The International Journal o f Accounting and Business Society
17Bad Board Governance, Family Dom ination,
Agency Problems, and Its Evidence
in Indonesian Listed Com panies
R atna N ilam M u ch tar
U n iversitas P ersada In d on esia YA I
Abstract
The
ownership structure
o f the
Indonesian
L isted
Com panies tends to be concentrated
,an d fa m ily is the
dominant controller. The fam ily domination causes agency
problem to non-family investor. By investigating the sam e
sam ple o f listed companies in Jakarta Stock Exchange in
1996 and in 2000, this research discovers that the
reduction o f fam ily ownership w ill decrease agency
problem . The optim al portion, the reduction o f fa m ily
ownership 20,0%. However, after achieving that portion,
the reduction o f fam ily ownership will increase the agency
problem . This research also fin ds that fa m ily is not the best
controller.
Meanwhile
the
bonding mechanism
that
effectively reduce agency problem is the increasing of
dividen d payment, not be increasing o f debt.
K e y w o r d s : a g e n c y p r o b l e m , f a m i l y o w n e r s h i p d o m i n a t i o n , b o n d i n g a f f e c t i v i t y .
Introduction
In g e n e r a l , t h e o w n e r s h i p o f l i s t e d c o m p a n i e s t e n d s t o b e c o n c e n t r a t e d in w h i c h f a m i l y a n d f i n a n c i a l i n s t i t u t i o n is t h e m a i n c o n t r o l l e r . T h i s p h e n o m e n o n is n o t o n l y o c c u r r i n g in t h e d e v e l o p i n g c o u n t r i e s b u t a l s o in t h e a d v a n c e d c o u n t r i e s b y t h e e x c e p t i o n s o f t h e U n i t e d S t a t e s o f A m e r i c a a n d t h e U n i t e d K i n g d o m . A s u r v e y c o n d u c t e d b y L a P o r t a a t a l ( 1 9 9 9 ) in 2 7 a d v a n c e d c o u n t r i e s f o u n d t h a t o f 6 4 % o f l i s t e d c o m p a n i e s t h a t h a v e c o n c e n t r a t e d , 3 0 % o f t h e m is c o n t r o l l e d b y f a m i l y .
I n I n d o n e s i a , m o s t o f l i s t e d c o m p a n i e s a r e a l s o c o n c e n t r a t e d o w n e d b y f a m i l y . A S u r v e y c o n d u c t e d b y C l a e s s e n s , D j a n k o v , a n d L a n g ( 2 0 0 0 ) f o u n d t h a t
f a m i l y o w n s 7 1 , 5 % o f I n d o n e s i a n l i s t e d c o m p a n i e s . Is t h e r e a n y p r o b l e m d u e t o t h e o w n e r s h i p s t r u c t u r e ? K u r n i a w a n a n d I n d r i a n t o r o ( 2 0 0 0 ) a r g u e d t h a t d u e t o t h e f a m i l y d o m i n a t i o n in I n d o n e s i a n l i s t e d c o m p a n i e s is o n e o f t h e f a c t o r s w h y t h e a p p l i c a t i o n o f g o o d c o r p o r a t e g o v e r n a n c e h a v e n o t e f f e c t i v e y e t in I n d o n e s i a . T h e y a r g u e t h a t i f I n d o n e s i a n l i s t e d c o m p a n i e s a r e s t i l l d o m i n a t e d b y f a m i l y , t h e p r o t e c t i o n o f m i n o r i t y i n v e s t o r s w i l l b e r e m a i n i n g w e a k .
C o n f l i c t o f i n t e r e s t b e t w e e n m i n o r i t y i n v e s t o r s a n d t h e d o m i n a n t f a m i l y i n v e s t o r is o n e o f v e r s i o n s in a g e n c y p r o b l e m , a n d t h e s c h o l a r h a s n o t g i v e n p r o p e r i n t e n t i o n . T h e y f r e q u e n t l y i n v e s t i g a t e t h e c o n f l i c t o f i n t e r e s t b e t w e e n i n v e s t o r s a n d m a n a g e r . T h i s is b e c a u s e m o s t o f r e s e a r c h e s a r e c o n d u c t e d in t h e U S a n d t h e U K in w h i c h a g e n c y p r o b l e m e m e r g e s b e t w e e n i n v e s t o r s a n d m a n a g e r . T h e r e f o r e t h e m e c h a n i s m t h a t t h e o r e t i c a l l y a n d e m p i r i c a l l y w a s p r o v e d t o r e d u c e a g e n c y p r o b l e m m u s t b e t e s t e d in I n d o n e s i a . B o n d i n g m e c h a n i s m b y i n c r e a s i n g d i v i d e n d o r d e b t s u g g e s t e d b y J e n s e n ( 1 9 8 6 ) h a s n o t e f f e c t i v e a p p l i e d in I n d o n e s i a .
B y u s i n g d a t a o f t h e U n i t e d S t a t e s L i s t e d c o m p a n i e s , F a m a a n d J e n s e n ( 1 9 8 3 ) a r g u e d t h a t m o n i t o r i n g c o s t t o r e d u c e a g e n c y p r o b l e m in c o m p a n i e s c o n t r o l l e d b y f a m i l y t e n d s t o b e l o w e r t h a n c o n t r o l l e d b y n o n - f a m i l y . M e a n w h i l e M c C o n o u g h y
et a l
( 2 0 0 1 ) f o u n d t h a t f a m i l y - c o n t r o l l e d c o m p a n i e s t e n d s t o h a v e h i g h e r m a r k e t t o b o o k v a l u e o f e q u i t y t h a n t h a t o f n o n - f a m i l y ’s c o n t r o l l e d c o m p a n i e s . I f w e d o n o t i n v e s t i g a t e t h e d i f f e r e n c e o f o w n e r s h i p s t r u c t u r e f r o m b o t h f i n d i n g s , w e w i l l h a v e m i s p e r c e p t i o n t h a t t h e f a m i l y - c o n t r o l l e d c o m p a n i e s a r e m o r e e f f e c t i v e t h a n n o n - f a m i l y ’s c o n t r o l l e d c o m p a n i e s t o o v e r c o m e a g e n c y p r o b l e m in I n d o n e s i a a s K u r n i a w a n a n d I n d r i a n t o r o ( 2 0 0 0 ) h y p o t h e s i z e d .1 8
Bad B oard Governance, Family Domination, ...
B y u s i n g l i s t e d c o m p a n i e s in 1 9 9 6 a n d 2 0 0 2 , t h i s s t u d y f o u n d t h a t t h e r e d u c t i o n o f f a m i l y o w n e r s h i p in t h e b e g i n n i n g w h a t w o u l d d e c r e a s e a g e n c y p r o b l e m . H o w e v e r a f t e r a c h i e v i n g t h e g i v e n p o r t i o n , t h e d e c r e a s i n g o f f a m i l y o w n e r s h i p p o r t i o n w i l l i n c r e a s e a g e n c y p r o b l e m . T h i s r e s e a r c h a l s o f i n d s t h a t in o v e r c o m i n g t h e a g e n c y p r o b l e m , f a m i l y ’s c o n t r o l l e d c o m p a n i e s is n o t a s g o o d a s o f f i n a n c i a l i n s t i t u t i o n c o m p a n i e s a n d S t a t e ’s c o n t r o l l e d c o m p a n i e s a l t h o u g h it m y h a v e a b i a s in i n d u s t r i a l a d v a n t a g e . In r e l a t i o n o f b o n d i n g m e c h a n i s m , t h i s r e s e a r c h f o u n d t h a t , b y i n c r e a s i n g d i v i d e n d , is e f f e c t i v e t o r e d u c e a g e n c y p r o b l e m . M o r e o v e r in 1 9 9 6 t h e i n c r e a s i n g o f d e b t h a d c a u s e d t h e i n c r e a s i n g a g e n c y p r o b l e m .
The International Journal o f Accounting and Business Society
19Family Ownership versus Manager Ownership
J e n s e n a n d M e c k l i n g ( 1 9 9 6 ) in t h e U S i n t r o d u c e d s y s t e m a t i c a l a n a l y s i s o n a g e n c y p r o b l e m . T h e y d e v e l o p e d a m o d e l r e l a t e d t o t h e m a n a g e r o w n e r s h i p in w h i c h is m a n a g e d . J e n s e n a n d M e c k l i n g d e f i n e d a a s a p o r t i o n o f s t o c k o w n e d b y m a n a g e r . I f a = 1 t h e c o m p a n y is w h o l l y o w n e d b y m a n a g e r . C o n s e q u e n t l y h e o r s h e w i l l b e a r a l l r i s k w h e n t h e c o m p a n y is u n d e r p e r f o r m e d . O n t h e o t h e r s i d e , i f a <1 t h e m a n a g e r w i l l b e a r t h e a f r o m its m i s t a k e , a n d t h e r e m a i n i n g (1 - a ) w i l l b e t r a n s f e r r e d b y o t h e r i n v e s t o r s . T h e l o w e r t h e p o r t i o n s o f h e r s t o c k t h e s m a l l e r t h e a t t e n t i o n t o i n c r e a s e v a l u e o f t h e c o m p a n y . M o r e o v e r m a n a g e r s m a y b e t a k e a c t i o n s t h a t g i v e p e r s o n a l b e n e f i t b y s a c r i f i c i n g o t h e r i n v e s t o r s . O n e o f m e c h a n i s m s s u g g e s t e d t o r e d u c e a g e n c y p r o b l e m b e t w e e n m a n a g e r a n d i n v e s t o r is t h a t m a n a g e r m u s t h a v e h i g h e r p o r t i o n o f s t o c k . T h i s is b e c a u s e t h e h i g h e r t h e p o r t i o n , t h e m o r e r e s p o n s i b l e t h e m a n a g e r t o i n c r e a s e t h e v a l u e o f c o m p a n i e s .
T h i s s o l u t i o n c a n n o t b e a p p l i e d in I n d o n e s i a b e c a u s e t h e r e is a d i f f e r e n c e r o o t o f a g e n c y p r o b l e m . In I n d o n e s i a , t h e p o r t i o n o f m a n a g e r is u s u a l l y h i g h b e c a u s e l i e / s h e is a l s o t h e m e m b e r o f f a m i l y w h o c o n t r o l t h e c o m p a n y . T o o v e r c o m e t h e a g e n c y p r o b l e m , t h e s o l u t i o n is n o t t o i n c r e a s e t h e o w n e r s h i p p o r t i o n b u t t o r e d u c e f a m i l y ' s p o r t i o n .
T h e q u e s t i o n is w h y t h e f a m i l y ' s p o r t i o n m u s t b e r e d u c e d ? S t u l z ( 1 9 8 8 ) i m p r o v e d t h e a g e n c y t h e o r y o r i g i n a t e d b y J e n s e n a n d M e c k l i n g ( 1 9 7 6 ). H e a r g u e d t h a t t h e r e l a t i o n b e t w e e n m a n a g e r ' s o w n e r s h i p a n d v a l u e o f c o m p a n y is n o n - m o n o t o n i c . In t h e l o w a , t h e i n c r e a s i n g o f m a n a g e r o w n e r s h i p t e n d s t o i n c r e a s e v a l u e o f t h e c o m p a n y . C o n v e r s e l y w h e n a is h i g h , t h e i n c r e a s i n g t h e m a n a g e r o w n e r s h i p w i l l i n c r e a s e a g e n c y p r o b l e m , in t u r n , it t h e v a l u e o f e n t r e n c h m e n t , a n o w n e r s h i p p o s i t i o n in w h i c h m a n a g e r is f r e e l y f o l l o w p e r s o n a l i n t e r e s t w i t h o u t a n y a n x i e t y f r o m s t r i k e f r o m o t h e r i n v e s t o r t h r o u g h h o s t i l e t a k e o v e r o r p r o x y f i g h t s . In t h e I n d o n e s i a n c a s e s , b e c a u s e f a m i l y o w n e r s h i p p o r t i o n is s t i l l in t h i s p o s i t i o n , t h e p o r t i o n m u s t b e r e d u c e d t o d e c r e a s e a g e n c y p r o b l e m .
The Influence o f Family Ownership on the agency Problem
L A P o r t a e t a l ( 1 9 9 9 ) a n d C l a e s s e n s e t a l ( 2 0 0 0 ) d e f i n e d f a m i l y a s a ll i n d i v i d u a l s a n d c o m p a n i e s w h o s e o w n e r s h i p is d o c u m e n t e d , e x c e p t t h e o w n e r s a r e l i s t e d c o m p a n i e s , o r f i n a n c i a l i n s t i t u t i o n . I n d i v i d u a l s a n d c o m p a n i e s w h o
2 0
B a d B o a rd G overnance, F am ily D o m in a tio n
,h a v e s o s m a l l o w n e r s h i p t h a t c a n n o t b e d o c u m e n t e d is c a t e g o r i z e d a s l i s t e d . T h e s e r e s e a r c h e s u s e t h i s d e f i n i t i o n .
I h i s r e s e a r c h c l a s s i f i e d f a m i l y o w n e r s h i p p o r t i o n t o b e 5 c a t e g o r i e s :
L e s s t h a n 5 , 0 0 % , 5 , 0 0 % - 1 0 , 0 0 , 1 0 ,0 1 - 2 0 . 0 0 % , 2 0 , 0 1 - 5 0 , 0 0 % a n d > 5 0 % . F a m i l y o w n e r s h i p p o r t i o n l e s s t h a n 5 % is t r e a t e d a s r e f e r e n c e g r o u p .
T h e i n c r e a s i n g p e r f o r m a n c e p o i n t s o u t t h a t t h e m a n a g e r is a b l e t o m i n i m i z e a g e n c y p r o b l e m . In t h i s r e s e a r c h , t h e p e r f o r m a n c e is m e a s u r e d b y t w o p r o x y ( 1 ) w e e k l y c u m u l a t i v e a b n o r m a l r e t u r n f o r o n e y e a r w i t h o u t d i v i d e n d a d j u s t m e n t ( n o t i f y b y C A R ) a n d ( 2 ) , w e e k l y c u m u l a t i v e a b n o r m a l r e t u r n f o r o n e y e a r w i t h d i v i d e n d a d j u s t m e n t ( n o t i f y b y C A R A D J ). A b n o r m a l r e t u r n is t h e d i f f e r e n c e a c t u a l r e t u r n a n d m a r k e t r e t u r n . T h e u s i n g o f a b n o r m a l r e t u r n a s a p r o x y o f c o m p a n i e s p e r f o r m a n c e is w i l l r e p r e s e n t t h e t r a d i n g s t o c k t h a t is s i m i i a r w i t h a t o u r n a m e n t . E v e r y s t o c k w i l l “ p r e s e n c e ” a s g o o d a s p o s s i b l e , a n d i n v e s t o r w i l l a c t a “j u r y " t h a t w i l l d e t e r m i n e w h i c h s t o c k is t h e b e s t . S t o c k s t h a t h a v e p o s i t i v e a b n o r m a l r e t u r n w i l l h a v e b e t t e r p e r f o r m a n c e . C o n v e r s e l y w h e n t h e s t o c k s h a v e n e g a t i v e a b n o r m a l r e t u r n , it h a s b a d p e r f o r m a n c e .
T h e t e s t m o d e l o f t h e i n f l u e n c e f a m i l y o w n e r s h i p o n t h e r e d u c t i o n a g e n c y p r o b l e m u s e s t w o c o n t r o l v a r i a b l e s t h a t a r e m a r k e t v a l u e o f e q u i t y ( M V E ) a n d b o o k t o m a r k e t v a l u e o f e q u i t y ( B M E ). T h e u s i n g m a r k e t v a l u e o f e q u i t y a s a c o n t r o l v a r i a b l e is b a s e d o n p r e v i o u s r e s e a r c h in w h i c h m a r k e t v a l u e o f e q u i t y h a s s i g n i f i c a n t l y i n f l u e n c e o n r e t u r n o f c o m p a n y ( K i m , L e e , a n d f r a n c i s , 1 9 8 8 ; C r u t h l e y a n d H a n s e n , 1 9 8 9 ; V o l p i n , 2 0 0 2 ; a n d M i l t o n , 2 0 0 2 ). W h e r e a s F a m a a n d F r e n c h ( 1 9 9 2 ) a d d e d B M E a s a v a r i a b l e t h a t i n f l u e n c e r e t u r n o f c o m p a n y . T h e r e s e a r c h i n v e s t i g a t e s l i s t e d c o m p a n i e s in J a k a r t a S t o c k E x c h a n g e in e a r l y
1 9 9 6 a n d s t i l l l i s t e d u n t i l t h e e n d o f 2 0 0 2 , a n d t h e a n a l y s i s is c o n d u c t e d o n l y f o r t h e y e a r o f 1 9 9 6 a n d 2 0 0 2 . T h e u s i n g o f 1 9 9 6 a s a n e a r l y a n a l y s i s is t o h a v e d e s c r i p t i o n t h e r e l a t i o n s h i p o f p a t t e r n f a m i l y o w n e r s h i p a n d t h e r e d u c t i o n a g e n c y p r o b l e m b e f o r e e c o n o m i c c r i s i s , w h i l e t h e u s i n g o f 2 0 0 2 d a t a is t o s h o w t h e r e l a t i o n s h i p t h a t p a t t e r n a f t e r e c o n o m i c c r i s i s . In t h e e a r l y 1 9 9 6 , t h e r e w e r e 2 3 8 c o m p a n i e s l i s t e d in I n d o n e s i a S t o c k M a r k e t , b u t o n l y 2 1 3 c o m p a n i e s r e m a i n in t h e e n d o f 2 0 0 0 .
Table 1 : The Result o f Relation Test Between Family Ownership and
The Reduction of Agency Problem
The International Journal o f Accounting a nd Business Society
21M o d e l : C A R i = a + pi D O W N 2 1 + p 2 D O W N 2 + p3 D O W N 3 i + p 4 D O W N 4 I + y 1 L n S iz e i + y 2 B M E i -+
(
1)
W h e r e , C A R is w e e k l y c u m u l a t i v e a b n o r m a l r e t u r n f o r 1 y e a r , C A R A D J is c u m u l a t i v e a b n o r m a l r e t u r n w i t h d i v i d e n d , D F O W N 1 is d u m m y v a r i a b l e t h a t h a s “ 1” m a r k f o r t h e c o m p a n y t h a t h a v e f a m i l y o w n e r s h i p 5 - 1 0 % , D O W N 2 is f o r o w n e r s h i p p o r t i o n 10,1 - 2 0 % . D O W N 3 is f o r 2 0 , 1 - 5 0 % , D O W N 4 is f o r > 5 0 % o w n e r s h i p , L n S i z e is In o f m a r k e t v a l u e o f e q u i t y , B M E is b o o k t o m a r k e t v a l u e o f e q u i t y , D Y E A R is d u m m y v a r i a b l e w i t h “ O ” m a r k f o r 1 9 9 6 a n d “ 1” f o r 2 0 0 0 . T h e f o l l o w i n g t a b l e p o i n t s o u t t h e i n f l u e n c e f a m i l y o w n e r s h i p p o r t i o n o n t h e r e d u c t i o n o f a g e n c y p r o b l e m .
Independence
Variable
Dep. Var :
CAR
Dep. Var :
CARADJ
Koef
Prob
Koef
Prob
C - 2 .1 7 4 8 0 .0 3 6 - 1 .9 8 7 7 0 . 0 5 8 D O W N 1 0 .2 5 6 2 0 .4 2 1 0 .2 1 8 1 0 .4 9 8 D O W N 2 0 .7 1 2 3
0.051
0 .6 5 8 80.074
D O W N 3 0 .0 7 4 7 0 .5 3 7 0 .1 5 6 7 0 .2 5 5 D O W N 4 0 .0 5 2 4 0 .6 0 3 0 .0 2 8 0 0 .7 8 4 L S I Z E 0 .3 8 4 20.019
0 .3 6 0 90.030
L S I Z E A2 - 0 .0 1 8 30.004
- 0 .0 1 7 40.007
B M E 0 .0 0 5 9 0 .1 8 1 0 .0 0 6 3 0 . 1 6 0 D Y E A R 0 .0 9 1 5 0 .1 3 2 - 0 . 0 1 19 0 .8 4 6E m p i r i c a l t e s t m o d e l u s e d h a d b e e n c h a n g e d f r o m t h e i n i t i a l m o d e l . T h i s is b e c a u s e R A M S E Y t e s t p o i n t s o u t t h a t t h e i n i t i a l m o d e l h a s e x p e r i e n c e d t h e s p e c i f i c a t i o n m i s t a k e o n I n S i z e v a r i a b l e , h e n c e t h i s w a s m o d i f i e d b y a d d i n g I n S i z e A2 . T h e u s i n g W h i t e - h e t e r o s k e d a s t i c i t y t e s t d o e s n o t s h o w a n y h e t e r o s c e d a s t i c i t y in t h i s m o d e l . M e a n w h i l e a u t o c o r r e l a t i o n t e s t u s i n g L j u n g - B o x Q S t a t i s t i c s p o i n t s o u t t h e r e is n o a u t o c o r r e l a t i o n w i t h i n t h e m o d e l .
T a b l e 1 p o i n t s o u t t h a t t h e u s i n g e i t h e r d e p e n d e n t C A R v a r i a b l e o r C A R A D J g i v e s t h e s i m i l a r r e s u l t . T h i s s h o w t h a t p e r f o r m a n c e p r o x y u s e d in t h i s r e s e a r c h is r e l i a b l e . B o t h m o d e l s h o w t h a t D O W N 2 c o e f f i c i e n t is p o s i t i v e s i g n i f i c a n t , w h i l e d u m m y v a r i a b l e f o r f a m i l y o w n e r s h i p is n o t s i g n i f i c a n t . T h e s e f i n d i n g
s h o w t h a t f a m i l y o w n e r s h i p b e t w e e n 10.1 - 2 0 % is t h e b e s t p o r t i o n t o r e d u c e a g e n c y p r o b l e m .
T h e i n v e s t i g a t i o n o n d u m m y c o e f f i c i e n t p o i n t s o u t t h a t D O W N 4 < D O W N 3 < D O W N 2 .> D O W N 1 . T h i s p a t t e r n i n t e r p r e t s t h a t t h e d e c r e a s i n g o f f a m i l y o w n e r s h i p in t h e b e g i n n i n g w i l l r e d u c e a g e n c y p r o b l e m , b u t a f t e r r e a c h i n g b e y o n d p o r t i o n o f 10,1 - 2 0 . 0 % , t h e r e d u c t i o n f a m i l y o w n e r s h i p w i l l i n c r e a s e a g e n c y p r o b l e m .
T h e i n f l u e n c e o f e c o n o m i c c r i s i s o n t h e d e g r e e o f r e l a t i o n s h i p b e t w e e n t h e r e d u c t i o n f a m i l y o w n e r s h i p a n d t h e r e d u c t i o n a g e n c y p r o b l e m is r e l a t i v e l y c o n s t a n t . T h i s is s h o w n b y y e a r d u m m y v a r i a b l e o f B M E is n o t s i g n i f i c a n t l y m f l u e n c e c u m u l a t i v e a b n o r m a l r e t u r n . W h e r e a s t h e s i z e o f c o m p a n y h a v e p a r a b o l i c s i g n i f i c a n t i n f l u e n c e o n c u m u l a t i v e a b n o r m a l r e t u r n . T h i s f i n d i n g p o i n t s o u t t h a t t h e b i g - s i z e c o m p a n i e s a r e n o t a b l e t o c o m p a n i e s w i t h s m a l l - s i z e c o m p a n i e s b e c a u s e t h e g r o w t h r a t e t h e s m a l l c o m p a n i e s a r e h i g h e r t h a n t h a t o f l a r g e - s i z e c o m p a n i e s , t h e s m a l l - s i z e c o m p a n i e s a r e m o r e a b l e t o c r e a t e a d d e d v a l u e .
T o t e s t r o b u s t n e s s t h e f i n d i n g , t h e r e s e a r c h m o d i f i e s d e f i n i t i o n o f f a m i l y w i t h a n o t h e r m o d i f i c a t i o n . F i r s t , f a m i l y d e f i n e d b y o n l y i n d i v i d u a l w h o s e o w n e r s h i p is r e c o r d e d . C o n s e q u e n t l y t h e o w n e r s h i p o f c l o s e d - c o m p a n y is e x c l u d e d f r o m t h i s c r i t e r i o n . S e c o n d , f a m i l y is d e f i n e d a s o n e i n d i v i d u a l o r c o m p a n y w h o s e o w n e r s h i p is d o m i n a n t . T h i s d e f i n i t i o n is u s e d t o a v o i d t h e p o s s i b i l i t y n o t t o h a v e f a m i l y r e l a t i o n s h i p b e t w e e n i n d i v i d u a l c o m p o n e n t a n d t h e f o r m .
B \ u s i n g b o t h m o d i f i e d f a m i l y d e f i n i t i o n s , it is s t i l l f o u n d t h a t t h e p a t t e r n t h a t t h e r e d u c t i o n o f f a m i l y o w n e r s h i p in t h e b e g i n n i n g c a n b e a b l e t o r e d u c e a g e n c y p r o b l e m , b u t a f t e r r e a c h i n g a s p e c i f i c p o r t i o n t h e r e d u c t i o n o f f a m i l y o w n e r s h i p w i l l m a k e a g e n c y p r o b l e m i n c r e a s e s . T h e e m e r g i n g d i f f e r e n c e o n t h e m o d i f y f a m i l y d e f i n i t i o n is o n g r a d a t i o n d e g r e e o f r e d u c t i o n a n d t h e i n c r e a s i n g a g e n c y p r o b l e m w h e n t h e f a m i l y o w n e r s h i p d e c r e a s e . In t h e f a m i l y d e f i n i t i o n t h a t o n l y i n c l u d e s n d i v i d u a l o w n e r s h i p . T h i s f i n d i n g i n d i c a t e s t h a t the* r e l a t i o n f a m i l y o w n e r s h i p t h a t c o n s i s t s o f i n d i v i d u a l s is m o r e c l o s e l y t h a n t h o s e c o m p a n i e s .
In t h e d e f i n i t i o n o f f a m i l y t h a t i n c l u d e o n l y o n e d o m i n a n t o w n e r a m o n g i n d i v i d u a l o w n e r s o r c o m p a n i e s , t h e d e g r e e o f g r a d a t i o n o f d e c r e a s i n g / i n c r e a s i n g a g e n c y p r o b l e m b e c a u s e o f t h e d e c r e a s i n g t h e f a m i l y o w n e r s h i p is l e s s t h a n t h o s e o t h e r d e f i n i t i o n . E v e n w i t h t h e d e f i n i t i o n h y p o t h e s i z i n g i n t e r c o m p o n e n t f a m i l y o w n e r s h i p is i n d e p e n d e n t , it is n o t f o u n d t h a t o w n e r s h i p p o r t i o n t h a t is s i g n i f i c a n t l y t h e d e c r e a s i n g its a g e n c y p r o b l e m is b e t t e r t h a n o t h e r o w n e r s h i p is i n d e p e n d e n t is b i a s . T h e d e c r e a s i n g o f o n l y o n e o w n e r is n o t 2 2
B a d B o a rd G overnance, F a m ily D om ination,
...The International Journal o f Accounting and Business Society
2 3c a u s e t h e d e c r e a s i n g a g e n c y p r o b l e m s i g n i f i c a n t l y b e c a u s e o t h e r o w n e r is n o t d e c r e a s e .
Family Domination versus Non-Family Domination and the reduction
agency problem.
T h i s r e s e a r c h f i n d s t h a t in 1 9 9 6 , a s m a n y a s 8 5 . 8 5 % o f l i s t e d c o m p a n i e s a r e c o n t r o l l e d b y f a m i l y . 9 . 9 1 % b y l i s t e d c o m p a n y , 1 . 8 9 % b y S t a t e , 1 . 8 9 % b y f i n a n c i a l i n s t i t u t i o n s , a n d t h e r e m a i n i n g o f 0 . 4 7 % h a s n o d o m i n a n t c o n t r o l l e r . T h e c o n t r o l d e f i n i t i o n u s e d in t h e r e s e a r c h is 2 0 % w h i l e t h e f a m i l y d e f i n i t i o n u s e d i n t h i s r e s e a r c h is t h e d e f i n i t i o n t h a t i n c l u d e s a l l i n d i v i d u a l a n d c l o s e d - c o m p a n y . I n 2 0 0 0 , t h e c o n d i t i o n w a s c h a n g e d . C o m p a n i e s c o n t r o l l e d b y f a m i l y , l i s t e d c o m p a n y a n d f i n a n c i a l i n s t i t u t i o n d e c r e a s e t o 8 4 , 0 6 % , 7 . 7 3 % , a n d 0 . 9 7 % r e s p e c t i v e l y , a n d c o m p a n i e s c o n t r o l l e d b y S t a t e a n d n o d o m i n a n t c o n t r o l i n c r e a s e s t o 4 , 4 8 % a n d 2 . 4 2 % r e s p e c t i v e l y .
T h e r e a l i t y t h a t a l m o s t a l l l i s t e d c o m p a n i e s in I n d o n e s i a h a s d o m i n a n t c o n t r o l l e r r a i s e s a q u e s t i o n ; “ W h o a r e t h e b e s t c o n t r o l l e r t h a t is a b l e t o r e d u c e a g e n c y p r o b l e m ? ’ T a b l e 2 p o i n t s o u t t h e r e s u l t o f r e g r e s s i o n m o d e l i n c l u d i n g d u m Y n y v a r i a b l e o n f a m i l y c o n t r o ( D F O W N ) , f i n a n c i a l i n s t i t u t i o n c o n t r o l ( D I O W N ) , S t a t e c o n t r o l ( D S O W N ) , l i s t e d c o m p a n y c o n t r o l ( D C O W N ) , a n d t h e g r o u p o f c o m p a n i e s h a v i n g n o d o m i n a n t c o n t r o l a s r e f e r e n c e g r o u p .
T a b l e 2 p o i n t s o u t t h a t t h e f a m i l y - c o n t r o l l e d c o m p a n i e s a r e n o t s i g n i f i c a n t t o r e d u c e a g e n c y p r o b l e m . T h i s r e s u l t is d i f f e r e n t w i t h c o m p a n i e s t h a t h a v e n o d o m i n a n t c o n t r o l l e r . E v e n w h e n d e p e n d e n t v a r i a b l e C A R u s e d , c o e f f i c i e n t D F O W N is n e g a t i v e . It i n d i c a t e s t h a t t h e f a m i l y - c o n t r o l l e d c o m p a n i e s t e n d t o b e w o r s e in d e c r e a s i n g a g e n c y p r o b l e m a l t h o u g h t h e v a l e is n o t s i g n i f i c a n t . F r o m t h e t a b l e a l s o i n d i c a t e s t h a t l i s t e d c o n t r o l l e d is a s b a d a s f a m i l y - c o n t r o l l e d c o m p a n i e s in o v e r c o m i n g a g e n c y p r o b l e m . M e a n w h i l e S t a t e - c o n t r o l l e d c o m p a n i e s a n d f n a n c i a l i n s t i t u t i o n - c o n t r o l l e d c o m p a n i e s h a v e b e t t e r p e r f o r m a n c e t o h a n d l e a g e n c y p r o b l e m . F r o m y e a r d u m m y c o e f f i c i e n t p o i n t s o u t t h a t i n g e n e r a l t h e h a n d l i n g a g e n c y p r o b l e m b y t h o s e c o n t r o l l e r t e n d e d t o b e w o r s e n in 2 0 0 2 .
2 4
B a d B o a r d G o vern a n ce
,F a m ily D om ination,
Table 2 : The result o f test of the influence o f family domination
Onership and non-family ownership on the reduction of
Agency problem
M o d e l : C A R i = a + (31 D F O W N i + (32 D I O W N i + (33 D S O W N i + (34 D O W N i + y 1 L n S i z e i + y 3 L n S i z e A2 i + D Y E A R i
(
2
)
w h e r e C A R is w e e k l y c u m u l a t i v e a b n o r m a l r e t u r n f o r 1 y e a r , C A R D J is c u m u l a t i v e a b n o r m a l r e t u r n w i t h d i v i d e n d , D F O W N 1 is d u m m y v a r i a b l e t h a t h a s 1 m a r k f o r t h e c o m p a n y t h a t h a v e f a m i l y o w n e r s h i p D I O W N is d u m m y v a r i a b l e t h a t h a s 1 m a r k is c o n t r o l l e d b y f i n a n c i a l i n s t i t u t i o n , D S O W N is v a r i a b l e t h a t h a s 1 m a r k w h e n S t a t e c o n t r o l , D C O W N is v a r i a b l e t h a t h a s 1 m a r k w h e n l i s t e d c o m p a n y , I n S i z e is In m a r k e t v a l u e o f e q u i t y , B M E is b o o k t o m a r k e t v a l u e o f e q u i t y , D Y E A R is d u m m y v a r i a b l e t h a t h a s n u l l m a r k f o r 1 9 9 6 a n d 1 m a r k f o r 2 0 0 0 .
Indep. Var.
Dep. Var : CAR
Dep. Var :CARADJ
Koef
Prob
Koef
Prob
C - 2 .3 8 4 6 0 .0 3 1 - 2 .3 9 8 2 0 .0 3 3 D F O W N - 0 .1 2 0 2 0 .7 2 9 0 .0 6 7 5 0 .8 4 8 D I O W N 0 .4 4 5 6 0 .2 4 7 0 . 6 5 1 6
0.096
D S O W N 0 .7 1 5 50.028
0 . 8 9 9 00.006
D C O W N - 0 .1 7 7 4 0 .6 3 0 0 .0 0 8 8 0 .9 8 1L S I Z E 0 .4 5 1 9
0.007
0 . 4 2 5 70.013
L S I Z E A2 - 0 .0 2 1 3 0.001 - 0 .0 2 0 20.002
B M E 0 .0 0 5 8 0 .1 8 7 0 .0 0 5 5 0 . 2 1 0 D Y E A R 0 .6 9 8 30.010
- 0 .7 6 7 10.005
The Finding fa m ily controlled companies are not different not or even worse
than reference group (companies without dominant control) is consistent with
previou s finding. The decreasing o f fam ily ownership than can be able to
reduce agency problem must be up to 10,1-20% portion. H owever, when the
portion on the ownership increases the agency problem is also increase
Com paring fa m ily ownership 20% or more and com panies having fam ily
ownership 20% or less. Because p a rt o f reference group consist o f com panies
that has the most conducive to decrease agency problem (that is fam ily
ownership o f 10,1-20%), it is clear that fam ily-con trolled com pany is worse
than com panies in the reference group.
The International Journal o f Accounting and Business Society
2 5H o w w i t h a f i n d i n g t h a t l i s t e d - c o n t r o l l e d c o m p a n i e s a r e n o t s i g n i f i c a n t l y d i f f e r e n c e w i t h r e f e r e n c e g r o u p ? T h e l i s t e d c o m p a n i e s c o n t r o l l e d b y l i s t e d c o m p a n i e s h a v e t h e s a m e c h a r a c t e r i s t i c w i t h f a m i l y - c o n t r o l l e d c o m p a n y . In a d d i t i o n , f i n a n c i a l i n s t i t u t i o n - c o n t r o l l e d c o m p a n y , u s i n g C A R A D J d e p e n d e n t v a r i a b l e , is p r o b a b l y c a u s e d b y t h e m o r e i n d e p e n d e n t it h a s t h a n f a m i l y c o n t r o l c o m p a n i e s . O t h e r p o s s i b i l i t y is a n y d i v i d e d b i a s i n c l u d e d in m e a s u r i n g C A R A D J . T h i s is b e c a u s e t h e l o n g - t e a m i n v e s t o r s t e n d t o e x p e c t d i v i d e n d r a t h e r t h a n c a p i t a l g a r n .
T h e f i n d i n g t h a t s t a t e - c o n t r o l l e d c o m p a n y is b e t t e r t o d e c r e a s e a g e n c y p r o b l e m m u s t b e i n t e r p r e t e d c a u t i o u s l y . T h e a d v a n t a g e o f s t a t e c o n t r o l in o n l y o c c u r s is o n l y o n s t a t e l i s t e d c o m p a n i e s . T h e a g e n c y p r o b l e m t h a t h a s b e e n r e d u c e d is l i m i t e d o n l y o n t h e c o n f l i c t b e t w e e n s t a t e m a j o r i t y o w n e r a n d o t h e r m i n o r i t y i n v e s t o r , n o t b e t w e e n s t a t e a n d o t h e r s t a k e h o l d e r s . In a d d i t i o n , t h e p o s s i b i l i t y t h a t s t a t e o f a n y b i a s i n d u s t r i a l c h a r a c t e r i s t i c o f t h e l i s t e d s t a t e o w n e d c o m p a n y . B o n d i n g E f f e c t i v e n e s s in T h e I n d o n e s i a n C a p i t a l m a r k e t .
J e n s e n ( 1 9 8 6 ) a r g u e d t h a t b o n d i n g m e c h a n i s m u s e d t o r e d u c e a g e n c y p r o b l e m s is b y m a k i n g d e c i s i o n s t h a t r e d u c e f r e e c a s h f l o w . T h e s m a l l e r c a s h f l o w t h e s m a l l e r o p p o r t u n i t y t o u s e t h e c a s h f l o w f o r p e r s o n a l i n t e r e s t . O n t h e o t h e r w o r d s a g e n c y p r o b l e m w i l l d e c r e a s e w h e n t h e f r e e c a s h f l o w s m a l l e r .
T h e r e a r e t w o w a y s t o r e d u c e f r e e c a s h f l o w t h a t is b y i n c r e a s i n g d e b t a n d b y i n c r e a s i n g d i v i d e n d p a y m e n t . T h e m o r e d e b t , t h e m o r e f u n d s u s e d t o p a y p r i n c i p l e a n d i n t e r e s t . W h e r e a s , t h e m o r e d i v i d e n d s p a i d , t h e s m a l l e r f u n d a v a i l a b l e t o f i n a n c e c o m p a n y o p e r a t i o n .
T h e r e s u l t o f e m p i r i c a l t e s t f o r d i v i d e n d a n d d e b t b o n d i n g a f f e c t i v i t y in I n d o n e s i a n C a p i t a l M a r k e t is s h o w n in T a b l e 3.
Table 3 The Result O f Dividend And Debt Bonding Effectiv eness
M o d e l : C A R = a + p 4 D E R + p 2D Y + p 3( D F O W N * D E R ) + p 4( D F O W N * D Y )
Lnsize
+1
jBMEi + s
'
W h e r e C A R is w e e k l y c o m m u t a t i v e a b n o r m a l r e t u r n f o r 1 y e a r . D E R is d e b t t o e q u i t y r a t i o . B y is d i v i d e n d y i e l d . D F O W N is d u m m y v a r i a b l e t h a t h a s 1 m a r k f o r f a m i l y - o w n e d c o m p a n y , in S i z e is In M a r k e t v a l u e o f e q u i t y . B E M is b o o k t o m a r k e t v a l u e o f e q u i t y .
2 6
B a d B o a rd G overnance, F am ily D om ination,
D e p V a r : C a r D e p . V a r : C A R A D J
V a n K o e f P r o b K o e f P r o b
C - 1 .7 2 1 5 0 .0 7 0 - 1 .5 1 0 2 0 .1 0 3 D E R - 0 .0 5 1 2 0 .0 4 6 - 0 .0 5 1 3 0 .0 3 7 D Y 1 .9 6 7 9 0 .0 6 8 2 .7 1 7 3 0 . 0 1 9 D F O W N D E R 0 .0 5 2 7 0 .0 3 5 0 .0 5 0 5 0 . 0 2 6 D F O R W N * D Y 0 .7 2 9 7 0 .6 1 2 0 .8 0 4 3 0 . 6 0 0 L S I Z E 0 .3 1 8 7 0 .0 3 8 0 . 2 8 3 7 0 .0 6 2 L S I Z E N G - 0 .0 1 6 6 0 .0 1 0 - 0 .0 1 4 2 0 .0 2 1 B M E 0 .0 0 5 9 0 .0 3 3 0 . 0 0 5 6 0 .0 7 4 D Y E A R -0 .0 2 8 1 0 .6 9 4 - 0 .1 4 7 7 0 .0 5 8 D Y E A R * D E R 0 .0 4 4 2 0 .0 9 1 0 .0 4 4 2 0 .1 1 0
The International Journal o f Accounting and Business Society
2 7Notes :
T h e M o d e l w i t h d e p e n d e n t v a r i a b l e C A R u s e s w h i t e H e t e r o s c e d a s t i c i t y C o n s i s t e n t S t a n d a r d E r r o r & C o v a r i a n c e c o e f f i c i e n t . W h i l e m o d e l w i t h d e p e n d e n t v a r i a b l e C A R A D J u s e s N e w e y - W e s t S t a n d a r d E r r o r & C o v a r i a n c e c o e f f i c i e n t .
Table 3 points out that DER coefficient is negative significant. This means that
in 1996 the increasing o f debt is not only effective to reduce agency problem.
But also it increases agency problem. This inconsistent fin din g with the agency
theory p ro b a b ly because the debt is obtained from the bank under the same
group o f the company. Therefore the credit feasibility and m onitoring the use o f
debt is week
Mean white . DFOW S*DER is positively significant. This indicates the
negative effect from the increasing debt tend to be neutralized when the
com pany con trolled by family. The positive coefficient o f DYEAR* DER points
out that in 2000. the negative affect o f increasing debt is significant decrease.
M oreover in the fam ily-ow ned company the influence o f debt is change to be
positive to reduce agency problem.
F a b l e 3 a l s o p o i n t s c u t t h a t D Y c o e f f i c i e n t is p o s i t i v e l y s i g n i f i c a n t . T h i s i n d i c a t e t h a t in g e n e r a l t h e in g e n e r a l t h e i n c r e a s i n g o f d i v i d e n d is e f f e c t i v e t o d e c r e a s e a g e n c y p r o b l e m e i t h e r in 1 9 9 6 o r 2 0 0 0 . T h e e x c l u s i o n o f D Y E A R * D Y v a r i a b l e in t h e F o r w a r d M e t h o d a n a l y s i s m o d e l is a p r o o f t h a t t h e r e is n o d i f f e r e n c e p a t t e r n a n d i n t e n s i t y o f i n f l u e n c e i n c r e a s i n g o f d i v i d e n d p a y m e n t o n t h e r e d u c t i o n o f a g e n c y p r o b l e m b e t w e e n 1 9 9 6 a n d 2 0 0 0 . In a d d i t i o n , p o s i t i v e D F O W ' N * D Y c o e f f i c i e n t b u t n o t s i g n i f i c a n t i n d i c a t e s t h a t b y i n c r e a s i n g d i v i d e n d in t h e f a m i l y c o n t r o l l e d c o m p a n y is m o r e e f f e c t i v e t h a n n o n - f a m i l y c o n t r o l l e d c o m p a n y . H o w e v e r t h e d i f f e r e n c e s o f a f f e c t i v i t y is n o t s i g n i f i c a n t .
Conclusions
A g e n c y p r o b l e m o f l i s t e d c o m p a n i e s in I n d o n e s i a c a n b e d e c r e a s e d w h e n t h e f a m i l y d o m i n a t e d o w n e r s h i p is r e d u c i n g . E v e r y r e d u c t i o n o f f a m i l y o w n e r s h i p c a n d e c r e a s e a g e n c y p r o b l e m , h o w e v e r t h e o p t i m a l r e d u c t i o n is b e t w e e n 10.1 % - 2 0 % . T h e p o r t i o n is t h e b e s t o w n e r s h i p b e c a u s e t h e m o r e r e d u c t i o n o f t h e o w n e r s h i p it t e n d s t o i n c r e a s e a g e n c y p r o b l e m .
F a m i l y is n o t t h e b e s t c o n t r o l l e r c o m p a r e d t o l i s t e d c o m p a n y , f i n a n c i a l i n s t i t u t i o n o r s t a t e . E v e n f i n a n c i a l i n s t i t u t i o n a n d s t a t e t e n d t o h a v e b e t t e r c o n t r o l o n a g e n c y p r o b l e m t h a n f a m i l y c o n t r o l a l t h o u g h t h e r e is b i a s o n i n d u s t r i a l a d v a n t a g e o u s o n t h e l i s t e d S t a t e O w n e d C o m p a n y .
B o n d i n g m e c h a n i s m b y i n c r e a s i n g d e b t is c l e a r l y n o t e f f e c t i v e t o d e c r e a s e a g e n c y p r o b l e m . In 1 9 9 6 t h e d e b t i n c r e a s i n g h a s i n c r e a s e a g e n c y p r o b l e m . In a d d i t i o n b o n d i n g b y i n c r e a s i n g d i v i d e n d in g e n e r a l is e f f e c t i v e t o d e c r e a s e a g e n c y p r o b l e m .
2 8
B a d B o a rd G overnance, F a m ily D om ination,
...The International Journal o f Accounting and Business Society
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