Corporate Governance, Ownership, and Firm Efficiency: An
Application of Two - Stage Data Envelopment Analysis to Thai
Listed Manufacturing Enterprises
Yot Amornkitvikai
Ph.D., Lecturer, Faculty of Economics, Rangsit University,
Thailand; [email protected]
Charles Harvie
Associate Professor, University of Wollongong, Australia;
[email protected]
Director, Centre for Small Business and Regional
Research, University of Wollongong, Australia.
A review of the relevant literature.
III. Data sources and data classification.
IV. Empirical models using DEA.
The economic significance of the results
VI. Policy implications and recommendations
 Weakness in corporate governance and risk management in
Thailand was highlighted as being one of the major causes of the 1997
financial crisis related to, for example, the dominance of controlling
shareholders and the limited protection of minority rights (Claessen et
al., 2000; East Asia Analytical Unit, 2000).
 During the pre- crisis period, most Thai firms were controlled by
family members or a single shareholder that undermined the
enhancement of corporate governance in Thailand (East Asia
Analytical Unit, 2000).
 After the 1997 Asian financial crisis, however, the corporategovernance system in Thailand was strengthened through a number of
means, such as
(i) developing the country's institutional framework for accounting
and auditing practices,
(ii) improving listed companies' disclosure practices,
(iii) promoting best practices for directors of listed companies and
(iv) relaxing foreign ownership controls (East Asia Analytical Unit
2000; Talerngsri & Vonkhorporn 2005; Sally 2007)
The objectives of this paper, therefore, are threefold;
(i) To measure the technical efficiency performance of Thai listed
manufacturing enterprises using Data Envelopment Analysis (DEA);
(i) To examine the effect of corporate governance, via the form of
ownership structure, on their inefficiency; and
(i) To provide policy implications and recommendations to improve
their efficiency and competitiveness.
A literature review
 Financial indicators (e.g., return on assets and return on equity) are
frequently used to evaluate a firm's financial performance; in fact, their
financial performance is based on efficiency and productivity
improvements and price variations (e.g., input and product prices) (Fried
et al. 2008, p.11).
 This paper, therefore, measures a firm's performance based upon its
ability to produce maximum output from given inputs and production
technology. This involves measuring a firm’s technical efficiency. (see
Coelli et al. 2005, p.51).
 Technical efficiency is a relative concept, since it compares a firm’s
actual performance to a best-practice input-output association (Alauddin
et al. 1993).
A literature review
 In examining the behaviour and production efficiency of firms
this paper draws not only upon theories of technical efficiency
but also upon agency theory, as suggested by Jensen and
Meckling (1976), to empirically investigate the importance of
corporate governance via the form of ownership structure such as i)
controlling ownership, ii) managerial ownership, and iii) family
ownership as well as executive remuneration.
 For publicly listed firms, agency problems arise when authority
over the firm is transferred to professional managers due to the
dispersion of shareholders.
 In addition, managers may not pay much attention to managing
the firm’s resources, as an owner-manager does, and might transfer
resources to maximise their own benefits (Jensen & Meckling 1976).
 According to Jensen and Meckling (1976, p. 308) agency costs are
the sum of (i) monitoring expenditures by shareholders, (ii) bonding
expenditures by managers, and (iii) the residual loss.
 First, shareholders can also limit divergences from the managers’
interests by (i) establishing appropriate incentives for managers and by (ii)
incurring monitoring costs designed to limit harmful activities (Jensen and
Meckling, 1976).
 Second, managers can be asked to guarantee that their actions will not
harm the firm, or to ensure that shareholders will be compensated from
aberrant activities. This is called “bonding costs” paid by managers.
 The third agency cost is called the “residual loss” due to the reduction
in shareholders’ wealth affected by limited divergences from managers’
Asymmetric information problems can also slowdown improvement of
corporate governance in Thailand, which occur when firm insiders
(managers) can access better information than market participants, typically
shareholders, on the value of firms’ assets and investment opportunities
(Klein et al., 2002).
A dispersed ownership structure can cause asymmetric information
problems between managers and shareholders, since small shareholders lack
the expertise and incentives to monitor managers who work as their agents.
DeAngelo and DeAngelo (1985) argue that managerial ownership (insiders
hold a large stake of the firm) may be able to solve asymmetric information
As a result, asymmetric information problems can be used to explain two
problems. First, managers can cause “adverse selection” problems, since they
may possess some information which is unknown to outside investors.
III. Data Sources
The raw data used in this study was obtained from the Stock Exchange
of Thailand (SET).
This study used annually consolidated financial reports, which record
all business activities of listed firms including those of their subsidiary
Form 56-1 is an annual company report required by the Securities and
Exchange Commission (SEC) where all Thai listed firms must disclose
their annual business performance for shareholders and investors.
The form consists of three main parts: (i) executive summary, (ii)
company-issued securities and (iii) confirmation of accuracy.
Part (ii) was used for this study.
III. Data Classification
 The SET industrial sectors were classified into eight sub-groups as
follows: (1) Agro and Food Industry, (2) Consumer Products, (3)
Financials, (4) Industrials, (5) Property and Construction, (6) Resources
(energy and utilities), (7) Services and (8) Technology.
 Some listed firms that are not classified as manufacturing firms were
removed in order to conform to the International Standard Industrial
Classification for all economic activities (ISIC).
 As a result, data for 178 listed manufacturing firms, consisting of (i)
Agro & Food Industry (40 firms), (ii) Consumer Products (33 firms), (iii)
Industrials (59 firms), (iv) Publishing (7 firms), (v) Construction Materials
(27 firms), and (vi) Technology (12 firms), over the period 2000 to 2008.
IV. Empirical Model
Two approaches can be adopted to measure a firm’s technical
efficiency: a non-parametric approach such as DEA or a parametric
approach such as SFA.
SFA requires functional forms for the production frontier, and assumes
that firms may deviate from the production frontier not only because of
technical inefficiency but also measurement errors, statistical noise or
other non-systematic influences .
The DEA approach does not impose functional forms; moreover, it
uses linear programming to construct a frontier that envelops the data
on all firms.
Hence, all firms are compared to the firms that perform the best.
DEA overcomes restrictions on the production and distribution of
various residuals, as well as a small number of observations.
 For the DEA approach there are two assumptions regarding returns to
scale such as variable returns to scale (VRS) and constant returns to scale
 The CRS assumes that firms are operating at an optimal scale, but the
VRS assumes that firms are not operating at an optimal scale due to
imperfect competition, government intervention, and financial constraints.
 There are two common orientations, input and output, using DEA
 Input-orientated models measure technical efficiency as a proportional
reduction in input usage, but output levels are fixed.
 Input orientation is useful when firms have fixed output levels, and,
therefore, where they are forced to minimize their input usage.
 On the other hand output-orientated models identify technical
efficiency as a proportional increase in output production, where input
levels are constant.
 Output orientation is appropriate when firms have fixed input amounts,
and hence they are forced to maximize output production.
 In this study the VRS linear programming under the output orientated
model is used, which can be written as follows:
•The second stage of the two-stage D EA model is conducted by regressing
firm-specific variables on the firm’s VRS technical inefficiency scores which
are predicted from the first step of the two-stage DEA model.
5. Economic Significance of the Results
DEAP 2.1 provides three different types of estimated efficiency
scores: (i) constant returns to scale (CRS) technical efficiency, (ii)
variable returns to scale (VRS) technical efficiency, (iii) and scale
Only the VRS technical efficiency scores, however, will be used
for estimates of the maximum-likelihood Tobit model
VRS technical efficiency scores predicted by DEAP 2.1 for the
DEA approach is equivalent to pure technical efficiency scores
predicted by FRONTIER 4.1 for the SFA approach.
Figure 1: DEA Technical Efficiency during 2000 - 2008
The average technical-efficiency score for all listed manufacturing
enterprises predicted by DEA during the years 2000 to 2008 is 0.886 (or
88.6 per cent).
Table 1: Returns to Scale of Thai Listed Manufacturing Enterprises during 2000 - 2008
The DEA empirical results also indicate that approximately 86% of
Thai listed manufacturing enterprises, on average, operated under
decreasing returns to scale (DRS) during the period 2000 to 2008, given
the specification of the output-orientated model as shown in Table 1.
Table 2: Maximum-Likelihood Tobit Estimates for Parameters of the Two-Stage DEA
Policy Implications and Recommendations
Managerial Ownership
Managerial ownership was found to have a significant positive correlation
with the technical efficiency of Thai listed manufacturing firms.
A good corporate-governance system should be continuously promoted to
avoid possible agency problems caused by managerial ownership.
The Employee Stock Option Program (ESOP) can be continuously
promoted for Thai listed manufacturing firms
Minority shareholders can play a key role in the monitoring of listed
manufacturing firms’ operations; therefore, information on the roles and
voting rights of minority shareholders should be disseminated so as to
establish a checks-and-balances mechanism
Family and Foreign Ownership
Both family and foreign ownership were found to have a significant
positive correlation with listed manufacturing enterprises' technical
Family and foreign ownership of listed manufacturing firms, therefore,
should be promoted.
 Relaxation of foreign shareholding limits
 BOI financial and non-financial privileges
 Effective procedures for obtaining foreign business operations, as well
as providing accurate and prompt information for foreign investors
 Corporate governance among listed manufacturing enterprises
 Accounting and auditing best practices, including rules and
responsibilities of boards of directors
Family-owned firms, however, may contribute to an agency problem.
Executive Remuneration
Executive remuneration was found to have a significant
positive correlation with the technical efficiency of listed
manufacturing enterprises.
Attractive executive remunerations tied to firm and individual
performance should be promoted.
Providing information for minority shareholders regarding their
roles and voting rights is also crucial, since executive
remuneration must ultimately be approved by shareholders.
Firm size
Finally, firm size was found to have a significantly positive
correlation with the technical efficiency of Thai listed
manufacturing firms.
 The SET and SEC, therefore, should promote an increase in
their size.
 Fundraising used for productive investments (e.g. improving
production technology) should be promoted and facilitated.
 Listed manufacturing firms in the MAI can be encouraged to
apply for listing in the SET if they meet its listing criteria.

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