1. CORPORATE GOVERNANCE IN JAMAICA: A RISK MANAGEMENT APPROACH Dr. Twila Mae Logan Dr. Doreen Gooden Florida International University

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

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

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

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

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

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

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

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

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

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

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

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

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

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

16. Riskiness/Volatility of Returns Models R 2 : 26% and 30% In addition to weekly returns, the riskiness of the firm was increasing in insider percentage, and the largest ten shareholders, but decreasing in board shareholdings. Not significant Percentage of female directors listed on the junior market

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

18. Returns/Value Model R 2 : 40% and 42% Increases in managerial share ownership resulted in larger weekly returns (value). Positive but insignificant coefficients on Top ten block share holdings institutional shareholdings was positive but not significant. Number of insiders

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

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

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

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