For the dominant presence of a large shareholder, quasi external governance mechanism (such as institutional investor, audit quality, debt ratio) appear to have their proper roles in influencing firm value, phenomena that draw the attention of policy makers. However, it is also well documented that no other internal governance mechanism (such as board salary, non-executive directors and CEO related variables) can effectively contribute to firm value.
Introduction:
The firm value is the important feature to the investor for investment. In a firm, the large shareholder, institutional investor, audit quality, debt ratio etc are increased the company reputation. Basically, shareholders or large Shareholder are the owners of a business and they are the ultimate decision-makers on the direction of a company. While the management of a company has the day-to-day decision-making power, shareholders guide the strategy, financing and selection of management of the firm. In many cases, shareholders are the management of the firm. Shareholders also receive the benefits of dividends and the appreciation of the company’s value. However, they also are responsible for the liabilities of the firm and the risk of the value of the company dropping to zero. But the shareholders play an important role to increase firm value. If a large institutional investor invests in a company then the other people will be trusted for investing this firm. On the other hand, the board salary, non-executive directors and CEO related variables cannot effectively contribute to firm value; the internal governance mechanism is not the high level concern matter to the investor.
So it can be said that, for the dominant presence of a large shareholder, quasi external governance mechanism (such as institutional investor, audit quality, debt ratio) appear to have their proper roles in influencing firm value, phenomena that draw the attention of policy makers. However, it is also well documented that no other internal governance mechanism (such as board salary, non-executive directors and CEO related variables) can effectively contribute to firm value.
Firm Value: Firm value is a key metric for value investors of a company, because it best represents the total value of a company and is capital structure neutral. Firm value can be used for calculating enterprise value ratios that provide important comparisons between companies.
The large investor should have this mindset: When the investors buy a stock, they are buying a percentage share of the whole company. Firm value is the current market price if investors were purchasing the entire company. Why would investor value a company differently just because they are buying only a percentage?
Firm value of a company measures the value of the assets that produce the company’s product or service. On other words, it as an economic value that includes the equity capital (market capitalization) and debt capital (liabilities) of the company[1].
The fact that firm value makes allowances for debt and cash provides a neutral metric for calculating company value ratios. Firm value ratios can provide key insights and comparisons between companies despite the fact that the companies may have large differences in capital structure.
The role of shareholder, external governance mechanisms in a firm value:
Shareholders are the owners of a corporation. Companies sell shares of stock, or partial ownership in the business, in exchange for equity investment to operate the business. Shareholders typically affect company operations and decisions differently than other stakeholders concerned with the business
The large shareholder or investor can draw the attention of policy makers for taking the decision of company matter. Companies with shareholders have historically had a single primary objective of maximizing profit. While many companies try to balance shareholder interests with those of other stakeholders, profit objectives are typically still in focus with shareholders. A sole proprietor or partners in a business firm often have greater flexibility in setting goals aside from earning profit. Profitability also is important in attracting and retaining stockholders and having a solid stock value of firm value[2].
Shareholders also have direct influence on a business because they have voting rights on major corporate decisions. Shareholders vote, for instance, on elections of company board members. If company leaders want to split the company’s stock or spin off a separate business unit, shareholders usually have a right to vote on the move. Additionally, companies hold annual, and sometimes quarterly, meetings where shareholders can voice concerns and feedback. Activist shareholders who own large amounts of stock may also voice concerns publicly in an effort to sway company decisions.
The board of directors is the primary direct stakeholder influencing corporate governance. Directors are elected by shareholders or appointed by other board members, and they represent shareholders of the company. The board is tasked with making important decisions, such as corporate officer appointments, executive compensation, and dividend policy. In some instances, board obligations stretch beyond financial optimization, as when shareholder resolutions call for certain social or environmental concerns to be prioritized.
Boards are often made up of inside and independent members. Insiders are major shareholders, founders and executives. Independent directors do not share the ties of the insiders, but they are chosen because of their experience managing or directing other large companies. Independents are considered helpful for governance because they dilute the concentration of power and help align shareholder interest with those of the insiders[3].
Shareholder value is that value delivered to shareholders of a corporation because of management’s ability to increase sales, earnings, and free cash flow over time, leading to the ability for companies to increase dividends and encourage capital gains for its equity owners.
A company’s shareholder value depends on strategic decisions made by its board of directors and senior management, including the ability to make wise investments and generate a healthy return on invested capital. If this value is created over the long term, the share price increases and the company can pay larger cash dividends to shareholders[4].
Often, market participants and investors assume that corporations exist to maximize shareholder value, first and foremost. However, the legal requirement to do so is actually a persistent myth.
- Shareholder value is that value given to stockholders in a company based on the firm’s ability to sustain and grow profits over time.
- Increasing shareholder value increases the total amount in the stockholders’ equity section of the balance sheet.
- Legal rulings suggest that the maxim to increase shareholder value, in fact, a practical myth—there is actually no legal duty to maximize profits in the management of a corporation.
According to studies in behavioral finance, individual investors’ predilection to judge companies as better investment opportunities because they are perceived as highly reputed might be a fallacy. In current studies, corporate reputation is investigated as a determinant in the formation of risk and return expectations. Investors tend to assume that good investment opportunities come from ‘good’ companies, that is from companies with a high reputational rating (Shefrin and Statman, 1995; Shefrin, 2001). Relying on survey data published by Fortunemagazine on the reputation of major US companies, Shefrin finds that ‘Investors who judge that good stocks are stocks of good companies will associate good stocks with both safe stocks and high future earnings’. This defies empirical evidence that proves the opposite to be true. Investors err if they expect safe stocks and high future earnings (only) from ‘good’, or highly reputed companies. There might be, however, more to reputation’s role in determining investor behavior than this possibly misleading choice-effect.
Generally, investor behavior can be analyzed in terms of initial share purchases, in terms of switching behavior in the context of portfolio optimization, or in the context of ‘sticking to. From the perspective of the individual publicly traded firm, it may be beneficial when individual investors keep their shares on a long-term basis. Leaving detailed analyses to future research contributions, we propose that investor loyalty leads to stable relationships that reduce the risk of a (hostile) takeover; to less volatility in share prices; to the possibility of implementing long-term strategies instead of quarter-based activities; to a reduction of costs induced by investor relations. Among others, satisfaction with investment outcomes (the fulfillment of investor expectations) and corporate reputation are interpreted as determinants of investor loyalty[5].
The present paper investigates the construct of reputation and its influence on investors, especially their satisfaction and loyalty, using primary data and socio-psychological methodologies. Three research questions are investigated:
- How can corporate reputation, satisfaction, and loyalty be conceptualized taking an individual investor perspective?
- Does corporate reputation influence individual investor’s satisfaction and loyalty?
- What do the findings add to the notion of a detrimental effect of reputation on individual investor decision-making?
- External mechanisms
There are two types of mechanism system. The first one is internal mechanism system and the type of control that contributes to the regulation of potential conflicts that may arise between shareholders and managers. This control is exercised through the outdoor market including: financial market, market goods and services, labor market managers. The external mechanism system can influence the firm value[6].
- The financial market
The control by the financial market, today, is more and more important with the development of stock markets. Indeed, there is a direct relationship between efficiency, competence of managers and market value of the company. If the management strategy is likely to harm the interests of shareholders, they always have the option to sell their shares, so, accordingly, decrease the value of the company.
- The market of goods and services
Competition in the market of goods and services can discourage leader of a firm who manage the detriment of shareholders. Indeed, any competitive market pushes the manager to optimize the management and to play a preventive role against the demise of the company. The effectiveness of this mechanism of control is limited.
- The labor market for managers
This market is an effective system of control since it highlights the importance of human capital in management. Managers are constantly faced with the pressure of the labor market. This place offers a selection of the most efficient of them through the competition which exists between external and internal managers.
(d) The auditor
The auditor represents a mechanism for management control and a way to reduce the discretionary latitude. The objective of the auditor is to provide shareholders with more developed and more relevant information. ” The internal audit function plays a crucial role in the ongoing maintenance and assessment of a bank’s internal control, risk management and governance systems and processes–areas in which supervisory authorities have a keen interest ” (Basel Committee on Banking Supervision2 , 2012). Also, both internal auditors and supervisors exploit risk based approaches to decide their respective work plans and actions.
(2)Internal mechanisms
It is well known that, the internal mechanism system are not increase the firm value. Because, the investor shall not want to know the salary of the director or the salary of the of the CEO or other board salary, non-executive directors and CEO related variables, which are irrelevant to the firm value or firm efficacy. So it can be said that, the dominant presence of a large shareholder, quasi external governance mechanism (such as institutional investor, audit quality, debt ratio) appear to have their proper roles in influencing firm value.
Internal mechanisms are the internal means in the firm that can encourage managers to maximize the company value. These means include, in particular, board of directors, audit committees, auditor, ownership structure, mutual monitoring and supervisory board[7].
- The board of directors
The board of directors is one of the mechanisms of control that has been most discussed in research on corporate governance and the question of its usefulness has been much of debate over the last decade.
The board of directors, which represents the interests of shareholders, appears as the preferred mechanism responsible for controlling officers and whose function is essential to minimize the costs resulting from the separation of ownership and control in modern organizations. The board of directors controls the affairs of the company in order to achieve the following objectives:
- The verification of financial reliability;
- The verification of compliance with laws and regulations.
- Committees
Committees are subsidiary to the board of directors. They perform particular functions or the ones that are delegated by the board. According to the legislation, committees are either mandatory or recommended. In some cases, they are required for companies well-defined in a sector. In countries where the creation of committees is mandated by laws or regulations, the number and structure of the committees are different from one country to another. Committees most commonly provided are: the audit committee; the remuneration committee…
(D)Structure-property:
This means of controlling relations between Shareholders and managers The ownership structure is an effective means of control of management executives, as it brings together, when certain conditions are present (capital concentration and nature of the shareholders), the basis for efficient monitoring system, namely, an incentive controllers to perform their functions, as well as cost control. “The internal audit function in banks” This publication is available on the BIS website. According to the agency theory two components of the ownership structure, the concentration of capital and the nature of the shareholders may be the cause of the performance of a company.
Conclusion: In conclusion it can be said that, the large shareholder and the external governance mechanisms can take a part in the influencing firm value, on the other hand the internal governance mechanism such as board salary, non-executive directors and CEO related variables cannot influencing the firm value effectively. And lastly, it can be said that this assignment has proved our topic which is “for the dominant presence of a large shareholder, quasi external governance mechanism (such as institutional investor, audit quality, debt ratio) appear to have their proper roles in influencing firm value, phenomena that draw the attention of policy makers. However, it is also well documented that no other internal governance mechanism (such as board salary, non-executive directors and CEO related variables) can effectively contribute to firm value”.
Bibliography:
- Caprio, G., Laeven, L., & Levine R., 2007. Governance and bank valuation. Journal of Financial Intermediation, 16, 584-617.
- Helm, S. Corp Reputation Rev (2007) 10: 22. https://doi.org/10.1057/palgrave.crr.1550036
- Pathan, S. and Skully M., 2010. Endogenously structured boards of directors in banks. Journal of Banking and Finance, 34(7), p 1590-1606.
- Pemsel, S., & Müller, R. (2012). The governance of knowledge in project-based organizations. International Journal of Project Management, 30(8), 865-876.
- Weir, C., Laing, D., & McKnight, P. J. (2002). Internal and external governance mechanisms: their impact on the performance of large UK public companies. Journal of Business Finance & Accounting, 29(5‐6), 579-611.
[1]Helm, S. Corp Reputation Rev (2007) 10: 22. https://doi.org/10.1057/palgrave.crr.1550036
[2]Pemsel, S., & Müller, R. (2012). The governance of knowledge in project-based organizations. International Journal of Project Management, 30(8), 865-876.
[3]Pathan, S. and Skully M., 2010. Endogenously structured boards of directors in banks. Journal of Banking and Finance, 34(7), p 1590-1606.
[4]Idid, 2.
[5]Caprio, G., Laeven, L., & Levine R., 2007. Governance and bank valuation. Journal of Financial Intermediation, 16, 584-617.
[6]Weir, C., Laing, D., & McKnight, P. J. (2002). Internal and external governance mechanisms: their impact on the performance of large UK public companies. Journal of Business Finance & Accounting, 29(5‐6), 579-611.
[7]Ibid, para.9.
Submitted by : Md.Shazzad Hossain.