Good corporate governance among listed firms matter to stock market investors, a recent study by the Philippine Stock Exchange (PSE) revealed.
The PSE recently released a study that examined the relationship between corporate governance (CG) practices and firm value in the Philippines. Firm valuation is measured by Tobin’s Q and market-to-book ratio (MBTV).
Tobin’s Q is the sum of the market value of equity plus short-term debt divided by total assets while MBTV is defined as market value divided by the book value of the common stock.
The study looked into the correlation between disclosure and corporate governance practices and firm value using a time series of corporate governance index (CGI) values for Philippine listed firms covering the period 2005-2008.
The study is funded by a grant from the United Kingdom government, as part of the project to establish a corporate governance segment in the PSE. Well-known and respected corporate governance expert, Dr. Stephen Cheung of the Hong Kong Baptist University, was commissioned to conduct the study.
“The PSE is encouraged by the results that showed a positive correlation between corporate governance and firm valuation,” lawyer Francis Lim, PSE president and CEO, said. “These findings prove that investors value corporate governance practices as well as affirm the PSE’s direction of promoting good corporate governance practices in listed companies,” he added.
The following are the major findings of the study: corporate governance practices of listed firms improved during the sample period (2005-2008); firm valuation is directly related to the level of corporate governance and changes in governance practices; investors are most concerned about CG issues that relate to equitable treatment of shareholders, disclosure and transparency and board responsibilities; and firm valuation is positively associated with a higher level of mandatory disclosure. Evidence shows that investors reward Philippine firms for disclosing more than what is required.
“Now that we have empirical proof that such a relationship (CG and firm value) exists in the Philippine context, we can push the CG reform agenda more actively.” Jonathan Juan Moreno, head of the PSE’s Corporate Governance Office, said. “We have long promoted CG by arguing on the legal and moral case. This study helped us prove that there is a business case for CG,” he added.
In 2007, the PSE embarked on a Corporate Governance Improvement Program (CGIP) that is composed of an internal capacity-building component and an externally-oriented confidence-building program. The flagship projects under the CGIP are the” PSE Corporate Governance Guidelines for the Listed Companies”, the introduction of CG provisions in the revised listing and disclosure rules, the “Investors Rights and Obligations”, and the UK Government-funded “Maharlika Board Project”- an initiative that aims to establish a corporate governance segment in the Exchange to distinguish companies that subscribe to higher corporate governance standards. –Daily Tribune