Corporate Governance and Firm Value During a Financial Crisis

Abstract

We evaluate the effects of management ownership and other corporate governance variables on Hong Kong firms’ stock performance following the onset of the Asian Financial Crisis (1997-98), a period during which corporate governance structures to protect the interests of outside shareholders are most desired and needed. Hong Kong is selected because its securities laws and regulations closely resemble those of developed countries, thus providing insights into the expected effects of corporate governance structure on firm performance during a deep recession in the U.S. and Europe. Our investigation shows that Hong Kong firms with a more concentrated management (executive board) ownership displayed better capital market performance during the 13-month period of the Crisis. We also find that firms with more equity ownership by non-executive directors and in which the positions of CEO and board chairperson were occupied by the same individual experienced a smaller stock price decline. There was no evidence that a greater proportion of non-executive directors is associated with better performance. Our findings are consistent with the notion that there is a greater alignment of insiders with outside owners, rather than the expropriation by insiders who have the opportunity to divert value, for firms with higher levels of management ownership during an unexpected capital market crisis.

Keywords: Financial crisis, corporate governance, firm performance, management ownership

JEL Classification: G34, G10, G32, G38