 0 1.0000 137
Sales growth 4.4172 0.7812 3.041 6.3610 139
Inside own 0.1292 0.1820 0.0034 0.9095 139
Foreign own 0.2300 0.3249 0 0.8891 139
Firm size 5.7068 1.4217 3.0168 8.8196 139
Board size 8.4532 2.5544 5 17.0000 139
Table I.
Descriptive summary
statistics
Foreign Local
Stat. CASH INSOWN (%) CASH INSOWN (%)
Min. 65.49 0.34 3.32 0.34
Max. 4,018.21 62.53 1,326.89 90.95
Mean 963.87 8.80 413.19 14.42
SD 1,100.50 13.15 313.87 19.56
Notes: A ?rm is foreign if non-resident holding is greater than 50 percent and local otherwise; data is
for the period 2001-2007; cash is in thousand of Ghana cedi
Table II.
Cash holding and inside
ownership for foreign
and local ?rms
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4.2 Analysis of regression results
We present in this section a part of a system of four equations estimated in an attempt
to mitigate problems of endogeneity in some of the control variables. The system of
equations also provides us an opportunity to address the issues of interest to this study
in a more comprehensive system than can be obtained in single equations models on
the subject matter. We present here the equations for liquidity and inside ownership
equations. The Appendix, however, provides the complete results of the system which
includes corollary equations for foreign share ownership and Tobin’s Q. Our Tobin’s Q
equation borrows from Demsetz and Villalonga (2001) with some exceptions.
We left market risk to the error term and proxied ?rm-speci?c risk with income
volatility, and advertising and research and development expenditure with sales
growth (Table III).
Equation Obs. Parms RMSE R
2
x
2
p
LIQLOG 137 16 0.8937 0.3271 6218.61 0.000
INSOWN 137 16 0.1466 0.3538 190.27 0.000
Coef. SE Z p . jZj
LIQLOG
TOBINQ 20.3423 0.4953 20.69 0.4890
BCOMP 22.4577 0.7327 23.35 0.0010
BDSIZE 0.1265 0.0506 2.5 0.0120
SIZE 20.0392 0.0595 20.66 0.5110
INSOWN 20.2175 0.4909 20.44 0.6580
FRSHR 1.7506 0.2742 6.39 0.0000
LEVRG 0.1494 0.0540 2.76 0.0060
VOI 20.6183 0.5786 21.07 0.2850
FBEV 5.5767 0.6021 9.26 0.0000
MINE 3.0571 0.9919 3.08 0.0020
MANU 5.6123 0.5932 9.46 0.0000
AGPR 5.2361 0.8092 6.47 0.0000
DIST 5.4410 0.6155 8.84 0.0000
PRPB 5.5843 0.6474 8.63 0.0000
PHAM 4.6432 0.5094 9.11 0.0000
ICT 4.8775 0.6076 8.03 0.0000
INSOWN
LIQLOG 20.0065 0.0143 20.46 0.6470
TOBINQ 0.2020 0.0835 2.42 0.0160
BCOMP 0.0272 0.1269 0.21 0.8300
BDSIZE 0.0021 0.0089 0.24 0.8100
SIZE 0.0125 0.0100 1.25 0.2120
FRSHR 20.0762 0.0494 21.54 0.1230
LEVRG 0.0267 0.0090 2.96 0.0030
VOI 20.0981 0.0977 21 0.3150
FBEV 20.0557 0.1283 20.43 0.6640
MINE 0.3241 0.1718 1.89 0.0590
MANU 0.0491 0.1274 0.39 0.7000
AGPR 20.1562 0.1557 21 0.3160
DIST 0.0485 0.1287 0.38 0.7060
PRPB 0.1139 0.1341 0.85 0.3960
PHAM 0.1026 0.1061 0.97 0.3330
ICT 0.0566 0.1226 0.46 0.6440
Table III.
Regression results
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4.2.1 Corporate liquidity management. Our results show that Tobin’s Q has a negative
coef?cient but is not signi?cant in the determination of cash build-up. The two
governance variables showopposite signs whilst bothare signi?cant. Boardcomposition
has a negative coef?cient and is signi?cant to the cash equation. Board size on the other
bears a positive and statistically signi?cant relationship to cash accumulation. Further,
?rmsize shows a negative coef?cient but is insigni?cant in the model. Inside ownership
shows a negative coef?cient but is not statistically signi?cant in the liquidity equation.
Foreign share ownership shows a positive coef?cient andis statisticallysigni?cant inthe
liquidityequation. Our leverage variable also bears a positive andstatisticallysigni?cant
coef?cient in the liquidity equation. Income volatility does not have a signi?cant
coef?cient in the equation even though it shows a negative coef?cient, contrary
to expectation. The dummy variables are all statistically signi?cant and show positive
coef?cients in the liquidity equation. These suggest that the various industries in which a
?rm operates has a likely contribution to cash accumulation.
4.2.2 Ownership structure. Tobin’s Q is found to have a positive and statistically
signi?cant coef?cient in the insider ownership equation. Also noteworthy in the
ownership equation is that the corporate governance variables – board size and board
composition – are both insigni?cant even though they show positive coef?cients. Firm
size also bears a positive coef?cient in the ownership structure equation even though it
is not statistically signi?cant. Foreign share ownership shows a negative coef?cient in
the inside ownership equation even though the coef?cient is not statistically
signi?cant. Leverage is statistically signi?cant in the liquidity equation with a positive
coef?cient. Income volatility is however, insigni?cant in the inside ownership equation
even though it shows a negative coef?cient. Of the industry dummies, only the mining
sector is statistically signi?cant at 10 percent and positive.
5. Discussion and conclusions
There are a number of studies to compare our results withto understand the implications
of our ?ndings for the subject matter at hand, and the signi?cance of the study. Demsetz
and Villalonga (2001) provide evidence of an insigni?cant relationship between insider
ownership and Tobin’s Q. Our result is the contrary. Their position is that altering
the ownership structure is something shareholders do through their decisions. We
interpret our results differently. We believe that after the initial public offer, any decision
to invite other shareholders and thereby alter a ?rm’s ownership structure on the part of
existing shareholders would be enabled by signs of good performance. With this view,
we can see performance has a signi?cant and positive relationship with ownership
structure. Further, if managers and employee ownership re?ects an investment of their
wealth in the future of the ?rm, then our results re?ect utility maximization decisions by
insiders. Indeed, all the ownership variables bear a positive relationship with Tobin’s Q
in the corollary equations estimated in the system of equations.
The results on the governance variables are mixed. But let us take the variables
separately. Board composition shows a negative relationship with liquidity.
That shows a board’s composition can militate against cash accumulation drives if
such accumulation is not going to create any value for shareholders. We infer that the
quality of the board (board composition) is a more important restraining factor on
liquidity accumulation than the number of persons sitting on the board. The negative
relationship is also suggestive of a tendency for such a board not to come to decisions
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far easily, which could weaken any control the board would have over the affairs of the
company. The positivity of the board size variable shows that increasing board size
would lead to increased corporate liquidity accumulation. The indication is that
Ghanaian ?rms are probably lavish on boards of directors such that accumulating cash
balances helps meeting liquidity demand to for pay board remunerations.
There are strands of contradictory evidence in the literature on the in?uence of
corporate governance on inside ownership. Those that ?nd a positive relationship Ryan
and Wiggins (2004) and Davila and Penalva (2004) and those who ?nd a negative
association Denis and Sarin (1999), have both not been supported from our results. Our
results can be seen as a con?rmation of the observations of Coles et al. (2005) that the
relationship between inside ownership and board independence might be nonlinear,
as a linear modeling approach has been used in the study. In the Ghanaian context,
the evidence indicates that corporate governance does not in?uence inside ownership.
One interpretation of this result is that owning part of the stock of the company in Ghana
is not related to corporate governance initiatives to align managerial interest with
shareholders. This interpretation re?ects the positive result on Tobin’s Q in the insider
ownership equation. Firms listed on the GSE are among the country’s best performing
and managed where the company is not a subsidiary of a foreign company. Perhaps, this
fact overshadows what effect boards can have on managers to take up part of the
company’s stock.
Our results on the relationship between managerial ownership and increase in cash
holdings mirror that of Papaioannou et al. (1992). We con?rm their predicted negative
relationship, but like their ?ndings, the relationship is not signi?cant. Luo and Hachiya
(2005) results is, thus, uncon?rmed in the Ghanaian context. Our ?ndings could also be
explained by the observation of Jensen and Meckling that ownership structure is
in?uenced by a company’s industry. The industry dummies were present in the liquidity
equation and even though industry in?uence on ownership structure is only found true
in the case of mining in the inside ownership equation, the point can be made that such
in?uences could curtail managerial misuse of liquidity to the point of insigni?cance.
We would like to qualify this conclusion bearing in mind the non-monotonic relationship
between inside ownership and cash holdings observed by Ozkan and Ozkan (2002).
Another interpretation of the results is that the ?nancial environment restraints
liquidity misuse as part of the actions of managers in the Ghanaian context because
?rms can only raise funds frombanks, which has been very expensive over the past two
decades. Because all the industry dummies are signi?cant and positive in the liquidity
equation, the foregoing interpretation is plausible. Also, there have been fewer than ?ve
seasoned equity offerings on the stock market counting rights issues, which con?rms
environmental constraints onmanagement cashmisuse of liquid balances interpretation
of the results. The theoretical implications is that managerial abuse of slack resources –
perhaps through pet projects, empire-building ambitions – could be curtailed in an
environment where raising funds is expensive. This is symptomatic of pecking-order
theory of capital structure choice. We believe the evidence does not explain pecking
order conjectures but rather indicates that where there are fewer opportunities to invest
excess liquidity, managers just accumulate them, perhaps, to earn interest at the bank
and to spend on board remuneration as alluded to earlier.
The signi?cance of the foreign share ownership variable in the liquidity equation
con?rms the ?ndings of Mangena and Tauringana (2007) who found positive
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relationship between liquidity and foreign share ownership. The negative relationship
insider ownership and foreign share ownership is also note worthy. It shows that
foreign investors would avoid ?rms with higher levels of insider ownership. Obviously,
a foreign investor would be wary of a ?rm far away from home where the managers
own a greater number of the shares and voting rights because without strong investor
rights protection in the domestic country, the foreign investment’s risk level would be a
few notches up.
Two implications for corporate governance in Ghana are worthy of note. First,
corporate governance mechanisms in Ghana have no effect on alignment of
shareholders’ and managers interest. Second, corporate governance systems mighty be
costly for the listed ?rms. The fact that Ghanaian environment is yet to be faced with
debate over management and directors’ remuneration is a persuasive anecdote, a point
for further consideration. Atheoretical implication for the literature is that the ?nancial
and economic systems are likely constraining factors in managerial misuse or
otherwise of slack cash balances.
Note
1. We are thankful to an anonymous referee who point this out to us.
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Appendix 1
Equation Obs. Parms RMSE R
2
x
2
p
LIQLOG 137 16 0.8937 0.3271 6218.61 0.000
INSOWN 137 16 0.1466 0.3538 190.27 0.000
FRSHR 137 8 0.2836 0.2434 79.24 0.000
TOBINQ 137 11 0.1554 0.4235 107.36 0.000
Coef. SE Z p . jZj
LIQLOG
TOBINQ 20.3423 0.4953 20.69 0.4890
BCOMP 22.4577 0.7327 23.35 0.0010
BDSIZE 0.1265 0.0506 2.5 0.0120
SIZE 20.0392 0.0595 20.66 0.5110
INSOWN 20.2175 0.4909 20.44 0.6580
FRSHR 1.7506 0.2742 6.39 0.0000
LEVRG 0.1494 0.0540 2.76 0.0060
VOI 20.6183 0.5786 21.07 0.2850
FBEV 5.5767 0.6021 9.26 0.0000
MINE 3.0571 0.9919 3.08 0.0020
MANU 5.6123 0.5932 9.46 0.0000
AGPR 5.2361 0.8092 6.47 0.0000
DIST 5.4410 0.6155 8.84 0.0000
PRPB 5.5843 0.6474 8.63 0.0000
PHAM 4.6432 0.5094 9.11 0.0000
ICT 4.8775 0.6076 8.03 0.0000
_CONS (dropped)
INSOWN
LIQLOG 20.0065 0.0143 20.46 0.6470
TOBINQ 0.2020 0.0835 2.42 0.0160
BCOMP 0.0272 0.1269 0.21 0.8300
BDSIZE 0.0021 0.0089 0.24 0.8100
SIZE 0.0125 0.0100 1.25 0.2120
FRSHR 20.0762 0.0494 21.54 0.1230
LEVRG 0.0267 0.0090 2.96 0.0030
VOI 20.0981 0.0977 21 0.3150
FBEV 20.0557 0.1283 20.43 0.6640
MINE 0.3241 0.1718 1.89 0.0590
MANU 0.0491 0.1274 0.39 0.7000
AGPR 20.1562 0.1557 21 0.3160
DIST 0.0485 0.1287 0.38 0.7060
PRPB 0.1139 0.1341 0.85 0.3960
PHAM 0.1026 0.1061 0.97 0.3330
ICT 0.0566 0.1226 0.46 0.6440
_CONS (dropped)
FRSHR
LIQLOG 0.1421 0.0221 6.44 0.0000
TOBINQ 0.4402 0.1233 3.57 0.0000
BCOMP 0.7812 0.1983 3.94 0.0000
VOI 0.1032 0.1634 0.63 0.5280
LEVRG 20.0399 0.0155 22.58 0.0100
DIVP 0.3372 0.1791 1.88 0.0600
(continued)
Table AI.
Full results of systems
of equations estimated
CG and corporate
liquidity
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Appendix 2
Appendix 3
Min. Max. Mean SD
Panel A: cash holdings by industry
Agriculture 176.48 540.67 313.83 135.91
Distributive 197.89 981.71 444.00 193.40
Food and beverage 3.32 4,018.21 962.06 1,098.21
ICT 78.38 328.91 198.73 97.49
Manufacturing 50.10 1,326.89 579.17 365.01
Mining 75.20 159.03 108.45 26.20
Pharmaceuticals 50.97 534.62 194.56 173.47
Printing and paper 10.21 2,867.28 1,018.53 1,042.04
Table AII.
Industry cash and inside
ownership
(%) (%) (%) (%)
Agriculture 0.34 0.72 0.53 0.21
Distributive 0.78 33.35 12.78 12.72
Food and beverage 0.61 4.14 1.77 1.16
Manufacturing 7.50 33.35 19.16 13.47
Manufacturing 0.91 90.95 12.20 16.87
Mining 1.39 62.53 45.07 29.81
Pharmaceuticals 0.72 64.00 17.20 25.19
Printing and paper 1.08 64.00 18.92 17.06
Table AIII.
Inside ownership
by industry
BDSIZE 0.0015 0.0096 0.16 0.8740
SIZE 0.0192 0.0173 1.11 0.2680
_CONS 21.0117 0.1890 25.35 0.0000
TOBINQ
INSOWN 0.1738 0.0898 1.94 0.0530
LSALES 0.0357 0.0208 1.72 0.0860
LEVRG 20.0078 0.0095 20.82 0.4150
FBEV 20.5071 0.0707 27.17 0.0000
MINE 20.4177 0.0953 24.38 0.0000
MANU 20.6212 0.0701 28.86 0.0000
DIST 20.5550 0.0736 27.54 0.0000
PRPB 20.4595 0.0817 25.62 0.0000
PHAM 20.6363 0.0784 28.12 0.0000
ICT 20.6219 0.0867 27.17 0.0000
SIZE 20.0028 0.0106 20.27 0.7890
_CONS 0.5628 0.1413 3.98 0.0000 Table AI.
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Appendix 4
Appendix 5
Corresponding author
Godfred A. Bokpin can be contacted at: [email protected]
Foreign Local Total
2001 7 8 15
2002 5 12 17
2003 4 17 21
2004 4 18 22
2005 5 17 22
2006 6 17 23
2007 6 15 21
Table AIV.
Sample of foreign
and locals
Year
Industry 2001 2002 2003 2004 2005 2006 2007
Agric 0 1 1 1 1 1 1
Distributive 4 4 4 4 4 4 4
Food and beverage 4 4 4 4 4 4 4
ICT 0 0 1 2 2 2 2
Manufacturing 4 5 5 5 5 5 5
Mining 1 1 1 1 1 1 1
Pharma 1 1 2 3 3 4 2
Printing 1 1 1 2 2 2 2
Total 15 17 19 22 22 23 21
Table AV.
Industry classi?cation
and number of ?rms
CG and corporate
liquidity
279
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