External Financial Needs Corporate Growth and Market Value in the Transition from Relation-Based to Rule-Based Governance: an Evidence in Taiwan

External Financing Need, Firm Growth and market Value: The Evidence on the Transition from Relation-based to Rule-based Governance Mechanisms In the first-year project, we will use the Taiwanese data which is characterized as the transition economy from relation-based to rule-based economy to answer the question of whether the significant moderating effect of external financing need on the association between corporate governance and firm value is still supported. We argue that for firms with higher degrees of relation-based governance mechanisms (e.g.: affiliated-group firms; or family-controlled firms), the moderating effect of external financing need is less significant. We expect to find results that the fact the moderating effect of external financing need with US data on the association between governance practices and firm valuation is no longer significant or leass significant in the relation-based governance environment. The expected empirical results demonstrate important implications that the transition from relation-based to rule-based governance has for those firms with a particularly strong financing need that external financing may provide with inefficient, and costly, ways of seeking financial liquidity in the economy with relation-based governance. In the second-year project, we will further analyze the association between financing needs and firm value with subsample of firms with good and poor governance mechanisms. During the period of transition from relation-based to rule-based governance environment, banking industry or firms with better governance mechanisms would tend to improve their disciplinary monitoring and information transparency (e.g.: to voluntarily disclose higher transparency level of information on compensation paid to directors and executives; or to voluntarily appoint more independent directors on the board). One of the purposes is to identify themselves from others with poor governance mechanisms. Therefore, the effects of external financing need are reexamined to investigate whether firms voluntarily engaged in improving governance mechanisms are valued with higher market values. Furthermore, the probit model is adopted to find specific properties of firms voluntarily improving governance practices. In addition, we will construct a prediction model to identify whether a firm is classified as the one undergoing transition from relation-based to rule-based mechanisms. In the third year project, we tend to investigate the effect of CEO power on the variability of firm value. During the transition from relation-based to rule-based governance environment, several firms would tend to improve their own governance mechanisms. Although such improvement brings benefits to shareholders and outside investors, it is also harmful to some stakeholders or insiders who bargained at their arms’ length. We therefore argue that for firms passing through the transition from relation-based to rule-based governance mechanisms, it would be burdened with higher variation of market valuations. This project would provide with a comprehensive understanding of financial implication of relation-based and rule-based governance mechanisms. In addition, these empirical results would highlight the benefit of transition policy, and further guiding the policy reforms on corporate governance development in Taiwan. The integration project would provide necessary support to enhance our researches where this subproject definitely benefits the depth conclusion on their parts.

Project ID:PF10001-0144
External Project ID:NSC99-2410-H182-011-MY2