**4. Corporate social responsibility**

improve a firm's performance [1, 47]. The gender of executives is believed to be another factor that has improved board monitoring Adams and Ferreira [1] by adding "multiple diversity

Ownership structure can be explained in many formats. In one form, it can be viewed as a concentrated and well-dispersed ownership structure. Concentrated ownership structure is the form of ownership in which large shareholders exist and are able to monitor a manager's activities in order to ensure the highest shareholder's value. Dispersed ownership structure, on the other hand, is the structure of ownership in which shareholders are not large enough to form an active monitoring group themselves. Concentrated ownership is found mostly in countries where stock markets are not yet developed. Another structural view is that the activities of the company are the criteria used to justify whether the structure is concentrated or dispersed [5, 17, 58, 60]. Ownership structure is also classified by its use of a particular legal system in La Porta et al. [56]. Countries where common law is used to enforce the governance structure (found in the US and the UK) lead to a more dispersed form of structure. On the other hand, countries where civil law (found in France, Germany, or in emerging markets) is used to protect investors may lead to a more concentrated ownership structure, since the poorer protection afforded by civil law is substituted by the internal control system derived from the larger shareholders. Berle and Means [9] proposed that ownership concentration should have a positive effect on value because it reconciles the interests of managers to share-

Byun et al. [16] used data from the Korean stock market to explore the relationship between ownership structure and firm value. They found that controlling shareholders through more direct ownership moderates the relationship between intensive board monitoring and firm value. In the US, Ajinkaya et al. [3] showed that firms with higher ownership concentration and higher institutional shareholdings are associated with stronger monitoring mechanisms. Previous research also argues that for any board with an entrenched CEO, monitoring capability will decrease because entrenched managers have greater bargaining rights, through which they can use their right to deviate firm resources to benefit their group [44]. Previous literatures have measured the entrenchment power of CEOs, using the situation when the CEO is the same person as the chairman of the board [13, 44]. Also, a CEO of long tenure is

One form of controlling shareholders is known as the family firm. A firm is regarded as a family firm if the shares of the company belong to either a single or a few families. In contrast, a widely held firm is the case in which shares of the company are held by many widespread investors. Many researchers have investigated the role of family firms on the firm value. Whether family firms improve or destroy the overall value of a firm is an interesting topic for researchers. Under the agency problem, large shareholders can expropriate wealth from minority shareholders to their group. Or, they can divert resources of the firm in order to

facets to the oversight lens" [57].

8 Firm Value - Theory and Empirical Evidence

more likely to become entrenched [19].

**3. Ownership structure and monitoring system**

holders. However, other researchers argue in opposite directions [25, 26].

After a long debate over the effectiveness of corporate governance, with the ultimate objective focusing on the wealth of shareholders, literatures have turned to ask questions about other stakeholders such as customers, social groups, or environmental lobbyists. Social pressures are the main driving forces of the strategic management in terms of both not only shareholders but also social issues too. The strategic management of many modern businesses includes the corporate social responsibility (CSR) of their strategic policy. CSR is also one attribute of corporate governance. However, researchers are still not clear about the benefit of CSR to shareholders.

In the context of the agency problem, managers of firms are inclined to invest for their own interests (i.e., for reputation) even in the cases of negative NPV projects. If an agency problem is manifested in the good policies (CSR in this case), the relative problem should be reduced when an efficient corporate governance mechanism is enforced.

If CSR is one attribute of corporate governance in terms of a tool to eliminate the agency problem and hence improve overall firm performance, one should observe the positive relationship between corporate governance and sustainability. Boghesi et al., [12] using the Governance Index or *G-index* as a proxy for the level of corporate governance in a firm (see [39]) find no relationship between *the G-Index* and the level of CSR. However, one may find that the level of CSR is higher for low insider firms (firms in which managers own a lower percentage of shares) and low institutional holdings. These findings suggest that investing in the CSR may not be due to the interest of shareholders but from the personal interest of managers. The theoretical implication from the agency problem is that if the CSR or other ethical policies are created in the service of a manager's private benefit, then strong governance should reduce the CSR or other goodness policies ([2, 18, 41]; and [12]) In fact, the managerial ownership or the *high institutional percentage of shares* in a firm represents institutional pressure which, in the context of this chapter, may not have much involvement in explaining the firm's investment in CSR activities. Thus, one could conclude that investment in CSR originates from *the personal motivation of managers rather than from institutional force*. Furthermore, findings about ownership structure and corporate governance are not consistent among different researchers. Barnea and Rubin [6] found a negative relationship between insider ownership and CSR, while Harjoto and Jo [41] found a positive relationship between institutional ownership and CSR activities; however, Boghesi et al. [12] found the opposite relationship—firms with larger institutional ownership are negatively related to the CSR. From the perspective of these research findings, the CSR might not be the ideal solution for the alignment of the managers' interests with the shareholders' interests.

Numerous empirical tests on the issue of the determinant factors of institutional ownership and governance structures are evidenced in many literatures that have been carried out over the last two decades. We provide some examples of the articles in the following section. Johnson and Greening [54] and Jansson [48] empirically found that companies with more pension funds representatives on the board perform better overall with the CSR. Siegel [72] showed that highskill labor firms are associated with a higher social sustainability performance. Turban and Greening [76] and Greening and Turban [40] evidence that high-quality workers are retained in high social sustainability performance firms. Unions in the firms are tested and hypothesized to affect corporate sustainability. Strong employees' unions are found to be positively correlated with high social sustainability performance [63].

a more horizontal structure and firms are very close to their various stakeholders. The new structure is accelerated by the widespread fastening of social integration through information

This new circumstance changes the explanation on the theory of firms in many perspectives. Characteristics of these changes can be observed in two important concepts about the theory of firms. First, the value of firms no more concerns only the explicit relationship of various stakeholders such as shareholders and debt holders, but it incorporates the relationships

*only a single group of stakeholders* (shareholders) will receive their value at the maximum level from the firms' operation, *but many groups of stakeholders have their claims on part of the firm's overall value* [52]. Until the introduction of agency problems, finance theories explained many financial issues away by relying on the clear separation between participants. Effects from the decisions of any one group do not have any (or small) effect on decision of others. The separation of ownership and control assumes that inside equity owners or managers maximize the value of the firm without any constraints on or without any concerns about other outside nonmanagerial shareholders' objectives. Furthermore, firm theory has previously had nothing to do with other stakeholders' desires. Stakeholders (customers, suppliers, community, etc.) were related to firms via the sole objective of profit maximization. In shareholders' maximization circumstance, only the cash flow to shareholders is taken into the valuation model by assuming that wealth of shareholders is created from sufficient returns without *acknowledging* 

This traditional approach to firm theory is challenged by researchers in many fields. Management theorists have now asserted that stakeholder theory has become the prominent theory instead of shareholder theory. The concepts of decision management beyond shareholders' value are welcome, such as the Customer Social Responsibility (CSR), the triple bottom lines, the Economics Social Governance, or the Corporate Governance. Marketing theory has introduced the new paradigm of *Maketing-3.0*. Finance researchers have also incorporated these changes into the existing theories such as *the firm's value determination, the capital struc-*

Shareholders' theory and stakeholders' theory are two opposing theories that view property rights differently. Traditional shareholders' theory views shareholders as the only owners of the assets since they invest their money (capital) into the firm and they should therefore get the residual income to offset the risk from an operation. Traditional structure, therefore, assigns the right to shareholders who select the board to be their representatives. The board then selects the managerial team to operate a firm. Another perspective or stakeholders' theory views that all stakeholders have their own rights with regard to their assets in a firm. Workers invest their human capital, customers and suppliers also contribute to a firm and should have their own claims on the part of the total income. Consumer co-operatives and

1 Implicit relationship or implicit contracts are found in the relationships between nonmonetary stakeholders (social

environment or community surrounding the organization, or environmental organizations).

Second, *not* 

Firm Value

11

http://dx.doi.org/10.5772/intechopen.77342

which are the implicit ones to be included in the valuation function process.<sup>1</sup>

technology, as outlined brilliantly by Seidman [69].

*or mentioning various returns to other stakeholders' contributions.*

*ture theory, and the theory of firms.*

**5.1. From shareholders to stakeholders**

Previous sections have shown some internal control mechanisms such as the ownership of shares, the number of analyst following, or the incentive compensation program. In this section, the role of *board characteristics* is discussed to show that it is also used as an internal control mechanism in a firm ([14, 32, 33, 50, 45, 57]). The composition of the board of directors is studied by many researchers with regard to its relationship with the decision to invest in social programs (or the CSR).

Compositions of the board being studied [1, 33, 49] in literature include board size, board independence and CEO entrenchment. The size of board or the number of directors on the board affect monitoring activities and henceforth can capture the level of corporate governance in a firm. A larger board size is generally argued to have communication problems and a higher agency problem. Free-rider problems from inert committees in large-sized boards give rise to greater power to the CEO. Larger board firms are expected to have lower monitoring costs [49]. Previous empirical studies have evidenced that board size is negatively related with a firms' performance [1, 29, 38, 81].

Agency theory is the product of suspicious views over the relationship between principal and agent. The implication of this theory is that it is natural for owners and managers to foster interests in their own wealth rather than the firm's wealth (or shareholders' wealth). The agency relationship is under criticism because of the conflicting goals of the principle and the agents [24]. While agency theory views that conflicts of interests are not beyond expectation, the *Stewardship theory* offers the opposite view. Stewardship theory posits that managers are not opportunist nor commit to their duty for their own interest. Without any individual interests, board members can focus on strategic planning and on monitoring roles for the firms' overall sake. These roles are more manifest when the board of directors imposes effective communication, collaboration, personal charisma, and networking. Moreover, the gender differences literature suggests that such qualifications are to be found more in women rather than men [20, 57]. Based on this theory, gender differences may play more vivid roles in producing managerial outcomes that differ from all-male boards only.
