Results
After excluding financial institutions (due to
their principal line of business involving accepting deposits or premiums to
making loans or investments, rendering a direct comparison of their accounting
returns with those of other industries misleading), companies with missing data
(e.g., those suspended for trading, or those with losses in the previous year,
hence a meaningful P/E could not be calculated) and companies with outdated
financial data (those not yet published 2020/21 annual reports) from our complete
list, the sample size became 1,276 (see Table 1):
Table 1 – Sample Composition
|
Company Category |
Number |
% |
|
|
Main |
Large Companies (excl. CEs & CAs) |
161 |
12.6% |
|
Medium Companies (excl. CEs & CAs) |
365 |
28.6% |
|
|
Small Companies (excl. CEs & CAs) |
363 |
28.4% |
|
|
Main & GEM |
CEs |
203 |
15.9% |
|
CAs |
75 |
5.9% |
|
|
GEM |
Excl. CEs & CAs |
109 |
8.5% |
|
Total |
1,276 |
100.0% |
|
Table 2 reveals that the mean % of NEDs of all the 1,276 companies was 0.5536 and mean % of INEDs was 0.4265. The mean No. of NEDs was 4.48 while the mean No. of INEDs was 3.33. The medians of these four proxies for independent director were reasonably close to the means, indicating that the sampling distributions were reasonably symmetric. This was also evident by looking at the skewness figures which ranged from 0.314 to 2.239. The respective standard deviations of these four proxies with symmetric shape are therefore useful indicators.
In contrast, the four proxies for company financial performance skewed far to the right. The means of ROE, ROA, P/E and MV/BV were 13.7588, 6.3151, 70.88 and 1.8236, while the respective medians were much lower at 9.5525, 4.0735, 11.16 and 0.7733. The positive skewness ranging from 11.254, 7.087, 33.349 and 10.777 were indeed very high, confirming the presence of extreme outliers.
Table 2 – Descriptive Statistics of the Whole Sample
Table 3 – Sample Composition without Outliers
|
Company Category |
Number |
% |
|
|
Main |
Large Companies (excl.
CEs & CAs) |
113 |
11.4% |
|
Medium Companies (excl.
CEs & CAs) |
276 |
27.9% |
|
|
Small Companies (excl. CEs
& CAs) |
290 |
29.4% |
|
|
Main & GEM |
CEs |
168 |
17.0% |
|
CAs |
67 |
6.8% |
|
|
GEM |
Excl. CEs & CAs |
74 |
7.5% |
|
Total |
988 |
100.0% |
|
The means and medians of all the variables became reasonably close. Their closeness was supported by the degrees of skewness which ranged from 0.897 to 1.572. That showed the sampling distributions of all the variables were reasonably symmetric (see Table 4).
Table 4 – Descriptive Statistics of the Whole Sample without Outliers
As mentioned earlier, to isolate the effects of size, growth-orientation and shareholder background, the whole sample was divided into different groups for running separate regression analyses. Different groups could then be compared in respect of the strength of relationship between the tested variables. On top of the groups identified in Table 3, all non-CE/non-CA Main Board Companies (679 in total) were further divided into High MV/BV Companies and Low MV/BV Companies. High MV/BV Companies were defined for the purposes of this study to delineate those companies with a MV/BV exceeding 3, which represented a high ratio. By implication, low MV/BV Companies were those with a MV/BV ratio of 3 or less. As such, 27 high MV/BV Companies and 652 low MV/BV Companies were identified.
Hypothesis 1
Many significant
associations, with p-values less than 0.05, were found after simple
regression runs (see Table 5):
Table 5 – Linear Regression Results
|
Company Category |
Indep. Var. |
Dep. Var. |
r |
p-value |
|
Main & GEM – All Companies |
% of NEDs |
ROE |
0.067 |
0.036 |
|
% of INEDs |
ROA |
0.097 |
0.002 |
|
|
MV/BV |
0.081 |
0.011 |
||
|
No. of NEDs |
ROA |
0.122 |
0.000 |
|
|
MV/BV |
0.070 |
0.029 |
||
|
No. of INEDs |
ROA |
0.097 |
0.002 |
|
|
P/E |
0.067 |
0.035 |
||
|
Main Board – All
Companies (excl. CEs & CAs) |
No. of NEDs |
P/E |
0.081 |
0.034 |
|
No. of INEDs |
ROE |
0.086 |
0.024 |
|
|
ROA |
0.077 |
0.046 |
||
|
P/E |
0.115 |
0.003 |
||
|
Main Board – Large
Companies (excl. CEs & CAs) |
% of INEDs |
P/E |
0.227 |
0.015 |
|
No. of NEDs |
ROE |
0.277 |
0.003 |
|
|
No. of INEDs |
ROE |
0.356 |
0.000 |
|
|
Main Board – Low MV/BV
Companies (excl. CEs & CAs) |
% of NEDs |
P/E |
0.078 |
0.048 |
|
No. of INEDs |
ROE |
0.089 |
0.024 |
|
|
ROA |
0.081 |
0.038 |
||
|
P/E |
0.107 |
0.006 |
||
|
Main & GEM – CAs |
% of NEDs |
MV/BV |
0.373 |
0.002 |
|
No. of NEDs |
MV/BV |
0.245 |
0.045 |
The p-values of these findings were less than 0.05, and indeed in some cases were less than 0.01, hence the first null hypothesis was rejected at a significance level of 5%. In other words, independent directors were found to be associated with company financial performance. It could be seen that, independent directors, for HK-listed companies as a whole, in terms of both percentage and absolute number, were positively associated with both accounting returns (ROE, ROA) and market-based returns (P/E, MV/BV). Similar impacts were evidenced for subgroups including All Main Board Companies, All Large Main Board Companies, and Low MV/BV Main Board Companies. For CAs, however, the association was on market-based return (MV/BV) only.
Before further analysis, it thus seems that independent directors’ positive impact was more pronounced on companies on the Main Board than on the GEM; more on Large Main Board Companies than the Medium and Small ones; more on Low MV/BV Main Board Companies than the High MV/BV ones. Market-based return reacted positively for CAs with more independent directors, though accounting returns did not display similar effect.
Hypothesis 2
The respective correlation
coefficients found with GEM companies were compared against those found with
Main Board companies using r-to-z transformation. Likewise, high MV/BV
Main Board companies, as another proxy for growth-oriented companies, were
compared with low MV/BV Main Board companies for sensitivity analysis. In
addition, to control for the possible effect of size, GEM companies were
separately compared with three subgroups of Main Board companies, namely,
Large, Medium, and Small. For a two-tailed test, if the absolute value of z
is greater than 1.96, a 5% significance level is attained. One significant
difference was found (see Table 6):
Table 6 – Z-Value between Growth-Oriented Companies and Non-Growth Oriented Companies
|
Groups Concerned |
Indep. Var. |
Dep. Var. |
z-value of the
difference |
|
GEM – All Companies
(excl. CAs & CEs) with Main Board – Large Companies (excl. CAs & CEs) |
No. of INEDs |
ROE |
-2.373 |
Though there were no other significant differences identified, the positive association between No. of INEDs and ROE was significantly stronger in Large Main Board Companies than All GEM Companies excluding CAs and CEs.
Hypothesis 3
In relation to Companies
Majority-Owned by Mainland Chinese Interests and Companies Majority-Owned by
Non-Mainland Chinese Interests, one significant difference was found (see Table
7).
Table 7 – Z-Value between Companies Majority-Owned by Mainland Chinese Interests and Companies Majority-Owned by Non-Mainland Chinese Interests
|
Groups Concerned |
Indep. Var. |
Dep. Var. |
z-value of the
difference |
|
Main & GEM – CAs with
Main Board – Medium Companies (excl. CAs & CEs) |
% of NEDs |
MV/BV |
1.979 |
Though no other significant differences were found, the association between % of NEDs and MV/BV was significantly stronger in CAs than in Medium Main Board Companies.
Conclusion
Keeping in mind that truly
independent directors are difficult to have, there is again strong evidence in
the HK context that independent directors lead to better corporate financial
performance. The positive associations cover independent directors in percentage
or absolute terms, as represented by INEDs alone and combined with NEDs as
well, and corporate financial performance expressed in accounting ratios or
market-based returns. Such associations are evident in companies of all sizes,
settling some previous question about the validity of the one-size-fits-all
requirement of independent directors (Mok, 2005) imposed on all listed
companies.
There is insufficient evidence to claim that independent directors have greater impact on growth-oriented companies than non-growth-oriented companies, though the positive association between No. of INEDs and ROE was found to be significantly stronger in Large Main Board Companies than All GEM Companies. We can therefore conclude that independent directors in Large Main Board Companies, especially INEDs, are more associated with increasing accounting return than those in growth-oriented companies. It might be a reflection of the higher quality or effectiveness of INEDs in Large Main Board Companies against those in growth-oriented companies.
There is also insufficient evidence that independent directors have greater impact on companies majority-owned by mainland Chinese interests than those not majority-owned by mainland Chinese interests. However, the association between % of NEDs and MV/BV was significantly stronger in CAs than in Medium Main Board Companies. It could mean that NEDs in CAs, as against their counterparts in Medium Main Board Companies, are viewed more favorably by the market, and that view is reflected in higher market valuation.
Given decreasing investors’ interest, the GEM has effectively failed to live up to its expectation in assisting growth enterprises. With the progressive influx of sizeable CEs and CAs into the Main Board, coupled with more and more HK companies expanding into the mainland market, there is growing infiltration of mainland Chinese characteristics in the HK market in general. Whether a company is growth-oriented, or a company is majority-owned by mainland Chinese interests, is becoming less of a characteristic in the HK context. In any event, this particular market shows strong evidence that there are positive associations between independent directors and corporate financial performance.
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