UNIVERSITI PUTRA MALAYSIA

FIRM CHARACTERISTICS, CORPORATE RESTRUCTURING AND

PERFORMANCE IN MALAYSIA

NORAZLAN ALIAS

GSM 2008 14

FIRM CHARACTE RISTICS , CORPORATE RESTRUCTU RING AND PE RFORMANCE IN MALAYSIA

By

NORAZ LAN ALIAS

Thesis Submitted to the G raduate School of Management, U n iversiti Putra Malaysia, in Fulf i l lment of the Requi rement for the Degree of Doctor of Philosophy

October 2008

Abstract of thesis presented to the Senate of Universiti Putra Malaysia in fulfi l lment of the requirement for the degree of Doctor of Phi losophy

FI RM CHARACTE RISTICS, CORPORATE RESTRU CTURING AND PE RFORMANCE IN MALAYSIA

By

NORAZ LAN ALIAS

Chairman : Professor Annuar Mohd . Nassir, PhD.

Facu lty Graduate School of Management

This study examined the relationship between specific characteristics of the firm

such as board of d irectors' ownership, institutional ownership, concentrated

ownership, debt ratio and levels of diversification which had been identified in

the l iterature as the determinants of corporate restructuring and corporate

performance before and after restructuring. Ninety three debt restructuring firms

and n inety six asset restructuring firms l isted on the Bursa Malaysia (formerly

known as Kuala Lumpur Stock Exchanges) between 1 990 and 2002 firms were

selected as the final samples.

The findings of the study showed that the presence of board of directors in the

ownership of the firm prior to debt restructuring and asset restructuring did not

support the argument that when board of d irectors become owners, the

ownership would lead to improved performance of the firm in terms of return on

total assets (ROA) and return on operating cash flow (RCF). Also, prior to debt

restructuring , institutional ownership and concentrated ownership had negative

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relationship on performance. However, prior to asset restructuring , institutional

ownership had sign ificant positive relationship whi le concentrated ownership

had negative relationship on performance. The find ings also revealed that the

ownership structure had no sign ificant relationship with firm's performance

fol lowing debt restructuring but had significant relationship with performance

fol lowing asset restructuring. I n conclusion , in Malaysia, the firm's ownership

structure played a role in determining performance only following asset

restructuring but not debt restructuring.

This study showed that there is negative relationship between debt ratio and

firm's performance prior to debt restructuring and asset restructuring.

Furthermore, debt restructuring and asset restructuring d id not improve firm's

performance with increased use of debt. In conclusion, this study does not

support the argument that the presence of debt fol lowing corporate restructuring

wou ld increase monitoring activity which leads to improved performance.

This study also found that prior to debt restructuring and asset restructuring, the

levels of d iversification as measured by the degree of revenues concentration

had sign ificant positive relationship with performance. However, debt

restructuring resu lted in no significant relationship between the levels of

d iversification and performance while asset restructuring resu lted in sign ificant

positive relationships between the firm's levels of d iversification and

performance measured in return on operating cashflow.

III

I n conclusion , in Malaysia, it is asset restructuring and not debt restructuring

that led the firms to benefit from the reduced level of d iversification.

IV

Abstrak tesis yang d ikemukakan kepada Senat U niversiti Putra Malaysia sebagai memenuhi keperluan untuk ijazah Doktor Falsafah

CIRI-CIRI , PE NSTRUKTU RAN SE MULA DAN PRESTASI FIRMA 01 MALAYSIA

Oleh

NORAZ LAN ALIAS

Pengerusi: Professor Annuar Mohd. Nassir, PhD.

Faku lti Sekolah Pengajian Siswazah Pengurusan

Kajian in i memeriksa hubungan antara ciri-ciri spesifik firma seperti pemi likan

ahli lembaga pengarah, pemi l ikan institusi , pemi l ikan berpusat, n isbah hutang

dan tahap pempelbagaian seperti yang telah d ikenalpasti di dalam kaj ian lepas

sebagai penentu penstrukturan semula dan prestasi firma sebelum dan selepas

penstrukturan semula. Sebanyak sembilan puluh tiga firma yang telah

menstruktur semula hutang dan sembilan puluh enam firma yang telah

menstruktur semula aset yang tersenarai d i Bursa Malaysia(dulu d ikenal i

sebagai Kuala Lumpur Stock Exchanges) d i antara tahun 1 990 dan 2002 telah

dipi l ih sebagai sampel akhir.

Dapatan kajian in i menunjukkan kehadiran pemil ikan ahl i lembaga pengarah

sebelum penstrukturan semula hutang dan penstrukturan semula aset tidak

menyokong hujah bahawa apabila ahli lembaga pengarah juga menjadi pemi lik,

persamaan kepentingan ini akan membawa kepada prestasi firma yang

meningkat dalam pulangan atas aset dan pulangan atas al irtunai operasi .

Sebelum penstrukturan semula, pemi likan institusi menunjukkan hubungan

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positif manakala pemilikan berpusat menunjukkan hubungan negatif dengan

prestasi. Selanjutnya , pemil ikan ahli lembaga pengarah, institusi dan berpusat

ini tidak ada hubungan signifikan dengan prestasi selepas penstruktusan

semula hutang tetapi ada hubungan yang signifikan dengan prestasi selepas

penstrukturan semula aset. Kesimpulannya , di Malaysia penstrukturan semula

aset dan bukan penstrukturan semula hutang telah menjurus struktur pemi likan

firma berperanan dalam menentukan prestasi firma.

Dapatan kajian ini menunjukkan wujud hubungan negatif antara n isbah hutang

dan prestasi firma sebelum penstrukturan semula hutang dan penstrukturan

semula aset. Tambahan pula, penstrukturan semula hutang dan penstrukturan

semula aset telah tidak menjurus firma untuk meningkatkan prestasi mereka

dari pertambahan penggunaan hutang. Kesimpulannya , di Malaysia kehad iran

hutang selepas penstrukturan semula tidak konsisten dengan hujah bahawa

kehadiran hutang akan meningkatkan aktiviti pengawasan yang menjurus

kepada peningkatan dalam prestasi.

Sebelum penstrukturan semula hutang dan penstrukturan semula aset, tahap

pempelbagaian seperti yang diukur oleh darjah pemusatan perolehan

mempunyai hubungan positif dengan prestasi . Bagaimanapun , penstrukturan

semula hutang menjurus kepada hubungan tak sign ifikan antara tahap

pempelbagaian dan prestasi manakala penstrukturan semula aset menjurus

kepada hubungan positif yang signifikan antara tahap pempelbagaian dan

prestasi yang d iukur dalam pulangan al irtunai operasi. Kesimpulannya,

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penstrukturan semula aset dan bukan penstrukturan semula hutang d i

Malaysia telah menjurus firma-firma Malaysia mendapat faedah dari

pengurangan tahap pempelbagaian.

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ACKNOW LEDGEME NTS

Syukur Alhamdul i l lah. Without the almighty Allah's b lessing , this study would

not have been possible. It is a pleasure to thank and express my sincere

appreciation to my thesis committee members, Professor Dr Annuar Mohd

Nassir, Professor Dr Fauzias Mat Nor and Associate Professor Dr Tawfiq Shah

for their patience, invaluable guidance, unreserved assistance and

encouragement throughout the preparation of this thesis. Their continuous

guidance and comments have made this thesis a success.

I would l ike to express my special thanks and honest appreciation to my family,

especial ly my wife, Nahariah Jaffar, my children , Afiah Nasuha, Ahmad Anwar

Nazif and Afiah Nadiah, my parents and relatives for their support, love and

concern throughout this difficult and demanding period .

Vlll

I certify that an Examination Committee met on September 1 5, 2008 to conduct the final examination of Graduate student on his or her Doctor of Phi losophy thesis entitled " Firm Characteristics, Corporate Restructuring and Performance in Malaysia" in accordance with Universiti Pertanian Malaysia (Higher Degree) Act 1 980 and Universiti Pertanian Malaysia (Higher Degree) Regulations 1 981 . The Committee recommends that the candidate be awarded the relevant degree. Members of the Examination Committee are as fol lows:

Zainal Abid in Mohamed, PhD Professor/Deputy Dean, Graduate School of Management Universiti Putra Malaysia (Chairman)

Norhayati Ahmad, PhD Professor/Dean Student Development and Entrepreneurship College of Business Universiti Utara Malaysia (External Examiner)

Bany Ariffi n Am i n Nordin, DBA Senior Lecturer Faculty of Economics and Management, Universiti Putra Malaysia (Internal Examiner)

Annuar Md. Nassir,PhD Professor/Dean Faculty of Economics and Management Un iversiti Putra Malaysia (Chairman of Supervisory Committee)

SHAMSHER MOHAMAD RAMADILI MOHO, Phd Professor/Deputy Dean Graduate School of Management Un iversiti Putra Malaysia

Date: lo..l�/")'oo9

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The thesis submitted to the Senate of Universiti Putra Malaysia has been accepted as fulfi l lment of the requirement for the degree of Doctor of Phi losophy. The members of the Supervisory Committee are as fol lows:

Annuar Md. Nassir, PhD Professor/Dean Faculty of Economics and Management Universiti Putra Malaysia (Chairman)

Fauzias Mat Nor, PhD Professor/Dean Graduate School of Business-UKM Universiti Kebangsaan Malaysia (Member)

Taufiq Hassan Shah Chowdury, PhD Associate Professor Faculty of Economics and Management Un iversiti Putra Malaysia (Member)

-

SAMSI NAR MD. SIDIN, PhD Professor/Dean Graduate School of Management Universiti Putra Malaysia

Date: OJ' 4/�t)o �

x

DECLARATION

I hereby declare that the thesis is based on my original work except for quotations and citations which have been du ly acknowledged . I a lso declare that it has not been previously or concurrently submitted for any other degree at U PM or any other institutions.

Xl

TABLE OF CONTENTS

ABSTRACT ABSTRAK ACKNOWLEDGMENTS APPROVAL DECLARATION LIST OF TABLES LIST OF FIGURES LIST OF ABBREVIATIONS DEFIN ITION OF TECHNICAL TERMS

CHAPTE R

1 I NTRODUCTION

2

1 . 1 Background of Study 1 .2 Problem Statement 1 .3 Objectives of the Study 1 .4 Research Questions 1 .5 Justification of the Study 1 .6 Contribution of the Study 1 .7 Assumption of the Study

LITERATURE REVIEW

2 . 1 Overview of Chapter 2.2 Defin ition of Technical Terms 2 .3 Ownership Structure, Levels of Diversif ication

and Financial Leverage 2.4 Ownership Structure,Diversification and Capital Structure

2.5 Ownership Structure and Firm's Performance 2.6 Ownership Structure and Corporate Restructuring

2.7 Corporate Diversification, Corporate Restructuring and Performance

2 .8 Capital Structure and Corporate Restructuring 2 .9 Capital Structure and Performance 2 . 1 0 Ownership Structure, Diversification, Leverage and

Asian Financial Crisis

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Page

i i v vii i ix xi xv xvi xvii xvi i i

1 2 6 6 7 9 1 0

1 2 1 2

1 6 1 7

1 9 26

30 32 35

37

2. 1 1 Corporate Restructuring and Firm's Performance 2. 1 2 Corporate Restructuring Models 2. 1 3 Corporate Restructuring Background in Malaysia 2 . 1 4 Chapter Summary

40 49 56 60

3 THEORETICAL FRAMEWORK AND HYPOTHESES DEVELOPMENT

3. 1 Overview of Chapter 62 3.2 Agency Theory and the Likelihood of

Corporate Restructuring 63 3.3 Agency Theory, Ownership Structure and

Corporate Restructuring 63 3.4 Agency Theory, Diversification and Corporate Restructuring 66 3 .5 Agency Theory, Capital Structure Theory

and Corporate Restructuring 70 3.6 Poor Performance 74 3 .7 Agency Theory and Corporate Restructuring Performance 75 3 .8 Justification of the Variables 78 3.9 Determinants of Corporate Restructuring Performance

Variables 80 3. 1 0 Research Model 86 3. 1 1 Chapter Summary 87

4 DATA AND METHODOLOGY 4 . 1 Sampling 89 4.2 Determinants of Corporate Restructuring Performance 92 4 .3 Data Source 95 4.4 Data Selection Procedure 96 4 .5 Estimator Model Type 96 4.6 Normality Test 97 4.7 Testing for the Presence of Heteroscedasticity 97

4 .8 Testing for the Presence of Autocorrelation 98

4 .9 Chapter Summary 99

5 RESULTS AND DISCUSSION 5. 1 Overview of Chapter 1 00 5.2 Descriptive Statistics 1 00 5 .3 Normality Test 1 01 5.4 Group Statistics and Independent Sample T-test for Debt

Restructuring 1 03 5 .5 Group Statistics and Independent Sample T-test for Asset

Restructuring 1 1 1 5 .6 Comparison of Group Statistics between Debt

Restructuring and Asset Restructuring 1 1 8

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5.7 Mu lticol l inearity Diagnostic Tests 1 1 9 5 .8 The Relationship Between Firm's Characteristics and

Performance Before (-1 ,-2) and After (+2 ,+3) Debt Restructuring 12 1

5.9 The Relationship Between Firm's Characteristics and Performance Before (-1 ,-2) and After (+2 ,+3) Asset Restructuring 1 28

5. 1 0 Summary of Findings 1 34

6 CONCLUSIONS, IMPLICATIONS OF F INDINGS, L IMITATIONS AND SUGGESTIONS FOR FUTURE RESEARCH 6 . 1 Conclusions 139 6.2 Implications of Find ings 1 47 6 .3 Limitations and Suggestions for Future Research 1 50

Future Research

BIBLIOGRAPHY 1 53

LIST OF APPENDICES

APPENDIX A: Debt Restructuring Firms 1 64

APPENDIX B : Asset Restructuring Firms 1 67

APPENDIX C: 1 70

BIODATA OF STU DENT 1 80

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LIST OF TABLES

Table Title Page

Table 1 a Descriptive Statistics of Debt Restructuring Variables 1 02

for Years(-2,-1 ,0 ,+1 , +2,+3)

Table 1 b Descriptive Statistics of Asset Restructuring Variables 1 02

for Years(-2 ,-1 ,0 ,+1 ,+2,+3)

Table 2a Group Statistics and Independent Sample T-test for 1 09

Window (-1 ,-2) and Window(0 ,+1 )

Table 2b Group Statistics and I ndependent Sample T-test for 1 1 0

Window (-1 ,-2) and Window(+1 ,+2)

Table 2c Group Statistics and I ndependent Sample T-test for 1 1 0

Window (-1 ,-2) and Window(+2 ,+3)

Table 3a Group Statistics and Independent Sample T-test for 1 1 6

Window (-1 ,-2) and Window(+0 ,+1 )

Table 3b Group Statistics and I ndependent Sample T-test for 1 1 7

Window (-1 , -2) and Window(+2 ,+3)

Table 3c Group Statistics and Independent Sample T-test for 1 1 7

Window (-1 ,-2) and Window(+2 ,+3)

Table 4a Pearson Correlations for Debt Restructuring Variables 1 20

Table 4b Pearson Correlations for Debt Restructuring Variables 1 20

Table 5 Results of GLS Estimations with AR(1 ) Between Firm's

Characteristics and Performance Before and After Debt

Restructuring 1 27

Table 6 Resu lts of GLS Estimations with AR(1 ) Between Firm's

Characteristics and Performance Before and After Asset

Restructuring 1 33

Table 7 Summary of the Relationship between Firm's Characteristics

and Performance Before and After Debt Restructuring and

Asset Restructuring 1 38

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LIST OF FIGURES

Figure Page 1 Heitman and Zahra's Model 50 2 Bethel and Liebeskind's Model 51 3 Johnson's Model 54 4 Co-ord ination Flow of Restructuring Workouts in Malaysia 58 5 Research Model 88 6 Breakup Period of Study 91

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LIST OF ABBREVIATIONS

CDRC Corporate Debt Restructuring Committee

SC Securities Commission

UNDP Un ited Nations Development Programme

DR Debt Restructuring

AR Asset Restructuring

BODOWN Board of Directors' Ownership

INSOWN I nstitutional Ownership

CONOWN Concentrated Ownership

LEV Debt Ratio

DIV Levels of Diversification

LOGTA Log Total Assets

LOGGDP Log Gross Domestic Products

GLS General ized Least Square

ROA Return on Total Assets

RCF Return on Operating Cashflow

AR(1 ) First Order Autoregressive Model of Serial Correlation

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DEFINITION OF TECH NICAL TE RMS

Corporate Restru cturing Refers to a major a lteration or reconfiguration in the composition of firm's assets combined with a major alteration or reconfiguration in its corporate strategy.

Scope of corporate restructuring Refers to financial restructuring, portfolio restructuring , operational and organizational restructuring.

Debt Restructu ring Refers to a transaction in which current debt is replaced with new debt that results in a reduction of interest payment or principal payment or extension of repayment period or exchanges equity for debt.

Corporate Divestitu res Refers to sel l-off or asset sales, spin off and equity carveout. Spinoff involves share d istribution to the existing shareholders while equity carveout involves new share issuance for a newly created subsidiary.

Involu ntary Restructuring and Voluntary Restructuring Involuntary restructuring is forced by external mechanisms due to default while involuntary restructuring involves no intervention by external mechanisms.

Financial Distress A situation where cashflow or l iquidation value is less than current financial obligation .

Firm specif ic characteristics Refers to ownership structure internal ly and external ly , levels of d iversification and financial leverage as portrayed by ratio of debt to total asset.

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CHAPTE R 1

INTRODUCTION

This chapter introduces the background of this study regard ing internal and

external factors that i nfluence a firm's performance . It a lso briefly l inks the firm's

performance with the event of corporate restructuring , scope of corporate

restructuring and the arguments or reasons for restructuring. Next, the study

d iscusses the corporate restructuring background in Malaysia, the problem

statement, its objectives and the importance of this study. This chapter

concludes with expected contributions of this study.

1.1. Backgrou nd of Study

The growth and performance of the business firm has always been an issue of

considerable interest to scholars especially those from business-related

d iscipl ines such as finance and strategic management. I n th is context, as agent

of the shareholders, the management of a firm influences the growth and

performance of a firm because it is actively involved in decision making and in

formulating the firm's corporate policy. The market environment, for example,

changing regulations and state of competition , a lso have i nfluence on the

growth and performance of a firm . Therefore, poor corporate performance may

be due to operating an unprofitable l ine of business, overd iversification, stiff

competition and unfavourable changes in regu lation, which al lude to the

increasing l ikelihood of becoming the target for takeover threats (see, Morck et

al. , 1 990, and M itchel l & Lehn , 1 990). A long period of poor performance may

ultimately bring firms into financial d istress. Consequently, financial d istress wi l l

put the firm into financial constraint that requires operating and financial

responses (Ofek, 1 993) to restructure the troubled firms.

1.2 Problem Statement

There are a few reasons for undertaking restructuring exercise i.e. to increase

their presence in the market, correct past mistake in strategy (Markides, 1 990),

reduce financial commitment and generate cash proceed(Gibbs, 1 993) , and

financial d istress (Wruck, 1 990;Ofek, 1 995) . Other reasons are a drop in

corporate performance (Jain , 1 985; Hoskisson and Turk, 1 990) , poor and

decl in ing profits at the business level , corporate level , or both (Ravenscraft and

Scherer, 1 987) . Some firms restructure to improve poor corporate performance

caused by over diversification , unprofitable capital i nvestment, poor corporate

governance and overleveraging (Markides and Singh, 1 997). I n other words,

the firm's characteristics such as ownership structure, level of d iversification

and debt ratio affect the firm's decision to undergo corporate restructuring .

Another reason for restructuring is as management's strategy to resist a

takeover threat [Jensen(1 986)] . However, Hoskisson et al ( 1 990) argue that

takeover threat is l ikely to be related to the incidence of corporate restructuring

only if d iversification results in loss of strateg ic control and poor performance.

Wruck ( 1 990) posits that however, poor performance without leverage does not

lead to financial d istress but financial d istress is often followed by organizational

2

restructuring . Organizational restructuring requires comprehensive

organizational changes in management, governance, and structure to create

value by improving the use of firms' resources. In conclusion , motives of

restructuring may d iffer.

Accord ing to Hoskisson et al (1 990) corporate restructuring probably results in

correcting inadequate governance pattern , creation of a more focused

d iversification strategy, increase in strategic control and reduction in

dependence on bureaucratic control via reduced corporate staff and increase

firm performance and shareholder wealth . Specific on debt restructuring , Stone

(1 998) states that the goal is the timely and orderly transformation and

reduction of debt with a view to enhancing profitabi l ity, reducing leverage, and

restoring credit to viable enterprises.

Corporate restructuring exercise has long been considered as one of the

approaches used by firms to resolve the operational and financial constraints

within firms due to unforeseen and foreseen circumstances i n the business

environment. However, the impacts and consequences on firm stakeholders

vary. The various focuses of d ifferent types of restructuring namely portfol io,

financial and organizational as defined by Gibbs( 1 993) and Bowman et

a l . ( 1 999) are clear. The question is why does restructuring have positive or

negative outcomes? What factors lead to positive or negative outcome?

Bowman et a l . further elaborates (1 999, p48) "not al l forms of financial

3

restructuring work equally wel l though financial restructuring improves

economic performance with the largest returns coming from leveraged and

management buyouts . . . . . . ".

These inconsistent empirical evidences lead to various unresolved questions as

posted in Bowman et al. ( 1 999) on why simi lar types of restructuring have

d ifferent returns to shareholders.

I n this context, Lai and Sudarsanam (1 997,p) also emphasize that ". . . . . any

restructuring strategy has d ifferent impl ications for d ifferent stakeholders­

shareholders, lenders, managers and employees often leading to conflicts of

interests among them. " I n support of this argument, Bowman et. a l (1 999)

advocate that the d iversity in restructuring outcomes is due to selection of

d iverse actions by firms.

The Asian financial crisis in 1 997 had largely affected the current economic

scenario that caused many firms in Malaysia to experience d ifficult time in their

business operations and financial position due to rising interest rates,

depreciating Ringg it against foreign currencies and decl in ing share values.

Fol lowing the financial crisis the number of firms that defaulted or undergoing

restructuring and the amount of debt involved in debt restructuring increased

sharply. However, it can be argued that firms restructure for several reasons

such as poor corporate governance, overd iversification and overleveraging .

4

Consistent with the argument that corporate restructuring is meant to correct

firm specific characteristics due to overd iversification, poor corporate

governance and overleveraging, some firms in Malaysia had undertaken debt

restructuring and asset restructuring such as operating asset d ivestment before

the financial crisis but the financial crisis in Ju ly 1 997 escalated the amount of

restructured debt and number of firms involved in debt restructuring.

However, these characteristics do not reflect the firm's motivation to do

correction or adjustments on weaknesses such as weak governance, over

d iversification and h igh leveraging to improve performance. Rationally,

corporate restructuring wil l give meaning when firms make adjustments or

corrections on specific characteristics that exhibit weak governance, over

d iversification and h igh leveraging to improve performance. This argument has

led to unresolved questions with respect to corporate restructuring of which

some wi l l be the research questions of this thesis.

In other words, firms that experience business d ifficulties in the short and long

period must find a way to be back on track and continue to gain the confidence

of the shareholders and marketplace. Thus, a restructuring exercise must be

able to drive the firm's management to improve the firm's efficiency and

increase shareholders wealth . Thus, firms that have undergone the

restructuring exercise should remain efficient and enjoy synergistic effect after

the restructuring.

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1.3 Objectives of This Study

I n this study, three d ifferent elements of the firm, i .e the corporate governance

mechanism as depicted by its ownership structure , the firm's corporate strategy

as depicted by its level of d iversification in business activities, and the firm's

capital structure as depicted by its debt ratios are used to investigate their

influence on corporate restructuring .

Thus, the objectives of this study are as fol lows:

(i) To examine the profi le of ownership structure , level of d iversification ,

debt ratio , firm's size and economic performance before and after the

debt restructuring.

(i i) To examine the profile of ownership structure , level of d iversification ,

debt ratio, firm's size and economic performance before and after the

asset restructuring.

( i i i) To examine the effects of ownership structure, level of d iversification,

debt ratio , firm's size and economic performance on firm's

performance before and after debt restructuring

( iv) To examine the effects of ownership structure, level of d iversification,

debt ratio, firm's size and economic performance on firm's

performance before and after asset restructuring

1.4 Research Questions

(i) Do characteristics of the firm such as ownership structure, level of

d iversification and debt ratio d iffer before and after corporate

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